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Setting up a holding company is a great strategy for entrepreneurs to grow their businesses. Find out why in this article.
What is a Holding Company
A holding company is a company that owns other companies (subsidiaries). A holding company doesn’t engage directly in the business. The subsidiaries will do the actual business (sell goods and services), so the subsidiaries are also called operating companies.
Benefits of Holding Company
- IP Rights Protection. You can make the holding company own the IP rights (trademarks, patents, copyrights). When the operating company enters into contracts with other companies, the IP rights won’t be affected by the contracts. For example, when Amazon FBA sellers sign contracts with Amazon, they give up a lot of IP rights to Amazon. You can prevent this by creating a holding company, which will own the IP rights.
- Protect business assets from the creditors of the operating LLC. If the operating company is sued, the creditor can’t take assets in the holding company and assets in other subsidiaries. So you should always allocate more assets in the holding company instead of leaving the asset in the subsidiaries.
- borrowing and lending. The holding company can borrow at lower rates than other businesses because it has ownership in such a diverse group of businesses.
Holding company vs Parent company
- A holding company is a firm that doesn’t have any actual operations, but rather only has investments in other firms.
- When a company has its own operations and also owns other companies, it’s known as a parent company rather than a holding company.
The Duty of Holding Company
- Set up subsidiaries
- Make investment decisions. Invest and finance using the holding company.
- To maintain independence as separate companies, the holding company and the operating company must maintain separate bank accounts and accounting records
- Perform all operating activities through the operating company. The holding company must never be involved in these operating activities.
- All employees who perform operating functions should be employees of the operating company, and should be paid using the operating company funds.
- have most of the cash between the businesses stored with the holding company, where it can earn interest, and loan to the operating company when necessary. So long as the cash is on the holding company accounts, it is not subject to liabilities of the operating company.
Tax Liability
The tax liability of the subsidiary passes through to the holding company, which then passes through to the individual. You still pay no tax in the US.
How to Form Holding Company and Operating Company
Holding Company Structure
- Holding Company: an individual Single-member LLC (Member-managed LLC, you as the member) Then you hold a meeting with yourself, deciding that you are going to form a subsidiary.
- Subsidiary: single-member LLC, the holding company as the member. The Subsidiary can be a manager-managed LLC, the holding company elects you as the manager. Or it can be a member-managed LLC, the holding company being the member. If you want anonymity, choose member-managed LLC.
Best practice: holding company member-managed, subsidiary manager-managed. You can appoint someone else or yourself as manager.
Follow the instructions in the following article to set up the holding company first. The holding company should be member-managed.
After the holding company is formed, you fund the holding company, then hold a meeting with yourself to decide that the holding company is going to form a subsidiary.
Follow the same steps in the linked article to set up the operating company. Be sure to select the holding company as the single-member. The operating company should be manager-managed. You can appoint yourself or someone else as the manager.
You will need separate bank accounts, EIN, and accounting for each company. However, you can use the same address and registered agent for both company. You can have bank accounts in the same bank, but separate bank accounts.
- For the holding company, you can use a name like ABC holdings, LLC.
- For the operating company, you can use a name like ABC Operating Company, LLC, or ABC Trading, LLC
How to Pay Yourself
You should not take distributions from the subsidiary. The member of the subsidiary (the holding company) takes distribution, then you as an individual takes distribution from the holding company. You can also pay management fees to yourself, instead of distribution.
How to Fund the Operating Company
- First, transfer money from your personal bank account to the holding company account to fund the holding company (Capital Contribution)
- Then transfer money from the holding company to the operating company (Capital Contribution)
Transfer Profits From the Operating Company to the Holding Company
- You can take a distribution from the operating company whenever you want, so the profits are transferred to the holding company
Company Name and Brands
- Use a generic name for the holding company, since it’s not going to engage in actual business.
- Use a brand name for the operating company. The holding company owns the brand name and the operating company uses the brand name as the company name and sell the brand product.
Choose a Name for Your Holding Company
Since the holding company doesn’t directly engage in business, you have more freedom in choosing a company name.
- It should not indicate a line of business, such as “International Trade LLC”.
- It should not bind to a geographical location, such as “California Holding LLC”
- Make sure you can obtain a domain name for your company name.
- You may also want to search the US Patent and Trademark Office’s website to determine if your chosen name has been registered as trademarks. This will help you to avoid a costly trademark infringement later on.
- Although your holding company isn’t engaged directly in business, you should choose a name that leaves a good impression. Don’t use very long, not pronounceable names.
