Yes, an LLC can be a holding company. A holding company is formed purely to own other companies and they do not perform any business of their own. You can create an LLC to form a holding company. The majority of holding companies are either LLCs or corporations.
Forming a holding company and re-structuring your business under its umbrella can be a complex process. If you’re planning to create one – you should seek professional advice to ensure all legal aspects have been complied with.
Let’s a take closer look at – Can an LLC Be a Holding Company?
What Is a Holding Company? | Benefits of a Holding Company | What Is an LLC? | Advantages of LLC as a Holding Company | Disadvantages of LLC as a Holding Company | How To Form an LLC Holding Company | What Is a Parent Company?
WHAT IS A HOLDING COMPANY?
A holding company is a business entity that owns other companies. A holding company does that conduct any business itself. It does not supply any goods or services and is not involved in the day-to-day running of its subsidiary companies.
A holding company exists solely to own or control other companies and their assets – such as intellectual properties, buildings, goods, patents, and trademarks. And, crucially a holding company is insulated from most debts incurred by each company it owns.
This debt protection means that if one of the subsidiary companies goes bust, its debt cannot be passed on to the holding company. The holding company provides an additional level of debt protection to its owners.
Holding companies are not just for large multinational corporations. They provide important benefits for small and medium-sized business owners too. Holding companies can be structured to minimize liability and to shield individual subsidiary companies from the losses of one another.
PROFESSIONAL LEGAL ADVICE
Structuring a business to be owned by a holding company is a complex arrangement. And, to take advantage of its benefits you need to have taken care of all the details and paperwork. You should seek professional legal advice when forming a holding company.
BENEFITS OF FORMING A HOLDING COMPANY
What are the benefits of forming a holding company? The two primary benefits of forming a holding company are to limit potential losses and to reduce tax liability.
LIMIT POTENTIAL LOSS
One of the key benefits of a holding company is to limit potential loss. A holding company helps prevent a loss experienced in one part of your business from impacting another. Individual companies and groups of assets can be protected from one another and prevent a domino effect if one should fail.
If one of the subsidiaries runs into financial difficulty and is pursued by its creditors for its debts – a holding company helps place the assets of other subsidiary companies beyond the reach of the creditors. It forms a protective shield that can contain the losses to the area they were incurred.
Holding companies are often used to separate high-risk and low-risk companies. Owners of low and high-risk companies can use a holding company to insulate their assets.
Under the umbrella of a holding company, low-risk companies are placed in a separate subsidiary to protect them from high-risk ventures. Should the high-risk companies fail or be sued the holding company provides a layer of protection to the low-risk companies.
REDUCE TAX LIABILITY
Holding companies are often formed to reduce the tax liability of their subsidiaries. Once a holding company is formed it becomes the legal owner of each of its child companies. This umbrella company can then be moved to a jurisdiction that offers a more favorable tax rate.
The subsidiary companies are known as operating companies. And, they will continue to be located in the locations they do business. The holding company however will be officially registered in a region that allows the owners to take advantage of favorable tax regimes.
Additionally, a holding company allows its owners to offset annual trading losses. The operating profits and losses of each subsidiary can be consolidated within the umbrella company.
This practice allows the holding company to offset the losses of one company against the profits of another and reduce its tax liability.
WHAT IS AN LLC?
An LLC is a type of company and a legal entity used to form, structure, and operate a business. LLC stands for Limited Liability Company. It is a company structure that separates and protects its owners from the debts of the company.
They provide the same limited liability protection as a corporation but are easier to form and operate. Other benefits of an LLC include pass-through taxation, easy formation, and a flexible management structure. An LLC is the US form of a private limited company.
ADVANTAGES OF LLC AS A HOLDING COMPANY
What are the advantages of using an LLC as a holding company? Forming an LLC to act as a holding company has several benefits including limited liability protection, reduced operational exposure, and the creation of an additional layer of protection, see below.
LIMITED LIABILITY PROTECTION
Forming an LLC offers limited liability protection to its owners. This is one of the key benefits of forming an LLC. If the holding company is an LLC, its owners will benefit from limited liability protection.
This means, in most cases, the personal assets of the company’s owners cannot be seized to cover debts incurred by the company. It creates a layer of separation between the company and its owners.
REDUCED OPERATIONAL EXPOSURE
Holding companies do not perform any operations. They do not produce any goods or supply services. They serve only as a vehicle to own subsidiary companies that fall under its umbrella. This means there is a greatly reduced risk of being sued – as a result of operational activities.
ADDITIONAL LAYER OF PROTECTION
A holding company creates an additional layer of protection between the operating companies and the owners. The subsidiary operational companies are owned by the holding company. Which in turn is owned by the company members.
Additionally, it allows company owners to insulate assets and businesses from one another. This helps prevent losses incurred by one subsidiary from affecting other companies owned by the holding company.
DISADVANTAGES OF LLC AS A HOLDING COMPANY
What are the disadvantages of forming an LLC as a holding company? The key disadvantage relates to the complexity of structuring and operating the parent company as a separate entity. Failing to draw clear lines of distinction between a holding company and its subsidiaries can result in the parent company losing its liability protection.
When forming a holding company as an LLC there are important several structural requirements that must be met. The umbrella company and its subsidiary companies must adhere to the requirements that draw a clear line of separation between the two.
The best way of ensuring your holding company is correctly structured is to hire a legal professional. They can guide you through the process of forming an LLC holding company and positioning its subsidiary companies under its umbrella.
HOW TO FORM AN LLC HOLDING COMPANY
Forming an LLC holding company follows many of the same steps as forming an LLC. The rules vary from state to state, so check the requirements for your specific region.
You can hire an LLC formation service to complete the process for you. And, we advise consulting a legal professional who can guide you through the legal complexities of forming a holding company for business needs. In general, forming an LLC holding company will involve the following steps.
- Choose a State
- Select a Company Name
- Appoint a Registered Agent
- Submit Articles of Organization
- Choose a Management Structure
- Create an Operating Agreement
- Obtain an EIN
- File Annual Reports
WHAT ABOUT A PARENT COMPANY?
What’s the difference between a holding company and a parent company? The terms ‘holding company’ and ‘parent company’ are sometimes used interchangeably. However, there is a clear difference between the two.
A holding company serves only to own other companies and assets. A holding company does not produce any goods or provide any services. It does not conduct any business of its own.
A parent company owns subsidiary companies – just like a holding company – but also conducts business. Parent companies pursue their own business ventures and activities in addition to owning subsidiary companies.
About the Author
Rachel Hall – LLC Specialist
Rachel joined the My LLC Guide team in the spring of 2021. She is a graduate of the McCombs School of Business at the University of Texas. She studied business administration and has a particular interest in strategic decision-making, risk management, and legal and regulatory business requirements.
She is a founding member of a business advisory company that she formed with a group of like-minded McCombs alumni. Outside of business, Rachel likes to volunteer at the Central Texas food bank where she helps prepare food donations for distribution. She is also a keen fan of music and dance and enjoys attending live performances.