Creating a Parent Company: Everything You Need To Know
Creating a parent company requires individuals to go through the formalities of corporate formation.3 min read
Updated June 25, 2020:
Creating a parent company requires individuals to go through the formalities of corporate formation. Basically, a parent company is an entity with one or more subsidiaries. Such a company is also the majority shareholder in its subsidiary companies.
Once it's created, you can then form the subsidiaries and assign majority shares to the parent company. The following are the steps required to form a parent corporation.
Choose a Jurisdiction
You must decide the jurisdiction where the parent corporation will be established. Each state in the U.S.has its incorporation laws, but the state of Delaware is said to have the most favorable corporation laws.
Draft the Company's Articles of Incorporation
The articles of incorporation is usually a one-page document that lists the directors, shareholders, incorporators, registered agent, and registered address of the company. Although it isn't a requirement, you may include a corporate statement of purpose when filing the articles of incorporation. However, it's best to use the phrase "any lawful purpose" since it offers maximum flexibility.
The articles of incorporation must be filed with the SOS (Secretary of State) in your chosen jurisdiction (i.e., where your company is being incorporated). The filing should be accompanied by the appropriate filing fee.
Draft the Corporate Bylaws
A company's corporate bylaws act as the constitution and define the activities and powers of the directors and shareholders. In most states, however, drafting corporate bylaws isn't a requirement.
Other steps include:
- Repeat the incorporation process for the subsidiary companies you intend to create. When filing the articles of incorporation for the subsidiary, you must list the parent company as the majority shareholder or sole owner.
- To ensure effective control of the subsidiaries day-to-day operations, the parent company should appoint all, or a majority, of its directors.
- You should draft the subsidiary's share certificates and make them out to the parent company. The share certificates should be sent to the registered agent of the parent company for safekeeping.
An LLC can be organized as a parent company using trade names. When a business wants to acquire another company, they often use parent corporations.
Since an LLC (unlike a partnership or sole proprietorship) is a type of corporation, it can be used as a parent company. As such, you can form several companies and place them under an LLC.
To do this:
- You must first form an LLC in the jurisdiction you want to operate. Some states require two or more individuals to set up an LLC, while others require at least one individual. There are other unique requirements in your jurisdiction that you must be cognizant of when forming an LLC.
- Contact the IRS to obtain a federal EIN (employer identification number) and follow the state procedures to obtain a state tax ID number.
- For companies that you intend to place under the parent company LLC, you should file a DBA in the jurisdiction where the parent LLC was registered.
- In some counties, a separate registration is required. The trade name must be different from all other registered companies in the jurisdiction. Visit the website of the Small Business Association to learn other state requirements.
- After registering the trade names, you must publish them in major publications across the region or in accordance with county and state laws.
- At this point, you can form or purchase your LLC's subsidiary companies. The subsidiaries may have different legal structures, and you can create numerous layers of subsidiaries. However, each must have a separate EIN and unique trade name.
The parent company must be listed as the owner or majority shareholder of the subsidiaries. If you are purchasing an existing business to add as a subsidiary, you should change its registration information at the SOC to reflect its new status.
Tax Advantages of Creating a Parent Company
There are tax advantages to setting up a parent company with several subsidiaries. For instance, all the companies under the parent company, as well as the parent company itself, file their tax returns as one entity.
As such, the profits of one member subsidiary can be used to offset the losses in another. This means that the tax bill of the entire group may be lower than if all the members filed separately.
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