Suppose you have or plan to have multiple businesses. In that case, you can form a holding company that provides further asset protection and can be a limited liability company (LLC) or a corporation.
What Is a Holding Company
A holding company, or parent company, is a business entity with no business operations. Instead, it maintains a controlling interest (more than 50%) in a company or companies, often known as subsidiaries, that do have business operations.
The companies the holding company owns all have their management, while the holding company oversees those managers. As a result, the holding company can obtain financing for the subsidiaries and receive income from them.
Benefits of a Holding Company
- The holding company offers an added layer of financial protection, as the obligations of a subsidiary do not affect the holding company or other subsidiaries.
- The holding company can acquire other businesses so that you can expand your business portfolio.
- Very few management duties exist for holding company members since all the subsidiaries have their management.
- The holding company may have a better chance of obtaining financing since it will have a strong asset position as the owner of subsidiaries and access to multiple sources of income.
- The holding company offers portfolio diversification, as the subsidiaries can be involved in any industry, from fashion to tech to manufacturing and beyond.
Disadvantages of a Holding Company
- The cost will be higher than not having a subsidiary, as states require the holding company and subsidiaries to pay formation fees and other fees.
- Accounting for a holding company tends to be complex as it has multiple income streams.
- The holding company needs to monitor its subsidiaries’ management, performance, and record-keeping.
Choosing an LLC for Your Holding Company
When forming a holding company, you’ll need to choose between an LLC and a corporation. If you choose an LLC, the income from subsidiaries will pass through to the holding company members.
If you choose a corporation, the income from subsidiaries will be subject to corporate taxes and taxes on dividends paid to shareholders, referred to as double taxation.
A corporation may be a better choice if you plan to grow your business by raising funds from investors. Investors often hesitate to invest in LLCs because LLCs cannot issue shares. However, a corporation can issue shares and offer those shares to investors in exchange for capital.
The better option regarding taxes depends on many factors, so it’s best to consult with a tax advisor about how you plan to use the holding company.
A holding company offers many benefits, and in many cases forming an LLC for the holding company is the best option. But every situation is different, so it’s important to get the advice of a tax advisor and attorney to ensure you and your businesses have the best chance of success.