Holding companies own assets or stock of other companies. Typically, although they can, a holding company does not produce goods or services itself. Instead, the purpose of a holding company is to own assets or shares of other companies. Holding companies may also own property, including real estate, patents, trademarks, stocks, and other assets. Then, the holding company forms a corporate group with said subsidiaries or assets.
Usually, the holding company’s management is also responsible for the investment of the money. In this case, the holding company can obtain funds by making investments after selling equity interests. This can either be within itself or its subsidiaries or even by borrowing. It can also earn revenue from payments that it receives in the form of dividends, distributions, interest, rent, or payments from subsidiaries.
Creating a holding company is not as simple as making the decision to do so. There are many variables that come together when deciding how to form. One option is to bring together two business entities, but it can also be more. There are a few important decisions to be made when setting up a holding company such as,
When it comes to forming a holding company you will need to decide whether you wish to form as a corporation or LLC. There are various factors when it comes to deciding what type of entity you would like to form. Although both corporations and LLCs offer limited liability, there are also differences as well. You will need to weigh areas such as how profits are split, how management is done, and taxation.
Depending on the industry that you operate in, picking a name can be difficult. Many business owners immediately think to use their own first and last name as the LLC name. Despite this, this fully removes any sense of privacy that you might have. Choosing a name that explains what your company is about while also keeping it original is essential. Your LLC name cannot have the same name as any other business, and will also need to include LLC or another variation in the name such as “limited liability company.”
When forming a holding company the method in which you form as an entity will dictate your taxation as well. If you form as an LLC you will be able to choose how you want to be taxed. As a corporation, you can attempt either s-corp or c-corp status. Another option you have to choose is whether you want to form as a separate taxed entity or as a pass-through entity.
Although a holding company can be formed in any U.S state, when forming in a state other than your own, you will need to have some sort of presence there. What is great about holding companies is that the holding company and its subsidiaries do not have to be formed in the same state. Despite this, you will need to ensure that you obtain proper permits to do business in a state other than the original formation state.
The choice of a Registered Agent is something that will allow you to form in various states and have more freedom. The registered agent receives service of process and all legal communications for the business. Although this can be an owner, it can also be an employee, a lawyer, or a third party business that acts as a paid Registered Agent.
Here are a few advantages of setting up a holding company.
By placing operating companies and their assets into separate entities, it creates a liability shield. This means that the debts of each subsidiary belong to that subsidiary. Creditors of subsidiaries will not be able to reach anything owned by the holding company, nor a different subsidiary.
Even though a holding company controls its subsidiaries, it does not mean that they are required to own all of the shares or interests. By owning over 50% of the company, the holding company can control another company at a lower cost than if it acquired all of the interests.
There are holding companies that have financial strength which allows them to obtain loans at lower interest rates. This is typically more than that of its operating companies. Especially, when a business is in need of capital, is a startup, or if it is considered a credit risk. Then the holding company can obtain the loan and distribute the funds to the subsidiary.
Here are a few disadvantages of setting up a holding company.
The use of holding companies and subsidiaries does add an element of complexity. This is one that is typically not found in the single-entity structure. When a public traded corporation uses a holding company, it may be difficult to keep track of many subsidiaries.
The holding company and each subsidiary that is formed will need to pay formation fees. In many cases, there is also an annual report and franchise tax obligation. In this case, each will need to comply. Typically a standard operating company avoids these additional per-entity compliance obligations and additional costs.
Although forming a holding company can be filled with complexity and added compliance costs, overall it will keep your assets protected and provide you with many other benefits. Hiring a business lawyer is the best way to get started and ensure that you are compliant with all laws and regulations. Contact us today to learn more about forming your holding company.