What Are Delaware Holding Company Requirements?
The Delaware holding company requirements are very important for parent and holding companies to follow and failure to comply may result in lawsuits.3 min read
Updated July 13, 2020:
The Delaware holding company requirements are very important for parent and holding companies to follow. A parent company can form a holding company in the state of Delaware to hold certain assets of the larger company. If the requirements are not followed properly, the parent company can face lawsuits or even have their holding company shut down.
What Is a Delaware Holding Company?
Holding companies in Delaware were formed because of the state income tax law, which made it possible for foreign companies (those not formed in the state of Delaware) to be partially tax-exempt.
The tax code of Delaware states that corporations that operate within the state boarders only to maintain and manage their investments, intangible property, or trusts that are registered with the Investment Company Act of 1940 as investment companies may be exempt from corporate taxation.
Due to this taxation treatment for such companies, businesses began setting up corporations in Delaware that would act as sort of tax-exempt boxes to put their intangible assets in, called holding companies. These intangible assets or investments include things such as:
- Patent applications
- Trade names
- Trade secrets
Delaware holding companies are frequently used to hold different types of intellectual property as well as investments. These companies are subsidiaries of larger companies that own the rights to any of the assets held there. The parent company gets licenses for access to those assets, which gives royalties back to the subsidiary company. The fees paid for the licensure are tax deductible. Therefore, using a holding company doesn't add much cost to the operations of the parent company.
Holding Company Controversy
Some states take issue with the idea of holding companies because they see it as a loss of tax revenue that should be theirs. Certain states have actually sued multinational companies such as Victoria's Secret, Radio Shack, and Home Depot in an effort to recover the taxes they missed out on.
Holding companies do offer companies an opportunity to save money, but they can also lead to audits and lawsuits. The states that allow holding companies don't usually have a problem with the practice. However, the states where the companies are primarily doing business sometimes feel they are being cheated out of tax dollars.
The audits and lawsuits the state pursues against holding companies are usually meant to prove that the holding company is only set up to avoid paying taxes. They attempt to prove that the holding company doesn't conduct any business in the state in which it is formed but simply hides assets from taxation.
Requirements for Delaware Holding Companies
Holding companies formed in Delaware must be careful to meet all the necessary requirements to help avoid audits and legal issues. It is essential that the holding company maintains a separate identity from the parent company and a status of good standing with the SOS (Secretary of State). Some of these critical requirements include:
- Not allowing the holding company to conduct any business beyond simply managing intangible assets.
- Not allowing the holding company to purchase any property that isn't necessary to manage the parent company's assets.
- Keeping the holding company up-to-date with all fees and filing requirements with the state.
- Keeping up with all debt payments required of the holding company.
- Maintaining the right amount of capital in the holding company necessary to manage the parent company's assets.
- Maintaining a separate legal identity from any owners or members of the holding company.
- Maintaining separate records and bank accounts from other companies, including its parent company.
- Filing separate tax returns from those of the parent company.
Delaware holding companies should also be sure to keep up with all the basic requirements for corporations, like holding annual meetings, filing documents with the state, etc.
How to Start a Delaware Holding Company
To start a holding company in the state of Delaware, you'll follow the basic steps for starting an LLC or corporation in the state. The business's main address should be within the state borders. All Delaware holding companies must adhere to state laws regarding their:
The best way to start and maintain a successful Delaware holding company is to get counsel from an experienced business lawyer.
If you need help with Delaware holding company requirements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.