Holding companies have become quite popular in recent years because of their benefits to business owners. According to Investopedia, a holding company isn’t one that offers a service or produces goods but instead serves as the controller of another company’s stock. Holding companies are usually corporations or LLCs that offers their members unique benefits for being part of this type of business structure. Here, we’ll provide a holding company how-to that will guide you in registering your own holding company.
Why Register a Holding Company At All?
Typically, business owners develop holding companies to get tax benefits, protect their assets, distribute liabilities, and control or influence different companies. In some cases, the actual owner of a holding company may be hidden, allowing a measure of privacy. Holding companies can be quite lucrative as well. If the value of any of the stocks that the holding company increases, the LLC’s value increases along with them. According to The Street, one of the most well-known investing companies globally, Warren Buffet’s Berkshire Hathaway is a holding company for several other companies.
Holding companies also maintain equity within the companies it operates. If the holding company declines to sign off on the operating company’s debt, it is not responsible for that debt, leaving the liabilities on the operating company. This separation helps to shield investors from creditors, especially if the operating company has bitten off more than it can chew. Since the holding company’s assets are separate from the operating company, those assets are shielded from litigation. The only thing the holding company has to worry about is the potential to lose value in their stock.
Determine Your Needs
Holding companies may be created for several reasons, the most common being as a way to benefit from taxes as an individual member of the holding company. The holding company can act as a buffer between the owners and the operating company. When profits enter the holding company, the shareholders may withdraw money they need to use, leaving the rest within the holding company. Since the holding company is an LLC, it isn’t subject to taxation the same way an individual is. With considerable money flows, a holding company can potentially keep tax costs down to a minimum.
Register the Company and Deposit Your Assets
You can choose to register your business in any state. The choice of state may play an essential role in how the company (and you, as an LLC member) pays taxes. Standard registration documents such as articles of incorporation apply. You need to have these filed for both the operating company and the holding company. Typically, you can get an agent to register the company for you and secure things like the registration details and EIN. Some agents also offer to be the representative for the company within the state.
Once you have managed to register the business, it’s a simple matter to set up how the cash flow system will work between the holding and operating company. By design, the holding company will receive the operating company’s profits and then lend money to the operating company to cover its debts. Suppose you need to protect the assets of the operating company. In that case, you can sell them to the holding company, in case the operating company defaults or fails to meet its financial obligations.
Funding your Holding Company and Beginning Operations
Before your holding company can start operations, you need to set it up with a bank account. Most banks are more than happy to have a new holding company join them as a client. You are going to need the certificate of incorporation for your business in addition to your own personal information as the director of the company. If you’re not the director, you’ll need written permission to do business on behalf of the parent company.
You might wonder why you need a separate bank account for your business. As a sole proprietor, there’s no need to have a bank account separate from your business, since you trade as the same entity. An LLC or corporation, however, is its own tax entity and the money that is associated with that business needs to be kept separate from that of its members or owners. Once you have gone through the process of opening the business account, you can deposit cash as necessary to fund the holding company.
Typically, holding companies are “in charge” of operating companies. Business owners register the holding company first and then the operating company as a subsidiary of the holding company. That way, the holding company owns the operating company. Members of the holding company can then fund it to invest in the operating company. How the holding company runs the operating company is by lending it money. The holding company can act as a wealth store that the operating company can call on for funding when it needs it. This separation of assets means that the holding company provides an extra buffer of protection of liability from legal matters arising from the operating company.
If the operating company was in existence before the holding company, the process is slightly different. The holding company must first acquire the operating company’s assets before it can begin operations. You can simply sell the operating company’s assets to the holding company by filing a transfer of assets. With the holding company in charge of the operating company’s assets, those assets remain safe if the operating company ends up the subject of a court matter.
Be Careful With Company Registrations
Protecting your assets through a holding company has a bad reputation in some circles. Some individuals see it as a way to avoid facing penalties for poor business activities. Registering a holding company can be a beneficial move for many businesses, but having a single holding company might make it liable to litigation if the acquisitions it makes become prominent enough. You might be better off having multiple holding companies for each of your operating companies in such a case.
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