As a business owner, or an aspiring business owner, you’re no doubt interested in doing all you can to protect your assets. One way to do so is to form a holding company, which will then own one or more operating companies. If you’re planning to do this you might wonder: can the holding company be a limited liability company (LLC)? The answer is yes, the holding company can be an LLC or a corporation.
What Is a Holding Company?
A holding company, also sometimes called a parent company, is a business entity that has no business operations. It does not sell or manufacture products or offer any services. Its sole purpose is to hold controlling interests in other companies, which are operating companies, also called subsidiaries, that have business operations of some kind. Controlling interests means that the holding company owns at least 51% of the operating companies.
Each operating company has its own management for day-to-day operations, while the holding company management oversees the subsidiary management teams. They can appoint or remove subsidiary managers and make major decisions for the subsidiary companies. The holding company can also seek investment or loans and receive income from the subsidiaries.
Many large corporations are holding companies with multiple subsidiaries, but small businesses often use holding companies as well. For example, an entrepreneur may want to start a company that offers an online fitness app, but also have an idea for a gaming app. They can create a holding company and form separate subsidiary companies for each app that are owned wholly or in part by the holding company. They can also expand and form any number of new subsidiaries over time.
Advantages of a Holding Company
There are many reasons business owners form holding companies:
1. Liability protection
The financial obligations of each subsidiary are separate, so if one subsidiary cannot fulfill an obligation or is sued, the assets of the holding company and any other subsidiaries are safe. The holding company structure provides a shield of liability protection.
2. Easier Acquisitions
The holding company can use its assets to obtain control of another company to create a new subsidiary by only purchasing a controlling interest in the company, rather than 100% of the company.
3. Less Management Responsibility
Since each subsidiary has its own management, the holding company owners are not involved in day-to-day operations. A holding company could have any number of subsidiaries, all of which have separate management, while the holding company owners simply oversee the companies and receive income from all the subsidiaries.
4. Access to Financing
Since the holding company will own more assets than each subsidiary alone, it will be in a stronger financial position to obtain financing. The holding company could take out a loan, and then distribute the funds to one or more subsidiaries.
A holding company can control subsidiaries that operate in very different types of businesses and industries, thus diversifying the holding company owner’s portfolio.
Disadvantages of a Holding Company
While the benefits of a holding company are many, there are a few disadvantages as well.
1. Costs and legal compliance
The holding company and each subsidiary will require formation fees, annual fees, and any franchise and other taxes required by the state or states in which they operate. Each will also be subject to any further legal requirements of those states, such as licenses and permits.
While the subsidiaries have their own management, the holding company has multiple income streams that require separate accounting. The holding company also has oversight of the subsidiary management and must be in the loop about the performance and issues of each subsidiary. Record-keeping for all the subsidiaries can be a challenge.
Should Your Holding Company be an LLC?
If you’re forming a holding company, you’ll need to decide whether to form it as an LLC or corporation. If you choose a corporation, the income it receives from subsidiaries will be subject to corporate taxes, as opposed to the pass-through taxation of an LLC. Which option is better in terms of taxes depends on many specific factors, so it’s best to consult a tax advisor and discuss your plans for the holding company and how it will operate financially.
If you plan to grow your business with the holding company by raising funds from investors, a corporation may be your best bet. Investors do not usually invest in LLCs because LLCs cannot issue shares. A corporation can issue shares and offer those shares to investors in exchange for capital.
Holding companies can be very beneficial, but they can also be very complicated. The answer to the original question is simple – yes, a holding company can be an LLC. Whether it should be formed as an LLC is another question that is best answered with the advice of a tax advisor and an attorney, because there are many specific factors that affect that decision.