- How you can protect your businesses from the liabilities of your other businesses
- Does a D.B.A. offer you any legal protection?
- Are there alternatives to setting up a separate LLC for each business or property?
If you have multiple LLCs, it’s only natural to wonder if you should set up an LLC holding company. In order to determine the right move for you, it’s first important to understand why people set up a holding company. Here’s what you need to know.
What Is a Holding Company?
In the past, the organizational structure of parent/subsidiary companies was usually a parent “holding company” holding the stock of subsidiary companies. The holding company and its subsidiaries were all corporations or traditional LLCs.
While it is advisable to set up a new LLC for each different business interest, if the cost of managing a dozen or more companies is beyond your economic ability, the Series LLC may be an alternative. Some business owners set up a DBA (“Doing Business As” or “fictitious name”) for each separate company. They are often unaware that this exposes all of their businesses to each other’s liabilities. Setting up a DBA will not safeguard your personal assets from creditors of the business. You should form an LLC to limit your liability.
Holding Company vs. LLC
Entrepreneurs will often set up a holding company as an LLC. It typically oversees several subsidiary LLCs or corporations that conduct their own distinct business. The holding company owns the member interests (or stock) of the subsidiary companies. This structure is advantageous not only for liability protection but for tax reasons. In fact, a holding company may be entitled to tax write offs for capital losses by its subsidiaries. However, a properly structured holding company itself does not conduct any business operations.
Holding Company vs. Series LLC
The State of Delaware introduced the Series LLC in 1996. A Series LLC offers the benefits of a traditional LLC with one significant difference. A Series LLC can establish under that umbrella an unlimited number of self-contained “cells”. Correspondingly, Delaware law gives each sheltered cell some of the protections of separately incorporated subsidiaries.
For example, if you own multiple real estate investment properties, each property can be segregated into its own protected cell. A claim arising out of any one property should not allow that creditor or claimant to reach the assets in any other protected series cell. In contrast, if all properties were in a single traditional LLC, all would be at risk for a claim arising out of any one property. With a Series LLC, all of your eggs are still in one basket, but there is some separation between them. In other words, it’s like an egg carton to keep the eggs from breaking.
A Series LLC only pays one franchise tax fee, no matter how many protected cells it creates. Also, there is no cost to add protected cells or limit on the number of protected cells under the Series LLC. Because the LLC operating agreement is allowed maximum freedom of contract when drafting, the limit is your imagination.
- Here’s a link to a video and more information about how you can use a Delaware Series LLC: https://www.incnow.com/delaware-series-llc/.
Can a Holding Company Be an S Corp?
- An LLC is often used as a holding company. These LLCs often make an S Corp tax election, as S corp status can be advantageous for how passive holding companies operate.