Holding companies are often used by business owners, entrepreneurs, and businesses to hold an interest in another company or asset. Often business owners wonder if a holding company is something they need for their business. Holding companies can provide liability protection, consolidate income for lending purposes, support multiple subsidiaries and centralize operations management. Disadvantages to holding companies include complex legal documentation, additional tax filing requirements and additional ongoing costs. Everyone’s situation is different, so how the benefits and disadvantages affect each business owner is unique. In the following paragraphs, we consider some of the issues that may affect your decision as to whether to form a holding company.
What is a Holding Company?
First off, a holding company is simply an entity that owns other companies and assets. For example, a holding company might be a limited liability company (LLC) that a business owner owns. A holding company might own 100% of another LLC that owns a retail store, restaurant, or some other business. A holding company LLC could also own intellectual property, such as a trademark or patent. A holding company could own many different entities and many different assets. For example, a holding company could own an interest in ten different companies and license the intellectual property the holding company owns to each of the ten different companies One common way a holding company can be used is to invest in real estate. For example, a real estate investor might own many different rental properties, each of which is owned in a separate LLC. The real estate investor could set up a holding company that owns each of the separate LLCs. As a result the real estate investor would personally own one LLC (the holding company) and the holding company would own subsidiary LLC entities which own real estate
Lending Benefits to a Holding Company
One distinct benefit a holding company provides to a business owner is the consolidation of income from different business sources. Take for example, the real estate investor previously referenced; if that real estate investor wanted to get a loan to buy a property, a bank is typically going to look at the personal financial strength of the real estate investor. If the real estate investor personally owned twenty different LLCs, the bank is likely going to have to review each of the LLCs. If there was a change in any of the individual LLCs, this could be problematic to the loan approval. On the other hand, a holding company allows for the income of the twenty different LLCs to be consolidated into one revenue source to the real estate investor. The real estate investor with a holding company owns one LLC. This can potentially make the lending approval more simple and easier.
When considering whether a holding company is correct for you, some business owners need to determine whether their profession has specific ownership requirements. Many professions require some level of licensure with the state or other jurisdictions. In North Dakota, some types of entities must be owned by individuals holding a certain type of license. For example, a law firm must be owned by attorneys. In addition, some types of entities must be comprised of individuals who are individually licensed for a particular profession. For example, suppose you want to form a professional limited liability company (PLLC) in North Dakota. In that case, you must obtain a letter from the regulating board of profession that each member is a licensed individual. There are a few minor exceptions. For professional organizations, setting up a holding company may be challenging, if not impossible.
Taxes should also be a prime consideration when potentially setting up a holding company. Before setting up a holding company, you should consult with your tax professional. Often a holding company will require the filing of an additional tax return each year. This additional tax return will cause additional filing and bookkeeping costs. Depending on the exact structuring of your holding company, you could save on taxes or pay more in taxes. Therefore, consulting with your tax accountant is essential.
In North Dakota, there are restrictions as to what groups of people are allowed to farm or ranch using an LLC or Corporation. North Dakota generally has corporate farming laws that prohibit LLCs and Corporations from being used by nonfamily members. That said, there are many ways for nonfamily members to farm together using various forms of partnerships. Corporate farming laws by no means stop the use of holding companies, but one should be careful in how they structure a holding company if they are going to be in the business of farming or ranching.
Liability protection is often one of the main reasons a business owner may decide to use a holding company. Multiple limited liability companies provide multiple levels of liability protection. A holding company can provide additional liability protection when a business has multiple divisions of operation. For example, a business owner could own five retail shops in the Fargo-Moorhead area. Each retail shop is structured in its own entity and licenses shared branding and trademark information from the holding company. If an incident causes a major liability to one of the retail shop entities, the holding company and the other retail store entities may be protected.
Fargo Patent & Business Law is an intellectual property and business law firm. We are always happy to talk to you if you have questions about trade secrets, copyrights, trademarks, patents, or other intellectual property issues.
The information provided in this article does not and is not intended to constitute legal advice. All information, content, and material is for general informational or educational purposes only. Information provided may not be the most up-to-date legal information, and it is recommended that readers contact their attorney to obtain advice on any particular legal matter.