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Joshua - this is incredibly helpful as I'm launching a startup studio and preparing for lawyer meetings. Question though - let's say an investor invests 10M for 25% of the holding company. Does the investor also get a % of each company the holding co spins out / launches? Also - I'm assuming if let's say 5M of that capital was for capex / investments rather than opex, then we can also structure in a management fee / carry?
If the LLCs below a holding company send money up to the holding company (like Berkshire is setup) would that money be a exposure in liability if someone comes and sues a specific LLC location?
Hello. I hope you are able to receive comments on this article and thank you so much for such an outstanding description of a holding company. Now please help me fix my mess. I have formed a few small businesses. My only assets are old paid for property, used semi trucks, paper/digital consulting products, and used cars. With all of these little businesses, I have yet to clear the thresh hole profit of 100K. Mind you, I just started them all parallel to one another in the course of a year. Please, don't ask me why. I took a business course during my retiring exit from the Army and I lost myself in buying things to build companies that I thought would be a success. So far, no complaints. My question is, at what point should I form a holding company? I do not have investors and I am not partnered with any other companies or ventures. Should I start investing in other companies beforehand? I am pretty confused. I want to aim at organizing my businesses in some form. Please, help me fancy this up. I don't expect you to guru me, but to point me in the right direction. Thank you so much! Z.
Zmia, what you can do is, create an investment holding company (name it what you want). Fund that new investment holding company. Then your holding company can make investments into the other companies. Hope that helps.
I knew nothing, after your article I have an empire ready. you are a pro thanks
Hi Joshua; Thanks for an amazing article. I really need some advice and guidance on what me and my partner are planning to do.
I'm a US Citizen and my partner belongs to overseas. We both are planning to setup online software selling business and getting it registered in Wyoming as an LLC. The self written softwares which we have created are related to ERP (Enterprise resource planning), SEO(search engine optimization), Mobile apps store, Software applications for various business, Website plugins and tools and software services company. We are just going to sell all the softwares online ONLY across the world. The softwares are currently not patented in any country. But, we are planning to get all softwares patented in coming months in USA.
What we have decided so far:- In order to protect our Intellectual property, we have decided to go with creating a holding company and operating companies model. The holding company will hold all the software products ownership. We are planning to start 6 different operating companies to separate all different lines of businesses. (PLEASE CORRECT IF WE ARE WRONG)
My questions are:-1.) Should we from start follow the holding company and operating company model? i.e. should we register each separate business entity for separate line of business? We are a small business and want to see the customer response of each product before going with the patent procedure ORIs it possible to create a holding company later down the road based on the success of individual product.
2.) We will be only 2 people owning 50% - 50% share in the holding company and our operating companies will be also 100% owned by the holding company . Does it make sense to follow the holding and operating company model? (My understanding is that will protect our Intellectual property from lawsuits) Is this structure workable in USA?
3.) We also want to withdraw our daily/months expenses and salaries from the operating companies and pass it on to our offices across different country outside USA. (Is it possible?)
4.) What all things we need to follow as 1 partner is NON US and how the profits from Holding company or operating company should be distributed to him (monthly or quarterly or yearly basis)?
We are planning to start as soon as possible. I'll really appreciate all your help/ advice in helping us.
Vinnie you cannot currently patent software.
You're incredible Joshua. You have a talent for taken even the most complex concept and making it extremely easy to understand. I'm going to make use of your professional services one day. That's a promise.
The Article is very focused. All examples are well explained. And get the exact Idea about holding company and subsidiary. Hat's off!!!
Really really good article that helped me to understand why company does holding structure in 20 mins. Amazing writing. Thanks a lot!
I am looking for a software to allow me to oversee all assets (100% owned business -LLcs & LPs-, Private equity funds, Stocks, mutual funds etc) owned by my holding. There seem to be many options for funds and stocks but these do not have owned business modules. On the other hand there are many available software that allow only for single standalone entity entries which in turn need to be downloaded individually for consolidation, presentation and analysis.
By any chance do you know of such software?
So how would you record the following on the holding company and it's subsidiaries - a holding company taking the loan to purchase 3 subsidiaries and in return the 3 subsidiaries will be transferring funds (their portion of the liabilities) (principal + interest) to the holding company to repay the loan
Holding Company Entry:Dr. Cash - (proceeds from loan) Cr. Loan Payable (or any liability to show the loan) (proceeds from loan)Dr. Investment in Sub 1 (part of the proceeds from the loan) Cr. Cash (part of the proceeds from the loan)Dr. Investment in Sub 2 (part of the proceeds from the loan) Cr. Cash (part of the proceeds from the loan)Dr. Investment in Sub 3 (part of the proceeds from the loan) Cr. Cash (part of the proceeds from the loan)Subsequent loan to the Sub:Dr. Loan Receivable Cr. CashDr. Cash Cr. Interest Income(interest payment received from the sub)Subsidiaries Entry (same entry for all three subs) - The first entry is to purchase your stake in the sub; you can not own a company by just lending money to the sub; you first have to purchase the stake in the company then you can lend money to the sub.Dr. Cash Cr. Contribution from Holding Company(purchase the stake in the sub)Dr. Cash Cr. Loan Payable to Holding CompanyDr. Interest Expense Cr. Cash(interest payable to the holding company)I love accounting so I figured I would respond.
Simply wonderful Joshua! Clean and simple explanations on holding company organisation design - structure, process and the linkages. I am currently handling this subject for my rapidly growing holding company with new business entities popping every now and then. Very helpful to design, especially the finance function of the holding..great help, thanks.
If I wanted to start a holding company LLC into which I would put my professional services LLC (currently ineligible for pass-through rates in the new GOP tax bill), would that mean the income from my professional service LLC would be eligible for pass-through rates in the new GOP tax bill? (Now coming from a holding company rather than a professional services LLC?)
If I wanted to start an LLC to only hold stock in other companies with the purpose of giving it to my son to take over down the road, what are the pros/cons of this?
Your question is too vague and broad.For example, If I want to retain income and reinvest income of a holding C-Corp LLC of pure stocks, I need to find 10 equal share share holders(including me) with absolutely no family ties to avoid holding company tax. The solution turns out to be just buy SPY or BRK to solve this problem.
Is there still a holding company tax if its considered an S-corp? This holding corp would other assets besides stocks. Instead of setting up trusts for kids, i could add them as members to my LLC down the road when they become middle aged?
There would be no "holding company tax" other than C-Corp/C-Corp LLC. You need to focus on gift/estate tax(Fed/State/Local). You also need to consider "families by law" problems. Sometimes it would be better to create debt for "families by law" problems. It would be uncomfortable to see "were families by law" you hate sitting at the board meeting of your LLC.
Thank you for your replies. Consider that I would also be holding other assets under the LLC, this would be ok?
Can not comment on your situation. I would try an example.Let's say I setup 18 Wyoming LLCs. Each of them own a piece of beach front Calif RE.20 years later the buyers can choose to buy LLC with extreme low RE tax or buy RE with extreme high RE tax. This works perfect if Trump get rid of tax deduction.
Very helpful! Thanks! :-)
Very informative. I appreciate you!
I have come cross some information that classified holding companies into three models: Operational Management, Strategic Management, Financial Management but I did not understand how this is related to your Holding companies that you presented in this article? I look forward to your clarification about this classification
In order to transfer money tax free from the Operating Company to the Holding Company A: does the Holding Company have to be a C Corp or an LLC electing to file as a C ORB: can it be an LLC NOT electing to file as a C?In essence I would like to have the Operating Company a C Corp and the Holding Company as an LLC not electing to file as a C owning 100% of the Operating Company.Thanks for this awesome post making me think!
Speaking as a Trader, let's assume with the werewithall to do this. Would there be an incentive to become a Holding Company allowing others to invest in my project? That is, I would not be part of some familly group like you used in your example, but pretty much the boss of what I am doing investing my own initial cash. What legal pitfalls would I face?
I'm still trying to get my head around an effective model using holding companys. So if holding company A owns 80+% of two subsidiaries also acting as holding companies B & C, which both have their individual subsidiaries, how would I move funds from subsidiary B to subsidiary C? Subsidiary B will be the revenue driver to create the startup capital holding company A infuses into other startup ventures. I'm trying to figure out a way to move B's capital throughout the network without extreme tax ramifications.
This is simple. If they are LLC's LLC's are pass through entities and aren't taxed at the company level. You personally (and your other members/owners of the Holding LLC) are responsible for taxes on the entire structure of your operations. Therefore you can transfer the money to Company A from Company B and transfer the money back down to company C... just make sure your book keeping is on point and accurate because the more transfers you make the more complicated it becomes. If you transfer directly from B to C then in the event of a lawsuit you lose liability protection for company A, B & C and all of the assets they own are subject to the suit. It makes it easy to then say that your operation is not really several companies but 1 company (company A) doing business as a whole and can thus be sued as one such company. The exception would be loans from company B to company C.
If it's a corporation you can file a consolidated tax return in which your Company A is responsible for the taxes of the entire group like example above for LLC's. This means you aren't taxed for distributions & dividends between the companies just the overall profit/loss for the group but itemizing the group on reporting means you're going to need a team to handle reporting and tax prep and filing. Still you'll want transfer the money upstream then back down stream.
In both of these structures losses from one company can offset the profits of another so there is no real need to transfer money from company B to company C as the holding company is responsible for the group's taxes. The capital accounts and contributions from parent company to subsidiary and the dispersments to the parent company from the subsidiary need to be kept up to date in very pristine manner.
In order to do this the corporation must own at least 80% of the vote and percentage interest in the subsidiaries. In the LLC model the LLC is only responsible for their ownership interest in the subsidiary for tax purposes. So if the ownership percentage varies between subsidiary to subsidiary the potential for a book keeping nightmare exists and the ability to properly report or defend an audit decreases. The real risk is book keeping and accounting and as mentioned in the article... the cost of the required services to keep the engine running smoothly and recorded properly can become very pricey and time consuming.
I hope this helps.
remember I am not a attorney or a CPA. This comment is not meant to be taken as legal, investment or financial advice. To get your questions answered and before making a determination for yourself it's always highly recommended you speak to a licensed attorney with the authority to practice under the jurisdiction of the formation of your business entity AND a CPA.
The lawyer will help you protect your ASSets and the CPA will focus on how to preserve the maximum amount of your capital.Therefore to get the answers you are looking for in depth with applicable information you should consult with both.
Can a holding company be publicly traded and own privately held companies ?
Very well done especially with the use of examples. I also particularly enjoyed your humor.
Very helpful. Thanks, Josh.
Can a trust fund own a holding company?
Hey, how do I actually go about building something like this?
Say I have $ 2 million can I used $800,000 and buy a $100 M mutual fund and used the rest for real estate investments and franchises?
the example wasn't a description of the parent company getting a hold and owning a mutual fund with that much equity but advising that fund's management and collecting fees for advising. The reason they are saying it is a big market is because if you have the reputable skills to do so then maybe a big firm will hire you for consultation and rack up huge amounts of money on consultation fees because the actual fund has a lot of money.
very informative. Thank you.
Let's say I want to start a company that I will fund from day trading and other investment activities and then use the funds in the holding company to purchase other businesses and real and real estate. How would you structure the holding company legally? LLC or corporation.
What I am trying to do is have a place where I initially fund with profits from day and swing trading until I've accumulated a certain amount of capital and then incorprate another entity where the funds will be transferred to from the main holding company to purchase the an initial investment that generates cash flow and do that all over again. And the funds from the investment will stay with that specific new entity and accumulate while transferring additional funds from trading to purchase more cash flow generating investments. That initial new entity will be separate from the main holding company and i want to do that for several different types of investments (real estate, software/hardware, business acquisition)
It depends... review the laws and codes in the area in which you wish to form your entity and see what it entails. Corporations pay tax on the corporation and then the individuals pay tax on the income they receive thus "double taxation". LLC's are disregarded entities and are not taxed at the business level so the owner(s) "member(s)" are taxed on the business a whole on their personal taxes. Some juristictions allow the minimum number of corporate board members and officers to match the number of shareholders of the entitiy. You could be a 1 person private corporation however as mention in Joshua's wonderfully worded articles... you may become subject to additional taxation meaning you risk potential triple taxation at the federal level, not counting state or local taxations as well. However if you plan to level money in the entity to grow you aren't paying taxes personally on income you aren't receiving. In LLC's even if you take $0 out of the entity you are still taxed on the entire profit/loss of the entity, but you are only taxed once. Personal taxation on corporate dividends are lessor than personal taxes from LLC distributions at the highest tier.
There is no perfect right or wrong answer for this. Bill Gates has the Cascade LLC, Warren Buffet had Berkshire-Hathaway Inc. Both deal in the Billions of dollars in business. Coca-Cola and GE are incorporated and have hundreds of subsidiaries each (even though Coca-Cola has holding companies as large percentage shareholders). Both Bill Gates and his private Cascade LLC have shares in Microsoft, Coca-Cola & Berkshire-Hathaway (which has shares in Coca-Cola). Technically Bill sees 4 lines of income from Coca-Cola plus the income he receives being a board member of Berkshire and his salary as CEO of the LLC, both of which are partially afforded by dividends from Coca-Cola. Warren meanwhile does everything from the confines of Berkshire-Hathaway and has almost zero corporate staff.
These two gentlemen are the 2 most influential figures of the evolution of American Economics over the past two decades. Warren and Bill best friends and business partners and one does his holdings from an LLC and the other a Publically Traded corporation.
Remember I am not a attorney or a CPA. This comment is not meant to be taken as legal, investment or financial advice. To get your questions answered and before making a determination for yourself it's always highly recommended you speak to a licensed attorney with the authority to practice under the jurisdiction of the formation of your business entity AND a CPA.
Joshua... this information is great. In your opinion should you start a separate holding company for assets and for IP or can one holding company have both?
I own shares in an unlisted company and have just received an offer from a private equity holding company to indulge in share swop .I have no idea what to do as does anybody know if I have a better chance of selling my shares if I take part in this ?
i have a very confusing question. my father had his house (which was paid off) listed as a LLC Holding Co.he passed away leaving the holding co to the 4 children as members. The 4 children decided to sell the house.my question is..... Do we have to pay capital gains taxes on the income? or is the house considered an inheritance and not taxable??
Depends on the papers by which the LLC is formed. It can run as a C or S Corporation or Partnership. S/Partnership do pass through to the owners. C would completely shield you, it wouldn't be considered and inheritance because the property is owned by an entity that cannot die. (The LLC...) LLCs can behave weirdly if the operating documents specify them too. It's important to study them in detail.
Hi Joshua, thanks for this introduction to holding companies. i found it very useful. Are there currently any books you recommend in the area of setting up a holding company?
thanks i have just read your article and to me it deserve not just one time review. I hope you would do more of its kind in the future
Thanks a bunch. this article has really helped a lot. i actually read it all the way through too.
Thanks, I found that very educational.
Thanks for this article, I've learned a lot.
Was trying to form a 10 person equity holding company to grow my money. Found out, jut buy BRK and save all the troubles. Problems solved. One can also buy SP500 etf, but need to pay tax on 1-2% dividend payout.
great information for those who are thiking to start HC