Can A Holding Company Be An LLC?
When creating a new business, there are a lot of decisions to make. One option that may be unfamiliar to some is the use of an LLC as a holding company. In this post, we’ll break down what exactly a holding company is and what benefits an LLC can offer in that role. We’ll also explore some of the potential drawbacks to using an LLC as a holding company. By the end of this post, you’ll have all the information you need to make an informed decision about whether or not using an LLC as a holding company is right for your business.
What is a holding company?
A holding company (also referred to as investment holding companies, real estate holding companies operating companies, etc.) is a type of business entity that exists for the purpose of owning and managing other companies or assets. Holding companies can be set up for a variety of reasons, including holding assets such as intellectual property or property, managing risk, and providing a source of financing for subsidiary companies.
How is a holding company used?
Holding companies can be used to protect valuable assets, such as patents or trademarks or to separate divisions in preparation for a sale.
In some cases, a holding company will be used to protect intellectual property.
In other cases, a holding company may be formed to make it easier to sell off a particular division.
What are the advantages of a holding company?
Holding companies have a number of advantages, such as being able to offer specific benefits depending on your financial goals and business type. Here are three key takeaways.
Liability Protection – One of the main advantages of using an LLC as a holding company is the asset protection it can offer. By having the holding company own the assets, rather than the parent company, you can create a barrier between your personal assets and business liability. This is especially important if your business owns high-value assets or is at risk for lawsuits.
Asset Protection – A holding company can be used to protect valuable assets such as intellectual property. For example, if a business owns patents or trademarks, it can create a holding company to own and manage those assets. This can provide some protection from creditors in the event that the main business is sued or to protect against a hostile takeover. Often the parent company will pay the holding company a royalty fee for the use of the intellectual property which may offer tax benefits.
Lower cost of debt – A holding company can be useful if the main company wants to acquire smaller competitors or companies in a different industry. This way, the holding company can expand its borrowing capacity in addition to not competing against any borrowing restrictions the parent company may have.
Ownership flexibility – Another advantage of using an LLC as a holding company is the flexibility it offers in terms of ownership. For example, if you want to bring in investors or partners, you can do so without having to give them a stake in the parent company. This can be a way to raise capital without giving up control of the entire business.
This ownership flexibility can be useful for selling parts of a business too. For example, if an automotive company sells light car and truck parts in addition to tires and decides the tire division is now outside of its core mission, it may be able to sell off the tire line more easily if the tire line is moved to a holding company. By separating the assets and financials of the tire division from the parent company, it’s easier for potential buyers to evaluate the deal.
What are the disadvantages of a holding company?
While holding companies can be useful for a variety of reasons, they also have some drawbacks.
Costs – Setting up and maintaining a holding company is expensive. There are filing fees associated with setting up each holding company, along with the ongoing maintenance costs for annual reports, additional tax return filings, and legal compliance.
Complexity – A holding company structure is more complicated, which can make it difficult to understand how the business is organized. This can make it challenging for investors and lenders to understand the financials of the company and make informed decisions.
What is an LLC?
A Limited Liability Company (LLC) is a legal entity that offers owners limited liability protection. LLCs are popular because they offer the same limited liability protection as a corporation but without the complex tax and governance structure.
Related: What is an LLC?
Can a holding company be an LLC?
Yes – An LLC can be used as a holding company and is a popular choice over a corporation due to the ease of management and tax flexibility it offers.
If you are considering an LLC holding company structure, it is highly recommended to discuss your plans with an attorney who specializes in business law.
For many small businesses, a holding company may be more complicated than they need. A similar option that may offer the same type of protection at a fraction of the cost is a Series LLC. A Series LLC is a type of LLC that offers owners the ability to create separate “series” or mini LLC under the umbrella of the Series LLC.
The Series LLC is offered as an option in many states and each series can have its own assets, members, and liabilities. Series LLCs are popular for businesses that don’t want to put all of their eggs in one basket and be able to have asset protection without creating multiple different business entities.
Some examples of businesses that might use a series LLC include:
- Real estate investment companies can create separate LLCs for each property they own. Instead of putting each property into separate entities, a Series LLC can offer some protection in the event that one of the properties is sued as the other properties are protected.
- A holding company that wants to create different LLCs for each subsidiary business. This can offer some protection in the event that one of the businesses is sued.
- A business with multiple locations that wants to create an LLC for each location. This can offer some protection in the event that one of the locations is sued.
Related: What is a Series LLC?