Family Holding Company

What Is a Holding Company?

A holding company is a business entity that owns, or “holds”, other assets. These assets might include other companies, real estate, securities, patents, trademarks, copyrights, and more. Holding companies are unique in the sense that they typically don’t have operations of their own.

It’s common practice to see holding companies utilized by owners that have multiple assets across various industries. The holding company structure is a useful way to protect assets by limiting and isolating risk. An owner might also use a holding company as a way to transfer assets out of his or her name while still maintaining control over them.

Additionally, note that holding companies come in a number of different forms. Here, we’ll take a look at how family holding companies work and the common benefits associated with them.

How Does a Family Holding Company Work?

Choosing to set up a family holding company gives you the ability to transfer assets out of your own name while still holding onto control of those assets. This is achieved by setting up an LLC or corporation to serve as your holding company then allotting yourself a relative majority of its shares (i.e. the most shares of any owner).

Next, divide the remaining shares among your chosen family members in an agreed upon manner. Then, gift the assets over to the holding company. By maintaining a majority of shares in the company you will retain control over the assets and your ability to manage them.

Depending on the nature of your family’s goals, a holding company can also be structured to have family members working together as a cohesive unit where investment decisions are agreed upon by each of the shareholders. In this way, all of your family members will be invested in the goals and direction of the company.

Additionally, the family holding company structure can be a great tool for building wealth. Not only does it have an efficient structure for estate planning and passing on assets, but it can also help to minimize the impact of the estate tax on transferred wealth.

Benefits of a Family Holding Company

There are a number of benefits that a family can derive by forming a holding company. Typically, the most common advantages that are sought after with a family holding company are centralized management, asset protection, growth potential, and tax benefits.

Centralized Management: A family might decide to use a holding company in order to centralize the management of their assets. This can provide clarity on business operations, investments, and other matters, which is helpful when dealing with family companies.

Asset protection: The holding company structure is a great way to protect assets and isolate risk. If one subsidiary of the holding company has debts or legal issues, it will not impact the holding company or any other subsidiary. These liabilities will belong solely to the affected subsidiary, meaning that creditors cannot reach any other assets.

Growth Potential: Another benefit of the holding company structure is that it allows for further growth and development. Whether this is diversifying your assets or a family member with a new business idea, a holding company is well suited for expansion, providing capital, and mitigating risk.

Tax Benefits: Depending on how your family holding company is structured, you might be able to take advantage of certain tax benefits. Because subsidiaries are not required to file tax returns, the consolidated tax filings of a holding company offer potentially lower taxes, as well as simplification when managing family interests.

How to Start a Family Holding Company

If you’re interested in starting a family holding company, there a few steps that you’ll need to complete. One of the initial decisions you’ll have to make is choosing an entity type for your holding company. Traditionally, a corporation has been the common choice, but in recent years LLCs have grown in popularity. In fact, the structure of a holding company lends itself better to an LLC, as it’s not directly involved in operations and offers more flexibility in management.

Additionally, how you draft the operating agreement will play an important role in your holding company. There are any number of provisions that can be included in the agreement as a way of tailoring permissions, investments, and more, to your family’s specific situation.

For example, the operating agreement could stipulate that members make a regular contribution of a certain amount each month, or it could determine that no member is allowed to sell their shares without the agreement of the other members. In this way, the operating agreement can be a useful tool in maintaining family cohesion when dealing with financial matters.

When it comes to estate planning, a family trust is often utilized together with a holding company as a way of creditor-proofing assets and limiting exposure to estate taxes. When establishing your trust, you’ll need to name a trustee to take legal ownership of your assets. Then, you can fund the trust by transferring your assets to it. These assets can include property, bank accounts, securities, and more. Note, however, that when setting up a family trust, it’s always best to consult an experienced estate attorney.

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