When choosing how to structure your business entity, holding companies can frequently be a smart decision. This type of structure will deliver benefits that would be unavailable with a corporation or LLC. At the same time, the process of forming your holding company seems nearly identical to forming any business entity so you do not need to spend extra time.
The main difference between your holding company and other structures is that the holding company will not participate in any operations. Instead, it just “holds” assets, explaining the name. The holding company will own and control those assets, which can be anything from intellectual property, physical property such as real estate, or even other companies. When the holding company’s owners want to participate in operations, they do so via subsidiaries or through sister companies.
The biggest advantage of holding companies, and the most common reason to set one up, is to protect assets. With the holding company structure, your assets and operations are completely separate. This means that an illegitimate (or legitimate) lawsuit cannot lead to the loss of all your assets if an accident occurred. By separating the assets from actions, the assets are also segregated from risk.
Holding companies can also provide the owners with a degree of privacy that would not otherwise be possible. Many jurisdictions require companies’ owners to publicize personal information online, such as full name and basic contact details. Using a “double LLC” technique with your holding company will give you anonymity even in states that do not explicitly allow anonymous LLCs.
Forming a holding company will also have some implications in terms of your company’s taxes. Simply put, this type of structure tends to reduce taxes and simplify the filing process. That is because parent companies file tax returns, but the subsidiaries do not. This will save a significant amount of time, particularly in the case of holding companies with numerous subsidiaries. It is also possible to shift the income to jurisdictions with reduced taxes. Furthermore, thanks to the tax laws passed last year, LLCs pay less in taxes than sole-props.
Despite holding companies being considered a business structure, there are actually two different methods of setting them up. These setups are called sibling or sister-sister structures and parent-child structures.
With a sibling structure, the operating and holding companies have separate ownership. The owners may be the same, but that is not always the case. Most importantly, your holding company will not own your operating company.
By contrast, a holding company with a parent-child structure involves close ownership ties. Parent businesses, in this case, will directly own as well as manage children businesses. The children companies are subsidiaries with the parent (or holding) company officially listed for the owner. In this situation, the child companies will be single-member limited liability companies.
Holding companies can be found in all industries due to their range of benefits. They are, however, more common in certain situations, such as:
When choosing the structure of your business entity, take the time to evaluate if a holding company makes sense.
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