What is an LLC Holding Company?
An LLC holding company is an entity that organizes or controls the assets of subsidiary LLCs. Many business owners will strategically use holding companies to control stock or other interests and can create holding companies to help further organize their subsidiary LLCs or other businesses. Whether you should form a holding company for your business depends on your needs and how you would like to control the assets of your business.
In this article, we will be discussing everything you need to know about LLC holding companies. We will go in-depth into the advantages and drawbacks of establishing a holding company for your LLC in addition to defining exactly what a holding company can do for you.
Understanding LLC Holding Companies
As mentioned above, an LLC holding company is an overarching entity that is typically an LLC (but sometimes may be treated as a corporation) that doesn’t sell any goods or provide services. Instead of conducting business operations, the holding company is created to control the stocks, assets, and membership interests of other subsidiary companies. The subsidiary companies under an LLC holding company will typically be the parts of the business that sell goods or services and provide the assets for the holding company to organize.
You can create a holding company that owns all the subsidiary companies or one that only has enough stock or asset possession to simply control and organize the subsidiaries. It is also important to note that a holding company only makes the management decisions for the holding company and the assets of the subsidiaries; each individual subsidiary company will have its own management structures and will be responsible for the day-to-day business management.
An LLC holding company may also be responsible for making decisions on investments and how to obtain funds for making those investments. The holding company can sell equity interests in itself, subsidiaries, or may borrow money, in addition to earning revenue from payments by subsidiary companies.
The most popular use for holding companies happens in companies or large corporations that have multiple businesses providing different goods or services as subsidiaries; however, holding companies are found in all types of industries and amongst all sizes of business. A holding company makes it easy to organize all subsidiaries that operate separately under one overarching company and to control the assets and trading of these subsidiaries.
Do You Need an LLC Holding Company?
Whether you need to establish an LLC holding company depends on your business needs and if you need to organize the assets of several subsidiary companies. Some business owners find they can organize and control the assets of the several LLCs they own easily without the help of a holding company, but others prefer to establish a holding company for the ease of controlling or owning all the subsidiaries from one place.
It just depends on what you as a business owner think will work best for you; if you do have questions about creating an LLC holding company, you can speak to a tax or financial professional to get an idea of how an LLC holding company might affect your business.
LLC Holding Company vs Operating Company
The terms LLC holding company and an operating company are often used alongside each other, but they are quite different. The LLC holding company is the business entity that controls or owns all subsidiary companies. An operating company is another name for the subsidiaries that get controlled and is usually the source of assets, business, or profits that the holding company has been established to organize.
LLC Holding Company Benefits
The following benefits are something that you may receive should you choose to establish a holding company as part of your business’s organizational structure.
Lability and Asset Protection
By putting the control or ownership of your subsidiary’s assets under one holding company, you are able to provide additional liability protection. Even though the assets may be controlled by the holding company, the company and other subsidiaries are not responsible for the debts or judgments against the other subsidiaries. This allows the holding company and other subsidiaries to remain much the same even if a debt or lawsuit is filed against one part of the company.
Easier Financing Opportunities
When a holding company has significant financial strength, they are usually able to obtain loans and financing at lower rates than the individual subsidiary companies. This can help business owners secure financing more simply, at better rates, and then distribute it to the subsidiaries for investment or other use.
Less Startup Risk
Because each subsidiary is a separate entity and somewhat removed from the overarching holding company, there is less risk when it comes to starting up a new venture or investing in something new. This may help foster innovation and help business owners expand into areas that may not be profitable at first but can become an essential part of their business over time.
Hands-Off Management
A holding company doesn’t need to provide goods or services, nor does it need to be part of the same industries as its subsidiaries. This means the subsidiaries can mind their own business and handle their own day-to-day management while the holding company managers can be completely hands-off of the subsidiaries; there is no understanding that each subsidiary is required to create a holding company.
LLC Holding Company Disadvantages
There are some disadvantages to an LLC holding company that it is important to know before deciding whether this business entity is right for you.
Formation and Compliance Costs
When your form a holding company, you will be required to pay certain formation fees and compliance costs. The same is required for each subsidiary that you form to manage under your holding company. Additional compliance costs such as business taxes and annual reports may also be applicable, which can add up to a significant amount more than if you established and ran a single operating company.
Management Conflicts
A holding company does not have to own or control all the subsidiary’s ownership interests and assets, even though many individuals choose to give the holding company total control. This is because when the holding company does not have 100 percent interest, there may be the potential for conflict when it comes to managers of the holding company and those of the minority shareholders.
Over time, these conflicts can lead to a breakdown in the benefits that a holding company provides; it is important to ensure that the controllers of the holding company and any minority shareholders are on the same page to ensure collaboration.
Complexity
Even though an LLC holding company can provide several benefits, it may add a layer of complexity to your business that can be hard to deal with. This tends to occur when keeping track of assets, management and minority shareholder relationships, and taxes.
That said, you should always utilize a tool for keeping track of any records and information for your subsidiaries if you choose to establish a holding company because not doing so can make the complexity of this business structure even worse.
How is a Holding Company Formed?
Forming a holding company is much like forming the subsidiary LLCs underneath it. The only difference is that the company requires a specific set of separate records and a separate bank account. You need to treat your holding company like the separate business entity it is and only use it to control or manage the assets of any subsidiary operating companies.
In many cases, individuals forming series LLCs will utilize a holding company to keep everything organized. You can read more about the steps to forming your own LLC holding company here. Keep in mind that there may be different requirements based on which state you are operating out of, so always check local government websites before getting to work establishing your business.
Are Taxes Different for Holding Companies?
How your holding company is taxed depends on the type of business you are conducting with your subsidiaries, your operating state’s specific tax requirements, and how you are choosing your subsidiaries to be taxed. In most cases, a holding company’s subsidiaries are taxed as pass-through entities and the holding company files a tax return at the end of the year that encompasses each business.
However, this is a highly subjective process, and you should consult with a professional tax advisor to ensure that you file your taxes correctly to avoid making a mistake and incurring penalties.
Choosing the Best for Your Business
Deciding whether to establish a holding company is a highly personal decision and needs to be made once you have considered your business’s needs. In general, businesses that want to expand multiple subsidiaries and have the need to control the assets of these companies in one place can benefit from forming an LLC holding company. That said, remember to weigh the disadvantages of these business entities against the advantages before making a final decision.