LLC Holding Company: Everything You Need to Know
An LLC holding company is a way a business is structured that is popular with small businesses and start-up ventures.3 min read
2. LLCs as Holding Companies
3. Drawbacks of LLCs as a Holding Company
4. Benefits of LLCs as a Holding Company
5. What Is a Holding Company?
6. Do I Need a Holding Company?
Updated June 25, 2020:
An LLC holding company is a way a business is structured that is popular with small businesses and start-up ventures. This structure blends the benefits of a partnership and a corporation and provides tax benefits, as well as protection of personal assets from liability.
Membership In LLCs and Shares In Corporation
An LLC also provides flexibility when it comes to ownership as there are no restrictions on who can own and how many shares can be created for an LLC. Some LLCs may wish to eventually incorporate and choose Subchapter S corporation designation for tax purposes. It is important to note that changing from an LLC to an S corporation will bring about restrictions on ownership, including who can own a company and how many shares can be sold.
LLCs as Holding Companies
An LLC can be set up as a holding company, but when it is it will have no operation or function other than owning the other company and their assets. The company where the operations and business occurs, including where the employees and liabilities are, is referred to as the operating company.
A holding company holds not only the shares and membership interest in the operating company, but it also owns their important assets and basically leases them to the operating company for use. In this relationship, the operating company is able to purchase assets and cash from the holding company by taking a mortgage or security in the interest of the asset.
Drawbacks of LLCs as a Holding Company
There are some drawbacks to having an LLC as a holding company, some of which include:
- There is a higher level of complexity in the structure, creating opportunities for error.
- The assets of the operating company and their accounting must be separate from the holding company.
- Both companies must observe the formalities of being separate entities.
Failing to keep this separation and follow the operating procedures for both of the companies can result in the holding company being deemed a sham and possible legal action.
Benefits of LLCs as a Holding Company
Even though there are drawbacks, there are some benefits to having an LLC as a holding company. Even though creating the division between the ownership company and the operating company can be a little complex, there are advantages to having these two entities separate. Some of the benefits of an LLC as a holding company are:
- The operating company can shield its sole member from limited liability.
- The holding company can be protected from torts that occur as a result of the employees of the operating company.
- The holding company members will also enjoy the protection of limited liability.
- Since the holding company is the true owner of all of the operating company's assets and most of its cash, the company has additional protection from debts and creditors.
- Since the holding company provides no operations there is almost no opportunity for liability.
What Is a Holding Company?
A holding company, also referred to as an umbrella company or parent company, will own all of the controlling interest in the operating company, also referred to as a subsidiary. Holding companies can also be formed as a way to hold assets, such as building or equipment, and the stock of other operating companies, which in turn will own none of the assets.
Do I Need a Holding Company?
For multiple businesses that are small or have fewer assets, it may seem like a lot of trouble and expense to create a holding company when there are little assets to protect. If this is the case, you can just form one primary LLC and have several projects that are formed under the LLC.
If you choose this option, you will then use the doing business as designation. You could also create an LLC company for each business, though this would require you to maintain separate accounting systems and divide up the expenses between each company. If you have a business with a significant amount of assets, then a holding company would have a true purpose and would be worth forming one to protect the assets.
If you need help with forming an LLC 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.