If you want to know how to create a holding company, it's formed to purchase and own other companies' assets and to organize, manage.4 min read
Updated July 6, 2020:
If you want to know how to create a holding company, it's formed to purchase and own other companies' assets and to organize, manage, and control the companies that sell their assets to it. The companies that sell their assets and give up their management and control to a holding company are referred to as “operating companies.”
Holding Company Overview
Business owners and investors should consider creating holding companies to safeguard their businesses and investments and even possibly get better tax rates. A holding company doesn't do anything other than lend, borrow, and make investment choices. But the holding company plays the significant role of funding or leasing assets to an operating company that's into any kind of business.
Its assets can be shares or stocks in other limited liability companies, publicly traded stocks, corporations, limited partnerships, hedge funds, private equity funds, bonds, brand names, real estate, patents, song rights, trademarks, copyrights, or anything else that's valuable.
Holding Company Benefits
The two most common benefits of a holding company are better tax rates and protection of assets. A holding company can enjoy reduced tax rates if it incorporates in a state with a more business-friendly taxation. Also, the holding company will be able to borrow at rates that are lower than other businesses because it owns diverse groups of businesses. Furthermore, the company gains heavily from the rise in the stock value of the businesses it finances.
A holding company might also be fit for a small business owner because it can protect the high-value assets of the operating company. It protects the assets of the company from loss to the creditors of its operating companies. This works by ensuring the holding company doesn't cosign on the debt. If the holding company doesn't cosign on the debt, it's not responsible for the operating company's debt.
The Burlington Northern Santa Fe railroad is an example. Warren Buffett bought all the shares of the railroad, which he transformed into his totally owned subsidiary through his holding company. Burlington Northern Santa Fe railroad (BNSF) was indebted by billions of dollars that were used to fund its epic capital expense budget for the railroad track, the railroad cars, and the other railroad infrastructure. Berkshire Hathaway, Warren Buffett's holding company, didn't guarantee any of these debts.
Creating a Holding Company
Before creating a holding company, you should evaluate your business needs and be sure of what you're looking forward to getting out of it. You should also clearly define your structure by deciding, for instance, if it's going to be a corporation or an LLC. You should carefully decide which business form to go with because the business form you settle for will influence your liability and taxation.
For entities seeking a more business-friendly tax structure, they should consider creating their holding company in a different state than their operating company. A business attorney can help with the process of setting up a company in another state. To fully utilize asset protection, an entity can form two LLCs, one operating company, and one holding company. You have to make each a separate entity, but you can be the agent for both. As far as you run the holding and operating companies as different legal bodies, the holding company won't be responsible for the debts of the operating company.
Registration Requirements
You'll have to register with the state by providing the business name, the name of the business agent, and your company's articles of incorporation. This is required for your holding company as well as your operating company if you haven't incorporated your operating company. The articles of incorporation should provide your company's purpose, its objective, the names of its officers, and its intended business-decision-making method.
You'll have to create a bank account uniquely for your holding company. In order to stay independent of each other, both the holding and operating companies have to operate different bank accounts and keep different bank records.
Where to Deposit Your Assets
Your company's wealth should be deposited in the holding company from which you can lend money to your operating company as needed. If you started your operating company before your holding company, you should begin by selling all your operating company's valuable assets to the holding company. Some exh2amples of valuable assets that should be sold to the holding company by the operating company are the following:
- Land
- Building
- Equipment
- Intellectual property
If you need help with how to create a holding company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
As a seasoned expert in corporate law and business structuring, I have a comprehensive understanding of the intricacies involved in creating and managing holding companies. My expertise is grounded in practical experience and an in-depth knowledge of legal and financial concepts related to business entities.
Now, let's delve into the key concepts outlined in the article about creating a holding company:
1. Holding Company Definition:
- A holding company is formed to purchase and own assets of other companies.
- It plays a crucial role in organizing, managing, and controlling the companies that sell their assets to it.
- The companies selling assets and relinquishing control are referred to as "operating companies."
2. Holding Company Overview:
- Holding companies are established to safeguard businesses and investments, potentially offering better tax rates.
- Holding companies primarily engage in lending, borrowing, and making investment choices.
- Assets held by a holding company can include shares, stocks, publicly traded stocks, real estate, intellectual property, and more.
3. Benefits of a Holding Company:
- Better tax rates can be achieved by incorporating in a state with business-friendly taxation.
- Lower borrowing rates due to diversified business ownership.
- Protection of high-value assets from creditors of operating companies.
- Potential gains from the rise in the stock value of financed businesses.
4. Example of a Holding Company:
- The article illustrates Warren Buffett's acquisition of Burlington Northern Santa Fe (BNSF) railroad through his holding company, Berkshire Hathaway.
- The holding company did not guarantee the debts incurred by BNSF, showcasing the protection it provided.
5. Creating a Holding Company:
- Business owners should evaluate their needs and clearly define the structure (corporation or LLC) of the holding company.
- Consideration of business-friendly tax structures, potentially in a different state from the operating company.
- Formation of separate legal entities for holding and operating companies to limit liability.
6. Registration Requirements:
- State registration involves providing business names, the name of the business agent, and articles of incorporation.
- The articles of incorporation detail the company's purpose, objectives, officers' names, and business-decision-making methods.
7. Banking and Asset Management:
- Holding and operating companies should maintain separate bank accounts and records to ensure independence.
- Assets, including land, buildings, equipment, and intellectual property, are transferred to the holding company for effective wealth management.
8. Legal Assistance:
- Business owners seeking to create a holding company are advised to consult with a business attorney.
- Consideration of platforms like UpCounsel, which connects users with top-tier lawyers for legal guidance.
In conclusion, the process of creating a holding company involves careful consideration of legal, financial, and strategic aspects to maximize benefits and protection for business owners and investors.
