Key Takeaways:

  • A holding company primarily owns and manages assets but does not engage in day-to-day operations.
  • It provides asset protection and potential tax benefits, making it useful for small business owners and large corporations alike.
  • There are various types of holding companies, including pure, mixed, and financial holding companies.
  • Setting up a holding company involves choosing the right legal structure, registering with the state, and maintaining financial independence from its subsidiaries.
  • Proper structuring can protect a business from liabilities and optimize tax benefits.
  • A holding company must comply with state and federal regulations, which vary depending on the industry and location.
  • Seeking legal and financial advice can help in structuring a holding company effectively.

If you want to know how to create a holding company, it's formed to purchase and own other companies' assets and to organize, manage, and control the companies that sell their assets to it. The companies that sell their assets and give up their management and control to a holding company are referred to as “operating companies.”

Holding Company Overview

Business owners and investors should consider creating holding companies to safeguard their businesses and investments and even possibly get better tax rates. A holding company doesn't do anything other than lend, borrow, and make investment choices. However, a holding company plays a significant role in funding or leasing assets to its operating companies, regardless of their industry.

Its assets can be shares or stocks in other limited liability companies, publicly traded stocks, corporations, limited partnerships, hedge funds, private equity funds, bonds, brand names, real estate, patents, song rights, trademarks, copyrights, or anything else that's valuable.

Types of Holding Companies

There are several types of holding companies, each serving different purposes:

  1. Pure Holding Company – Exists solely to own shares in other companies and does not engage in any other business activities.
  2. Mixed Holding Company – Owns shares in other companies while also engaging in its own business operations.
  3. Financial Holding Company – Primarily engaged in banking, insurance, or financial services, regulated by government agencies.
  4. Intermediate Holding Company – A subsidiary of a larger holding company that itself holds shares in other companies.

Choosing the right type depends on the business goals, regulatory requirements, and operational needs.

Holding Company Benefits

The two most common benefits of a holding company are better tax rates and protection of assets. A holding company can enjoy reduced tax rates if it incorporates in a state with a more business-friendly taxation. Also, the holding company will be able to borrow at rates that are lower than other businesses because it owns diverse groups of businesses. Furthermore, the company gains heavily from the rise in the stock value of the businesses it finances.

A holding company might also be fit for a small business owner because it can protect the high-value assets of the operating company. It protects the assets of the company from loss to the creditors of its operating companies. This works by ensuring the holding company doesn't cosign on the debt. If the holding company doesn't cosign on the debt, it's not responsible for the operating company's debt.

The Burlington Northern Santa Fe railroad is an example. Warren Buffett bought all the shares of the railroad, which he transformed into his totally owned subsidiary through his holding company. Burlington Northern Santa Fe railroad (BNSF) was indebted by billions of dollars that were used to fund its epic capital expense budget for the railroad track, the railroad cars, and the other railroad infrastructure. Berkshire Hathaway, Warren Buffett's holding company, didn't guarantee any of these debts.

Potential Risks and Challenges

While holding companies offer many advantages, they also come with certain risks:

  • Regulatory Scrutiny – Financial and corporate regulators may impose restrictions, especially on financial holding companies.
  • Tax Complexity – While tax advantages exist, holding companies must comply with different state and federal tax laws.
  • Increased Administrative Costs – Managing multiple subsidiaries requires additional legal, financial, and accounting oversight.
  • Potential Liability Issues – Although asset protection is a key advantage, poor structuring or co-mingling of funds can expose a holding company to liabilities.

Careful legal and financial planning can mitigate these risks and ensure that a holding company operates efficiently.

Creating a Holding Company

Before creating a holding company, you should evaluate your business needs and be sure of what you're looking forward to getting out of it. You should also clearly define your structure by deciding, for instance, if it's going to be a corporation or an LLC. You should carefully decide which business form to go with because the business form you settle for will influence your liability and taxation.

For entities seeking a more business-friendly tax structure, they should consider creating their holding company in a different state than their operating company. A business attorney can help with the process of setting up a company in another state. To fully utilize asset protection, an entity can form two LLCs, one operating company, and one holding company. You have to make each a separate entity, but you can be the agent for both. As far as you run the holding and operating companies as different legal bodies, the holding company won't be responsible for the debts of the operating company.

Steps for Setting Up a Holding Company

To establish a holding company, follow these key steps:

  1. Choose a Business Structure – Decide between forming a Limited Liability Company (LLC), a Corporation, or another entity type.
  2. Register the Business – File the necessary documents with the state, including articles of incorporation or organization.
  3. Obtain an Employer Identification Number (EIN) – Required for tax purposes and to open business bank accounts.
  4. Open Separate Bank Accounts – Keeping financial separation between the holding company and its subsidiaries is essential for asset protection.
  5. Draft Operating Agreements and Bylaws – Define roles, responsibilities, and ownership structures for subsidiaries.
  6. Acquire Business Assets – The holding company can purchase assets such as intellectual property, real estate, or equipment.
  7. Comply with Legal and Tax Requirements – Stay updated on regulations and ensure tax filings are done correctly.

Proper structuring ensures maximum benefits while minimizing risks.

Registration Requirements

You'll have to register with the state by providing the business name, the name of the business agent, and your company's articles of incorporation. This is required for your holding company as well as your operating company if you haven't incorporated your operating company. The articles of incorporation should provide your company's purpose, its objective, the names of its officers, and its intended business-decision-making method.

You’ll need to create a separate bank account for your holding company. In order to stay independent of each other, both the holding and operating companies have to operate different bank accounts and keep different bank records.

Legal and Compliance Considerations

A holding company must adhere to state and federal legal requirements, which may include:

  • State-Specific Business Laws – Each state has unique registration requirements and tax laws for holding companies.
  • Industry Regulations – Financial and insurance holding companies may be subject to stricter oversight by federal agencies.
  • Annual Reporting and Compliance – Most states require annual reports, renewals, and tax filings.
  • Liability Protection Rules – To maintain legal separation, the holding company should not commingle funds with its subsidiaries.

Consulting a legal expert can help navigate these regulations and ensure full compliance.

Where to Deposit Your Assets

Your company's wealth should be deposited in the holding company from which you can lend money to your operating company as needed. If you started your operating company before your holding company, you should begin by selling all your operating company's valuable assets to the holding company. Some examples of valuable assets that should be sold to the holding company by the operating company are the following:

  • Land
  • Building
  • Equipment
  • Intellectual property

Tax Implications and Strategies

A well-structured holding company can provide significant tax benefits, such as:

  • Income Tax Deferral – Profits can be retained in the holding company to delay taxation.
  • State Tax Optimization – Forming the company in a tax-friendly state (e.g., Delaware, Nevada) may reduce tax liabilities.
  • Dividend Tax Planning – Dividends paid from subsidiaries to the holding company may qualify for reduced taxation under certain conditions.

However, tax laws vary, and professional tax advice is crucial to avoid potential penalties and ensure compliance with IRS regulations.

Frequently Asked Questions

  1. What is the purpose of a holding company?
    A holding company is designed to own assets and control subsidiary businesses without engaging in operational activities.
  2. What is the best state for setting up a holding company?
    States like Delaware, Nevada, and Wyoming are popular due to favorable tax laws and strong legal protections.
  3. Can a holding company own multiple businesses?
    Yes, a holding company can own multiple subsidiaries across different industries.
  4. Do holding companies pay taxes?
    Yes, holding companies are subject to federal and state taxes, but strategic structuring can reduce tax liabilities.
  5. How does a holding company protect assets?
    By separating valuable assets from operating businesses, a holding company reduces liability risks and shields assets from creditors.

If you need help with how to create a holding company, 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.