Can a Holding Company be an LLC: Everything You Need to Know
An LLC can be set up as a holding company, which is a corporation or other company that owns a controlling interest in a subsidiary company.4 min read
2. Advantages of Holding Companies
Can a holding company be an LLC? Yes, an LLC can be set up as a holding company, which is a corporation or other company that owns a controlling interest in a subsidiary company or in trademarks, hedge funds, real estate, and so forth.
LLC as Holding Company for Many Businesses
Holding companies are also known as parent companies or umbrella companies. Holding companies are business entities that do not have operations and therefore do not conduct activities; rather, they own assets.
An LLC or limited liability company is a legal entity combining elements of both a corporation and a partnership. The owners of an LLC are known as its members, and an LLC offers them the limited liability protection of a corporation while providing the ability to pass through profits and losses to its members. An LLC's operating agreement establishes its structure and addresses the distribution of profits and losses, contributions of members to the entity, and the interests of members.
Holding companies and LLCs are unique legal structure with regards to the statutes that govern their control and ownership as well as the parameters that influence the operation of the entities.
Because profits and losses pass through the LLC to members, the entity's earnings are considered to be the personal income of members by the IRS. The income is, therefore, only taxed once.
Additionally, LLCs limit the exposure of their members to liability for debts incurred. The limits of a member's liability are related to that member's personal investment in the entity or an amount that is specified in the LLC's operating agreement. LLCs are also beneficial because the records they must maintain are less burdensome than other legal structures.
Advantages of Holding Companies
Grouping companies together under a holding company provides advantages that they would not be granted if they were operating as independent entities.
- A holding company can benefit financially from the risks that its subsidiaries assume while limiting the liability that may result from such risks.
- A holding company's subsidiaries are protected from issues that occur in other subsidiaries. For example, if a plaintiff wins a judgment against one company, they cannot attach the assets of the others.
- If a subsidiary goes bankrupt, the holding company will not be affected and can simply sell its shares in the subsidiary.
- A holding company can file a consolidated tax return, which offsets the profits of some subsidiaries against the losses of others, potentially leading to a lower tax bill for the group of companies.
- Combining the resources of subsidiaries can create synergies and increase their value. For example, one subsidiary may have relationships with customers that are beneficial to another subsidiary.
Instead of going through the trouble and expense of forming a holding company, multiple small businesses with few assets can be formed as one company with multiple projects within it. Forming a new LLC for each business entity is another option.
An LLC that is set up to serve as a holding company does not conduct operations other than holding other entities and their assets. The operating company is where all operations occur and where liabilities and employees are.
Holding companies often own the operating company's most important assets, leasing them to the operating company, in addition to owning membership interests or shares. The operating company may also borrow cash from the holding company in order to purchase assets.
Most states do not restrict LLC ownership, and state law governs all non-tax elements of LLCs. Virtually any corporation, individual, or partnership may theoretically own membership interests. One LLC can, therefore, own other LLCs or shares in multiple corporations, including an S corp.
Generally speaking, a holding company's liability for its subsidiaries is related to the degree of control of that holding company over the subsidiary's operations. The Supreme Court decided in the 1998 case United States v. Bestfoods that if a parent company did not actively participate in or have control over the actions of its subsidiary, it is not liable for those actions.
An important exception is when the corporate veil is pierced. This means that the action, for example negligence or fraud, falls outside of normal business activities. In such cases, the owners of both the holding company and the subsidiary can be sued.
An additional level of complexity arises when an LLC operates as a holding company, since operators must observe the formalities with respect to both companies and must keep the assets of the operating company separate from the assets of the holding company.
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