If you are wondering what is an LLC holding company, then this post is for you. We break down everything you need to know.
What Are LLC Holding Companies?
You might have heard of a holding company before, but most people are not sure what they are and what these types of companies do. While they may still technically be a business, they have a few unique differences when comparing them to standard companies. In this post, we will cover what LLC holding companies are. This may help you to decide whether this is a structure that will benefit your business or you.
Operating Company Vs. Holding Company
Operating companies and holding companies usually go hand-in-hand. The holding companies don’t have operations of their own and rather solely exist to own controlling shares of other companies or a company, and other assets like factories, office buildings, investment securities, intellectual property, machinery, and other supplies and equipment.
Operating companies, conduct all the day-to-day business operations including selling services or products and hiring employees. This is ultimately known as a parent-subsidiary relationship, where the main difference is that a parent company in these situations doesn’t conduct business activities. LLCs are attractive options for these structures since the setup process is easy and they provide satisfactory Limited Liability Protection.
Reasons To Form A Holding Company
Many people that make the decision to form a holding company are looking for ways to limit or eliminate risk. When you have a holding company that is separate from your operating company to own assets of the operating business, it keeps these assets safe when any lawsuits are directed at your business. This can be extremely beneficial for people that operate higher-risk enterprises.
An example of this can include a company that sells and manufactures bicycle helmets that are separated into both an operating business and a holding business. The holding business owns the patents, machinery, and the factory, and a “controlling share” in the operating company, that will be paying to use the premises to manufacture the helmets and to hire the employees that will be selling them. In these situations, if an operating company is facing a lawsuit due to a person sustaining an injury to the head caused by a bicycle accident, the assets of the holding company are protected.
This is a structure that can also be beneficial for businesses that have several different interests or ventures. For example, food service companies might set up holding companies and separate operating companies for each business type they are running or every restaurant location. In this way, each of the ventures is protected if one of the others experiences a failure, and the assets of each business are stored safely in a holding company. This structure is also very common for people that own multiple rental properties and companies that are interested in trying out a new product line or range without causing risks to the rest of their businesses.
How Does Tax Work For A Holding Company?
Specific tax regulations and rules for LLC holding companies depend on the way the company is structured. Holding companies along with any subsidiaries can choose to file tax returns that are separate or file a single consolidated return. This will usually depend on the company’s circumstances.
If the subsidiary of a holding company is also structured as an LLC, it will then be taxed in the form of a “pass-through entity”. This also means that all the profits of the operating company pass to a holding company (the entity that owns it). The profits are then passed on to the owner and then reported as “personal income” on the owner’s tax return. This will remain the same regardless of how many LLC subsidiaries the holding business owns.
Holding Company: Pros And Cons
Similar to other things, forming an LLC holding company also has its own set of pros and cons. To decide whether this type of business structure will work for you is going to depend on your situation and the specifics relating to your business.
The Pros:
– Holding companies and the members will be protected from any lawsuits that relate to the operations of the subsidiary company. Examples of this can include injuries, damages, or defective products.
– Holding companies and the members will be protected from any lawsuits that relate to actions that arise from the employees of the operating company.
– Since a holding company usually holds the majority of the assets for the business, the financial risks are lowered when it comes to creditors or debt associated with the operating business.
The Cons:
– Holding companies and the members will be protected from any lawsuits that relate to the operations of the subsidiary company. Examples of this can include injuries, damages, or defective products.
– Holding companies and the members will be protected from any lawsuits that relate to actions that arise from the employees of the operating company.
– Holding companies and the m– Since a holding company usually holds the majority of the assets for the business, the financial risks are lowered when it comes to creditors or debt associated with the operating business.
What Is The Series LLC?
Depending on the state that the company operates in, there may be an option available to form a Series LLC. This is a structure that is available currently in 9 states. The Series LLC will essentially allow the business to form a holding business structure without the need to create a separate LLC for every subsidiary. This is a structure that must be created when the company files its Articles Of Organization. This will allow for “unlimited separation” of assets, operations, and business interests into an independent series. Even though there is a single filing, every subsidiary will be recognized as a legal and separate entity.
The main benefit of a Series LLC has to do with offering the same advantages and protections of a multi-LLC holding structure.
But there are no requirements in place to establish separate LLCs. This will also reduce the paperwork required and decrease expenses. However, every subsidiary that falls under the main holding business is required to have separate bank accounts as well as act as independent companies. At the same time, since this business structure is still relatively new, rules may vary according to the state, and there are also a few legal grey areas.
How to name your LLC company.
Should You Choose A Holding Company?
It is necessary to look closely at the goals and operations of your business before you decide whether a holding company LLC is a right decision for your company. In general, if you have a risky, complex, or segmented business, you could probably benefit from the holding-company structure.
In Conclusion
A holding company LLC can add additional expenses and complexity to your company but it also offers more legal and financial liability protection when compared to what a single, standard LLC structure provides. While this formation is not ideal for every business, it is still worthwhile to explore this option to find out if it may be a better fit when it comes to your business.