Should I Form a Holding Company for My Businesses?
Investing in Many Businesses
Some entrepreneurs invest their funds into small businesses. Let’s put it this way; a young go-getter named Angela Smith ventures into a variety of businesses involving gadgets and appliances. She then thinks of maximizing its asset protection, and put those businesses under separate Limited Liability Companies, (LLC) and then form an operating company — holding company. One of her main reasons for keeping her businesses under separate liability is the assurance that in some instances where one of the company backfires, the other companies won’t be affected.
Define Holding Company
In layman terms, a holding company is formed to systematize and organize smaller businesses. Known as the ‘umbrella’ or a parent corporation that controls the shares of other companies it possesses, and sometimes, it could be formed to dominate assets, such as stocks or architectural structures, while the rest of the company or companies serve as its operating subsistence that does not have assets.
Importance of Forming a Holding Company
When you own a chain of small businesses with very few assets just like Angela, there is a tendency that you will have a difficulty in forming a holding company. You will come up with a solution to possibly form just one company, Smith Enterprises LLC and afterward conduct several “propositions” throughout that LLC.
Taking in as an example that Angela has a store that sells appliances, and another one that offers a buying station for second-hand appliances, and she comes up with another idea after that.
Angela could form a fictitious name for each of that entity, given that it is under Mendoza Enterprises LLC.
She doesn’t have to form a holding company but creates a separate LLC for each one of the entity, instead. In that manner, she will have the means to of keeping the financial accounts for each one separate and distribute the expenses (for buying appliances and gadgets, respectively) among his company.
Since his assets are merely appliances that he sells, there won’t be a purpose to create a holding company, except to heel together with the financial accounts for the income and expenses.
Begin an LLC as a Holding Company
It’s a do-it-yourself task. Creating an LLC is effortless since all you have to do is to know what your requirement is as you click the website of the Secretary of State for your state, or reading an article about how to form an LLC will truly help.
Limitations on LLC’s Owning Entities
Even if several legal business subsistence can own each other’s stocks, there are withstanding restrictions that apply. From the state’s perspective, there aren’t too many restrictions — a C company can be in the possession of an LLC, but the restrictions arise on its IRS (Internal Revenue Service). When an LLC is the proprietor of a corporation, therefore, electing the tax status of C corporation should be done.
However, an S corporation is limited to LLC ownership since individuals owners that pay individual taxes can only have access to that type of corporation.
Another unincorporated business that is prohibited from owning another company is sole proprietorship since it is a single business owner who pays personal tax.
Holding Company Taxes
If you have multiple businesses, contacting an attorney is the best option to make. This is to make sure that everything you go through is under the provisions of the law and will have a rippling impact tax consequences.