should you have an llc holding company also known as an umbrella company well smart entrepreneurs are always looking for ways to protect their wealth in their business assets and after studying the tax code many people have found a number of strategies that help business owners to maximize their wealth and a widely adopted strategy is to divide one large business into several smaller business entities all controlled and owned by one single holding company
so in this video i want to talk all about how to create an llc holding company and why so we’ll explore what a holding company is how it is financed how it is used we’ll also review some pros and cons and look at some examples all throughout the way so i’m excited i hope you are too stay tuned
what is a holding company ?
so simply put a holding company is a parent business entity also a holding company may be referred to as an umbrella company it’s the same thing and you should know that even though we’re focusing on a loc holding company today a corporation can also be a holding company or a parent company now the holding company does not conduct any standard business operations meaning it does not manufacture anything it does not sell any products or services it just holds stock hey sean look i can be a holding company too okay kind of like that but essentially a holding company simply holds the controlling stock or other interest in child or subsidiary companies here’s a visual representation of a holding company now while a holding company does not conduct business operations on its own
it can own other companies that may sell services may sell products or manufacture goods the holding company may also hold other assets such as real estate properties or real estate portfolios vehicles equipment or anything else that can be of value to the other operations tied to the holding company now it’s important to note that a holding company may own 100 of a subsidiary or it can simply have enough interest that allows it to maintain control through voting rights
which usually is anything more than 51 percent now having control gives the holding company the power to oversee the subsidiaries or child companies that they run so for example the management team of a llc holding company can elect or remove directors or managers and the management of a holding company can also make major policy decisions like deciding to merge or even dissolve a subsidiary however each child company has its own management who runs the day-to-day operations of that subsidiary so they make the decisions about the
internal operations like who to hire who to fire and how to operate more effectively and efficiently so the people running the holding company do not participate in the operations of their subsidiaries hey sean look i can have multiple subsidiaries or child companies as well okay kind of like that but let’s go to move on now and talk about
how an llc holding company can be financed
so the people who are running the holding company are responsible for deciding where to invest its money they have to constantly ask themselves questions such as should we buy more real estate or should we buy a manufacturing plant or what other assets would be valuable to our holding company but where exactly does this money come from well a holding company can usually raise money in three different ways first by selling equity or interest in itself so basically they will be recruiting other people who want
to hold stock in their holding company or want to hold stock in any of their other subsidiaries secondly a holding company can simply borrow money from other investors or a bank which is pretty self-explanatory and lastly it can reinvest its own profits that it gets from their subsidiaries like their dividends their distributions rent payments or other payments from their child companies now raising money as an llc holding company tends to be a little bit easier because you have more members and you have more assets all right
now let’s move on and talk strategy so :-
how can you use a holding company
so first off a holding company can be used by any type of business regardless of the size or industry so small businesses or even single member entrepreneurs can start a holding company for example let’s say that you want to buy a multi-family apartment as a real estate investment what you can do is form two llc’s one llc would own the apartment building and the other llc will be the holding company
then let’s say that later on you want to expand your investment so you decide to raise some money by selling shares in your existing holding company and then with that money you go out and you buy a profitable e-commerce company that is already set up as an llc after making that type of acquisition you would still have one holding company with a new partner and together you guys would own two businesses
one would be the apartment building investment and the other will be an e-commerce store now here’s something really cool that you should know when you have a holding company with multiple assets that drive revenue and profitability then you can position your holding company for a major buyout like you could sell your holding company for millions of dollars to large investment firms or venture capitalists who love to do big deals in fact many public traded companies on the
stock market are actually holding companies who constantly try to improve their revenues and increase the price per share of their stock interestingly enough many people who buy stock don’t even realize that they’re investing into a holding company and not the actual operating company for example you’ve probably heard of lowe’s you know the home improvement store but lowe’s also has several other subsidiaries including a popular hotel called the lowe’s hotel
and on top of their hotel they also have ownership in a diamond offshore drilling company where they mine diamonds which if i had to assume they’re probably using their capabilities with the materials they can get from their lows home improvement business and then the construction intel they have from their hotel ventures to cross over into drilling with their diamond offshore company but anyway the bottom line here is that holding companies are everywhere and
smaller holding companies have a great chance of being acquired by larger holding companies so at this point you should understand what a holding company is how to finance one how you could potentially use a holding company for yourself
the advantages and disadvantages of an umbrella company
so advantage number one and you probably guessed it you have liability protection so by having a parent llc which is the holding company and then having multiple child llc’s which are the subsidiaries you have complete separation of each entity which gives you powerful liability protection between each entity because the debts of each subsidiary belong solely to that subsidiary for example if we go back to
what we talked about earlier let’s say that your e-commerce store is struggling and you’re not able to pay off some of its debts well in that case the creditor cannot go after the apartment building that the holding company owns but instead it can only go after the assets that belong to the e-commerce store
hey sean look i have liability protection from space invaders okay not like that but actually i have to make a small disclaimer and that is to remember what you sign because if you sign an agreement saying that you are personally liable for any debts or obligations then your llc cannot protect you against that all right also if you are a real estate investor and you have multiple properties and you are considering having multiple llcs
Frequently Asked Questions:
What is an LLC holding company?
An LLC holding company is a type of business entity formed to own and control other businesses, known as subsidiaries. The primary purpose of an LLC holding company is to provide a layer of protection and to separate the ownership and management of different businesses.
Why would someone consider forming an LLC holding company?
There are several reasons to consider forming an LLC holding company:
Liability Protection: By forming an LLC holding company, you can limit your personal liability for the debts and legal obligations of subsidiary companies.
Asset Protection: An LLC holding company can help protect valuable assets by keeping them separate from operating businesses.
Tax Benefits: The LLC holding company structure may provide certain tax advantages, such as the ability to offset profits and losses between subsidiaries.
Simplified Management: Having an LLC holding company allows for centralized control and management of multiple businesses, thereby streamlining the decision-making process.
What types of businesses are suitable for an LLC holding company structure?
An LLC holding company structure can be beneficial for a variety of businesses, including:
Real Estate Investments: Holding real estate assets through an LLC holding company can provide liability protection and facilitate asset management.
Intellectual Property: Companies that hold patents, trademarks or copyrights can use an LLC holding company to separate their intellectual property assets from their operating businesses.
Family Businesses: An LLC holding company can be useful for succession planning and facilitating the transfer of ownership within a family-owned enterprise.
Diversified Portfolio: If you have a portfolio of investments in a variety of industries or businesses, an LLC holding company can help manage and protect those assets.
Are there any disadvantages to forming an LLC holding company?
While an LLC holding company can offer many advantages, it is important to consider the potential drawbacks:
Increased complexity: Forming and maintaining an LLC holding company may involve additional administrative and legal requirements, such as separate tax filing and compliance obligations.
Cost: Setting up and operating an LLC holding company can involve additional expenses, including formation fees, legal fees, and ongoing maintenance costs.
Potential legal risk: If the LLC holding company is not structured and managed properly, there is a risk that the liability protections it provides could be pierced, exposing the owners to personal liability.
Limited Liability Limitations: While an LLC can protect the owners of the holding company from liabilities arising within the subsidiaries, it cannot protect against liabilities arising from the holding company itself.
Do I need professional assistance to form an LLC holding company?
It is highly recommended to seek professional assistance, such as an attorney or business formation service, to form an LLC holding company. They can help ensure compliance with legal requirements, draft necessary agreements and provide guidance on company structuring to meet your specific needs.
Can an LLC holding company be converted to any other business structure later?
Yes, in many cases, an LLC holding company can be converted to a different business structure, such as a corporation, if the business needs to change over time. However, the process of conversion may involve legal and tax implications, hence it is advised to consult professionals to understand the implications and take an informed decision.
Remember, each business situation is unique, and it is important to consult with qualified professionals, such as attorneys, accountants, or business advisors, to assess whether forming an LLC holding company is the right choice for your specific circumstances.
