If you are interested in starting a holding company, there a few steps you must complete to ensure your assets are properly protected and that all necessary state regulations are met. One of your initial decisions in this process will be choosing which structure you would like your holding company to take.
In the past, choosing a corporation for this structure was the common choice. However, more recently the trend has begun to favor limited liability companies (LLCs). There are a few reasons why this is the case, but primarily, entrepreneurs favor the simplicity and flexibility that an LLC offers over a Corporation. To be clear, yes, an LLC can be a holding company.
Choosing an LLC Structure for Your Holding Company
While corporations have long enjoyed a reputation of prestige thanks to their management reinvestment structure and well-established legal precedent, there are plenty of reasons why most now favor the structure of a limited liability company (LLC). LLCs experience simpler management structure and options, improved asset protection, and less compliance regulations. Additionally, LLCs avoid the double-taxation that corporations experience, due to their pass-through tax classification. An LLC may also be taxed as an S-Corporation.
Select a Name for Your Company
Thankfully, with the help of an LLC formation service, forming an LLC is a simple and straightforward process. For this reason, you may find that coming up with a company name is the most challenging part of the process. When it comes to naming your LLC, you will want to choose a name that you are proud of, but also one that does not sacrifice your privacy (such as incorporating a last name). Also, be aware that your name must include an entity identifier. In this case, an LLC identifier such as “LLC” should be included at the end of the name. The name must also be unique from other New Mexico companies registered with the Secretary of State.
LLC Operating Agreement
Drafting your company's governing documents is the next important step to take. While it is not required in most states, having these documents in place is smart practice and can save you from legal headaches down the road. The governing document you will want to complete for your LLC is an operating agreement.
Your operating agreement will address the management structure and ownership of your company. For example, the document might address how ownership percentages are calculated (i.e. the amounts contributed by each owner to receive their ownership stake). Additionally, the document should address any rules or processes that govern a change in ownership. For example, were the current owners to decide on selling their portion of the company, the operating agreement should detail a process by which other members could purchase it.
File Your Articles of Organization
Once these steps are completed, it is time to register your company with the New Mexico Secretary of State office. For LLCs, this document is referred to as your company's Articles of Organization. Similar to corporations and their Articles of Incorporation, the LLC Articles of Organization serve as the official formation document with the state. The filing fee for these articles in the state of New Mexico is $50.
It is important to note that when you register your company with the state you must designate a registered agent in order to complete your articles. The registered agent must be a New Mexico resident and maintain regular business hours at a physical New Mexico address. The agent must be available to receive important documents on behalf of your company, such as lawsuits and other important notifications. As part of our services, we can serve as your company's registered agent. This is an important step if you wish to maintain your personal privacy when forming your LLC, as the registered agent is publicly available information.
Apply for an Employer Identification Number
Your Employer Identification Number (EIN) is the unique number assigned to your company by the IRS. This number may also be referred to as a Federal EIN, FEIN, Taxpayer ID, or Employer ID. Its purpose is for identifying your company on federal taxes. Every corporation is assigned an EIN, as well as most LLCs. However, some LLCs may be exempt (often times these are single-member LLCs). Regardless of your LLCs classification, it is still smart practice to register and obtain an EIN from the IRS for keeping company and personal finances separate.
Open Your Business Bank Account
In order to open up a bank account for your business, you will need to provide a few things to ensure the authorization of your account.
- Articles of Organization
- Operating Agreement
- Federal Employer Identification Number
Obtain a Business License
In New Mexico, there is no general state-wide business license requirement. However, there can be business licenses required for certain local measures, such as building permits, occupational licenses, liquor licenses, and more. Depending on your industry, check how local ordinances in your area may affect your business. With a holding company, it is often the subsidiary that engages in operations and would require additional licensing, so it is unlikely that your LLC will need to obtain a business license. However, keep this in mind as you set up subsidiaries.
Setting Up Holding Company Subsidiaries
Once your holding company has been established, the next step is setting up its subsidiaries. This is the easier order, as it allows you to list the subsidiary owner as your holding company on the registration documents. In the event that you have an existing company that you wish to move under the control of your holding company, then a change to the company's operating agreement will be necessary in order to reflect its new ownership.