Holding companies are popular options for businesses that want benefits that are simply not available with certain other structures, such as limited liability companies or corporations. It is relatively straightforward to create your holding company. There is a key difference however: a holding company only owns and controls assets. It does not participate in operations. The assets owned by holding companies can vary and include things such as real estate, intellectual property, and other companies.
The structure of holding companies protects assets to a very strong degree. It can also reduce taxes and provide extra anonymity for businesses that value privacy. Most holding companies participate in operations via the use of either a sister company or a subsidiary, creating as many as are necessary.
As mentioned, one of the biggest benefits of holding companies is their ability to protect assets. This is particularly a concern when it comes to lawsuits from poor luck, accidents, or other causes. Unfortunately, if your assets are held by the liable company, they may be lost. Holding companies hold the assets separately so this is not a concern. The holding companies will then rent out the assets when subsidiaries or sister companies require them. The result is separating the risky elements of a business from its valuable assets.
A holding company can also help create privacy for businesses that do not want their information published online. This is a significant concern since many states have requirements for publishing the information of managers or owners online. With a holding company, particularly one that is anonymous, that company’s information gets listed online. This hides your information and can even deliver privacy in states like Florida that do not outright allow anonymous LLCs.
There are also some tax advantages associated with forming a holding company. One of the biggest benefits is the increased simplicity of taxes. Subsidiaries do not file tax returns. Only parent companies do. This means that if you use a holding company as a parent company with various subsidiaries, you will save time on tax returns as the subsidiaries will not need to file. Holding companies also make it possible to move income to states with lower income taxes, or even none at all. With the changes to tax laws in 2018, holding companies in the form of LLCs may also have lower taxes than their sole-proprietorship counterparts.
In some cases, you may need to register your operating company in a state other than the one you form your holding company in. This will be required if you transact business in that state. The specific definition for transacting business varies by state, but it typically includes having employees and having physical storefronts or property and it might include property management. This registration will not be a concern if you have an e-commerce company and in some other cases.
You have two main options for establishing your operating and holding companies. The holding company can act as a parent company with its own children companies. Or the holding company can be owned fully separately from the operating company, known as a sibling structure.