How to get Started with your Holding Company - Who needs a Holding Company? And Why? (Part 3)

If you’re thinking about setting up a holding company for your business there are many important questions that you need to consider.

Do you own multiple businesses? Many small business owner own several businesses that would benefit from having a holding company. If you own several businesses setting up a holding company would help keep each businesses’ liability separate so one would not be liable if another was sued.

Some business owners with multiple businesses that are very small with few assets think that forming a holding company is a lot of expense and trouble. These business owners create fictitious names for each “project” within a business. One drawback of this idea is that there is no protection for and greater exposure if something goes wrong.

What kinds of businesses do you own? This is important because there are legal and tax factors to consider. Are you involved in the businesses that you own? Will you continue your day job? Take on investors in the holding company? Add managerial staff? Will there be stock options for compensation?

            The above questions are important because the businesses you buy may be inside your expertise or it may not, which will require you to bring on third parties to evaluate if the business is really on solid ground. If you’re considering buying something outside of your “wheel-house” be sure to do your due diligence.

How are they structured?

            There are restrictions on LLC’s owning corporations. Yes, different business legal entities can own each other, but there are restrictions.

Most restrictions come from the IRS:

  • If an LLC is an owner of a corporation, the LLC must elect C corporation tax status.
  • An LLC cannot own an S-corporation because only individuals and certain trusts and estates can own this type of corporation.
  • A Sole proprietor is not eligible to own another company because it isn’t registered with the Sate and its tax status is limited.

Do you really need a holding company? Remember a holding company has one goal to acquire equity ownership in other companies. It’s not going to develop or market any products or services on its own. And if you enjoy developing and marketing products, then you’re going to want to team up with someone as an investor.

            If your businesses generating a significant amount of income, with nothing to do with it, or are currently holding assets operated by someone or another entity, then a holding company is right for you. You income should be deposited into the holding company and there you can lend money to your subsidiaries. If you’re ready to set up your Holding Company give us a call at 740.346.2899.