Key Takeaways:

  • A parent company is a corporation that holds a controlling interest in one or more subsidiary companies, enabling it to oversee operations and strategic decisions while allowing subsidiaries to function independently.
  • Choosing the right jurisdiction, such as Delaware, can offer favorable incorporation laws and tax benefits when establishing a parent company.
  • Drafting articles of incorporation is a critical step, requiring information on directors, shareholders, and the company’s registered agent.
  • Corporate bylaws serve as the internal governing document, though not always required by state law.
  • Tax benefits include consolidating profits and losses across subsidiaries to potentially reduce the group’s overall tax burden.
  • Parent companies can operate as holding companies (primarily owning assets) or operating companies (actively managing business operations).
  • Legal and financial protections often arise from structuring businesses under a parent company, such as liability separation and safeguarding assets.
  • Establishing a parent company can facilitate business expansion, streamline operations, and enable easier acquisition of new businesses.
  • Professional legal guidance can simplify the formation and management of a parent company—consider consulting an attorney through UpCounsel for assistance.

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 own incorporation laws, but Delaware is known for having the most favorable corporate laws.

Evaluate Legal and Financial Implications 

When determining how to create a parent company, evaluating the legal and financial implications is crucial. A parent company structure can provide liability protection by shielding the parent from the debts and obligations of its subsidiaries. Additionally, different jurisdictions offer varying levels of protection, corporate governance requirements, and financial reporting obligations.

Consider the following legal and financial factors:

  • Liability Separation: Ensures the debts of a subsidiary do not automatically transfer to the parent company.
  • Compliance Requirements: States like Delaware may offer business-friendly laws, but they require compliance with specific corporate regulations.
  • Taxation: Some states may impose franchise taxes or annual reporting fees, which can influence the cost-effectiveness of the jurisdiction.
  • Investor Preferences: Investors often favor jurisdictions with established corporate laws, such as Delaware.

Consulting an attorney can help navigate these complexities and ensure the chosen jurisdiction aligns with the company’s long-term goals.

Draft the Company's Articles of Incorporation

The articles of incorporation are 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.

Establish Ownership Structure and Share Issuance 

Defining the ownership structure is a foundational aspect of creating a parent company. Ownership details will be reflected in share certificates and shareholder agreements. The parent company typically owns a majority or all of the shares in its subsidiaries.

Key steps include:

  • Determine Share Allocation: Decide the number of shares to issue to founders and investors.
  • Identify Ownership Percentages: Define the percentage ownership of each shareholder.
  • Draft Shareholder Agreements: Clarify rights, responsibilities, and voting powers.
  • Issue Share Certificates: For subsidiaries, issue share certificates in the parent company’s name to establish formal ownership.

Carefully structuring ownership ensures clarity in decision-making and prevents disputes among shareholders.

Draft the Corporate Bylaws

A company's corporate bylaws act as its constitution, defining the activities and powers of the directors and shareholders. However, drafting corporate bylaws is not a requirement in most states.

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.

Appoint Directors and Corporate Officers 

Once the bylaws are in place, appointing directors and corporate officers is the next critical step in learning how to create a parent company. Directors oversee the company's strategic direction, while officers handle day-to-day operations.

Best practices include:

  • Appoint a Competent Board: Choose individuals with diverse expertise in business, finance, and legal matters.
  • Define Roles Clearly: Assign positions such as CEO, CFO, and Secretary with clearly defined responsibilities.
  • Consider Overlapping Appointments: For better oversight, the same individuals can serve as directors or officers in both the parent and subsidiary companies.
  • Hold the Initial Board Meeting: Document the appointment of officers and approve key corporate resolutions.

Proper leadership appointments ensure the parent company can effectively manage its subsidiaries and uphold compliance with corporate governance standards.

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,  including 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.

Benefits of Creating a Parent Company Structure 

Understanding the broader benefits of a parent company structure can guide businesses in deciding how to create a parent company that supports long-term growth and risk management.

Key benefits include:

  • Asset Protection: Segregating assets into separate subsidiaries can protect profitable divisions from liabilities associated with riskier operations.
  • Simplified Business Expansion: A parent company can acquire new businesses as subsidiaries without disrupting existing operations.
  • Brand Management: Subsidiaries can operate under distinct brands, preserving market positioning while benefiting from shared resources.
  • Streamlined Financing: Parent companies often have greater access to financing, which can be distributed across subsidiaries.
  • Operational Efficiency: Centralized management and shared services (e.g., accounting, legal) can reduce costs and enhance performance.

These advantages make the parent-subsidiary structure a strategic choice for businesses seeking scalability, operational resilience, and financial flexibility.

Frequently Asked Questions

1. What is the difference between a parent company and a holding company? 

A parent company typically oversees the operations of its subsidiaries, while a holding company primarily exists to own assets and shares in other companies without actively managing day-to-day operations.

2. How much ownership is required to form a parent company?

 A parent company generally needs to own more than 50% of a subsidiary’s voting shares to exercise control. Full ownership (100%) may be required in certain business strategies.

3. Can an LLC be a parent company? 

Yes, an LLC can serve as a parent company. It can own other LLCs, corporations, or partnerships, offering flexibility and liability protection.

4. Are there any risks associated with creating a parent company?

While a parent company structure can reduce liability, risks include complex compliance requirements, potential tax complications, and the need for effective governance to avoid mismanagement.

5. Do I need a lawyer to create a parent company? 

While it is possible to create a parent company independently, seeking legal counsel is highly recommended to ensure compliance with state laws, proper corporate structuring, and optimal tax planning. UpCounsel offers access to experienced attorneys who can assist with every step of the process.

If you need help with creating a parent company, you can post your legal need on the UpCounsel marketplace. UpCounsel accepts only the top 5% of attorneys/lawyers on its site. Attorneys on UpCounsel come from prestigious law schools like Yale Law and Harvard Law and usually have 14 years of legal experience, including work on behalf of or with companies like Airbnb, Menlo Ventures, and Google.