A holding company delivers benefits you cannot receive with a single LLC or Corporation. Setting up a holding company is no different than creating any other business. The difference is that holding companies do not engage in operations; they instead control and own assets such as other companies, real estate and intellectual property.
The company then uses sister companies or subsidiaries to engage in operations. This set up provides superior asset protection, potentially lower taxes and can provide anonymity when forming a company in another state. Learn about New Mexico LLCs here and whether they are a good fit for domiciling your next holding company. Yes, an LLC can be a holding company and you may use an S-Corp holding company as well.
Advantages of a Holding Company
There are numerous advantages associated setting up a holding company. This process provides the following benefits:
Asset Protection: Business owners are often afraid of legitimate and illegitimate lawsuits stemming from accidents, bad employees and bad luck. Nobody wants a jury of twelve people deciding how much they should pay out due to a situation out of your control.
A holding company is meant to solely hold assets and lease or rent them when necessary. This keeps valuable assets away from risk. For example, trucks or real estate can be held separate from the entities which sign contracts with clients, hires employees or other inherently risky activities.
Privacy: Many states require the owners or managers of a company to publish their information online. Having an anonymous company means its information is listed rather than yours. This "Double LLC" strategy can provide anonymity in states which at first glance don't seemingly allow it, e.g. Florida.
Taxes: This set up can simplify your tax filings and lower your taxes.
a. Only a parent company needs to file a tax return, rather than each entity below it. If there are multiple subsidiaries, then this can save considerable time during tax season.
b. Limited Liability Companies pay lower taxes than comparable sole-proprietorships after the new tax laws congress passed in 2018.
c. Income can be shifted to jurisdictions which have low or no taxes.
Holding Company Examples
Holding companies are used for real estate investing, e-commerce and consulting. Any business with significant assets or revenue, or one in a risky industry, should employ such a set up. Below are a few different examples of how to use such a structure.
Real Estate Holdings: An investor may use a holding company to reduce the risk associated with owning and renting properties. Holding companies can separate property management and the physical real estate. This reduces the risk of major losses from lawsuits.
Family Holdings: A family may use holding companies to consolidate tax return filings because only the parent company files a tax return, the subsidiaries do not. This simplifies end of year tax filings while helping families manage their interests in various assets and companies, e.g. an investment holding portfolio including equities, intellectual property, real property etc.
E-commerce: Online companies can isolate risk by opening subsidiaries for each product line. This allows e-commerce companies to separate different products for reasons as diverse as branding to minimizing risk. If you sell a potentially risky product, then there is no reason an incident with that company should affect your other revenue streams, assets, brands etc. It better allows you to sell off successful products as well since their books have been kept separate, and it is thus easier to establish the value of any one revenue stream.
Intellectual Property: IP can be held in its own company safe from any operational risks. This allows you to wind up operating companies in the event of a lawsuit. The IP can then be leased out to your next venture without carrying any baggage from the previous failure. Such a set up can also shift income to low or no tax jurisdictions via transfer pricing.
These are only a few types of holding company arrangements. The principals above can be applied broadly to trucking companies and restaurants which both can separate their valuable assets from their inherently risky ventures.
Why Domicile in New Mexico
It is common to wonder whether you can form an LLC in a different state than where you live. The answer is you can because companies have flexibility when setting up. Online companies don't technically exist anywhere and owning and managing real estate isn't considered "doing business". This means such companies can be established anywhere.
The notable exception to this is California which almost always tries to make people pay their absurdly high $800 annual report filing fee. New Mexico only requires you to maintain a registered agent in New Mexico. Otherwise, there are no annual fees, reports or filings.
Operating Companies and Foreign Entity Registration
It may be necessary register an operating company within a state that is not your chosen one. The idea is that companies must register in any state where they transact business. The definition of transacting business does not include: having several clients, having a contractor or supplier, opening up bank accounts, owning property, or holding meetings. Most do include: having a physical office or storefront, having an employee, and sometimes property management.
Some industries don't have this problem, e.g. e-commerce or online only companies selling on Amazon. Sometimes you cannot avoid registration, though. In this case, you would be advised to run operations in the registered company as much as possible but avoid holding assets in it. That operating company leases assets it needs to perform from the holding company.
Types of Holding Companies
There are two way to establish holding and operating companies. You may employ the parent-child structure whereby the "parent" company directly owns and manages the "children" companies. In this case, the holding company will be listed as the owner on the subsidiaries operating agreement, with you being appointed as the manager. This makes each child company a single member LLC.
The second option is to have the holding and operating companies be owned separately. They can have the same, or different, owners, but the operating company is not owned by the holding company. This second setup is called a sister-sister or sibling set up.
In each instance, the holding entity exclusively holds assets with the other companies handling clients, employees, inspections, loans, contractors, vendors, and tenants. This isolates valuable assets from operational risks.
E-Commerce Holding Companies
E-commerce companies appreciate the anonymity of New Mexico. It is possible to split product lines among entities or to form several entities and compete within the same space. Both assist with risk management.
Real Estate Holding Companies
Real estate investments commonly uses holding companies. This is done to manage operational risks and valuable assets. The physical real estate is owned by a separate business to reduce risks, both business and personal risks. Opting for an anonymous company reduces the risk associated with frivolous lawsuits, amd you may form a separate LLC for property management. This setup is generally referred to as a real estate holding company.
Implementing the holding company structure requires time and effort. Even so, the benefits outweigh the initial efforts. A New Mexico holding company can protect assets, deliver privacy, and reduce taxes. Learn more about New Mexico LLCs here and their advantages here.