When you are choosing the right type of business entity for your company, or if you are considering whether your company needs to be restructured, you may want to consider the benefits of a holding company.
Do you need a holding company? That depends on:
- The type of business you operate,
- Whether your business has multiple operations that can be separated,
- The amount of capital your business holds,
- Whether you need to insulate the various aspects of your business from one another, and
- Whether a holding company will save money on your business’s taxes.
What is a Holding Company?
A “holding company” can be as simple as a corporation or LLC that is set up to “hold” assets like real estate or other property, or it can be part of a more complex corporate structure that is designed to provide a “corporate shield” not only to the owners but also among the various aspects of the business’s operations.
Simple Holding Companies
In its simplest form, a single holding company can be formed to “hold” your business’ office building, fleet of vehicles, or other property.
In most cases, you would set up a corporation or LLC that is wholly owned by yourself or your business partners, and then transfer the assets to the holding company. The holding company would not conduct any business other than managing those assets – for example, paying property taxes, paying the mortgage, collecting rent, or paying for maintenance and repairs.
How does this benefit your business?
- If your business fails and you start a new business, the assets are still there for use by the new business,
- If you follow the rules and maintain the holding company separately from your personal and business dealings, creditors should not be able to seize the assets that are owned by the holding company,
- If your company is forced to file bankruptcy, the holding company may not be subject to bankruptcy and the assets owned by the holding company may be preserved, or
- If your business is sued and there is a judgment against you, the assets owned by the holding company might not be subject to seizure to satisfy the judgment.
Parent Companies and Subsidiaries
For larger or more diverse businesses, there are many benefits to setting up a corporate structure that includes a parent holding company and multiple subsidiaries.
Subsidiaries and Operating Companies
We can set up multiple subsidiaries that can be “operating companies,” each handling a different aspect of your operations, or that can themselves be “holding companies” set up to own the business’s assets like real estate, vehicles, machinery, equipment, or other property that is essential to the business’s operations.
Each operating company/ subsidiary handles the day-to-day operations of their respective business – manufacturing products, providing services, distribution, or whatever that business entails.
Parent Holding Companies
You also set up a parent holding company that does not conduct business and that does not handle the day-to-day operations of the subsidiaries, although the parent company will make major policy decisions that affect the subsidiaries.
The parent company should be either 1) wholly owned by you or your partners or 2) controlled by you or your partners because you retain more than half of the company’s stock shares.
This separates (and provides a corporate shield to) each aspect of your company’s operations, your company’s assets, and you personally (or your partners), and can provide significant benefits through liability protection and a reduction in the amount of taxes your company pays.
Holding Companies: Liability Protection and Risk Management
Let’s consider a corporate structure where there is 1) a parent holding company, 2) a subsidiary that manufactures widgets, 3) a subsidiary that installs widgets on job sites, and 4) a subsidiary that owns the buildings and equipment needed to continue operations.
You could combine all these aspects of your business into one corporation with different departments. If you do, however, a failure in one department can easily drag down the other departments and cause the entire business to lose money or even to fail.
If the various aspects of your business – and your business’s assets – are separated into different subsidiaries controlled by a parent holding company, however, they are insulated from one another to an extent.
- If the widget manufacturing subsidiary is forced to file bankruptcy, the widget installation company is still conducting business as usual and may not be subject to bankruptcy court.
- If the widget installation subsidiary is hit by a multi-million-dollar verdict in a wrongful death lawsuit, neither the subsidiary that owns your buildings and machinery nor the widget manufacturing subsidiary should be subject to collection efforts.
- If any of the subsidiaries are subject to bankruptcy, lawsuits, or collection by creditors, the other subsidiaries and the parent company may be insulated from the damage (and you may be insulated by the parent company), and operations can continue.
Tax Benefits from a Holding Company
For similar reasons, there can be significant tax benefits to a corporate structure that includes a parent holding company and multiple subsidiaries.
If you have a single corporation that includes all operations “under the same roof,” you are paying taxes on the aggregate profits of all operations together. If your operations are separated by subsidiaries with a parent holding company, however, the gains of one subsidiary reported on the parent holding company’s taxes can be offset by the losses of other subsidiaries, resulting in a reduction in your tax debt.
If your subsidiaries are wholly owned by the parent company, they are treated as a “disregarded entity” by the IRS – you don’t file separate taxes for each subsidiary, but the parent company’s tax debt can still be offset by the losses of one or more subsidiaries.
Piercing the Corporate Veil
The liability protections provided by a parent holding company/ subsidiary corporate structure are not absolute – creditors or plaintiffs can still “pierce the corporate veil” when the subsidiaries do not follow the rules that apply to corporations (or LLCs), when the corporations do not keep their operations and assets separate, or when the subsidiary/parent company structure is used to commit fraud.
To minimize this possibility, the parent company and subsidiaries must:
- Follow all rules, including staying current with annual or semi-annual filings and reports,
- Never commingle funds or assets,
- Be able to articulate a reason for the parent company’s existence other than to avoid creditors, and
- Never participate in or direct the day-to-day operations of the other companies.
Business Law Attorneys in Myrtle Beach, SC
Coastal Law’s Myrtle Beach business lawyers will help you to determine whether a parent holding company/ subsidiary operating company corporate structure is right for your business, help you to set up the corporations, and advise you as to SC’s ongoing requirements to keep your company in good standing.
Schedule a free consultation to discuss your new business or to discuss restructuring your existing business by calling (843) 488-5000 or filling out our online form.