Summary
A Family Holding Company, as part of an estate plan, can help protect assets from potential financial crises. By transferring ownership of assets to a corporation and establishing a family trust, individuals can maintain control while safeguarding their wealth. Seeking legal guidance is advised when making such decisions.
Set Up The Holding Company in Advance
Most professionals and business people can easily and unexpectedly find themselves embroiled in a financial crisis that could cost most of their assets. Doctors, lawyers, and other professionals sued for malpractice or misconduct, business owners who must fight liability suits, anyone dealing with whopping medical bills to cover a long-term illness, people who can't get enough insurance or can't afford to pay for the coverage they need.
In this escalating crisis the best self-defense is to get assets out of your name far in advance of any trouble with creditors. However, judges don't look kindly at people who transfer their assets in order to defraud creditors. The longer the time between a transfer in a court judgment, the less likely the transfer will be deemed fraudulent by the ones you're involved with in a suit.
Personal Savings
This is probably one of the better ways to fund your business start-up costs. If you have a personal savings account large enough to cover your expenses, this route is ideal. If you use your personal savings, you won't have to deal with owing lenders, either personal or professional, any money. The downside is, if your business start-up takes a huge chunk of your savings, it could leave you high and dry in personal emergencies where you might need that money.
Transfer Ownership & Maintain Control
Setting up a family personal holding company lets you keep control of your assets while transferring ownership of most of them out of your name. This is how it works, you establish a corporation giving yourself a relative majority of the stock and dividing the rest among the family members. For example, use your 100 shares 30 for you, 25 for your spouse, and 15 shares for each of your three children.
You then give your assets to the corporation as a gift. Managing them yourself. As chairman of the board. If you're sued, creditors can only get a hold of your 30 shares a minority interest in a private company, which isn't very useful. In many cases, creditors will be willing to settle for much less than originally demanded that fits in a more liquid form.
Establish a Family Trust
Spendthrift trusts, are an effective way to protect inheritances and other windfalls from ending up in your creditor’s hands. This is how it works, the trust is set up with you as the beneficiary and another party could be your spouse, or a lawyer, as long as it is one trusted person as your trustee. Worked into the trust states that the assets can't be used to pay creditors. People who intend to or will give you money for example; (your parents) would give it to the trust instead.
Tap Into Your Home Equity
If you own a home and have a strong credit rating, you might consider tapping into your home equity. This could help you cover your start-up costs, however, it increases the amount you owe on your home.
Sell Some Stuff
If you've got things around your house that you know you could live without, consider selling them to fund your start-up cost. Try selling your things in a yard sale, on Craigslist, eBay, or your local newspaper classifieds. If you put forth the effort, you'll probably end up with a decent chunk of cash. The benefit of this method is that you won't owe anyone anything if your business doesn't do as well as you'd have hoped.
Take Out a Loan
If you're unable to fund the start-up yourself, and can't or don't want to ask family members and friends for help, you might consider taking out a business loan. If you're interested in a bank loan, you need to pay a visit to your local bank and schedule an appointment to speak with someone in more detail about the services and loans provided. If you're not looking for as high of an amount, you might consider using a website such as Prosper, to obtain a smaller, private loan.
Parting Thoughts
A Family Holding Company, integrated into an estate plan, provides a shield for assets against potential financial crises, allowing individuals to maintain control while securing their wealth. Equitable answers to these questions, and others, are rarely straightforward and seldom easy. To act in the best interests of the business, shareholders, and clients, the prudent course of action for partners is to seek expert legal guidance and assistance. Additionally, answers to frequently asked questions about family holding companies are provided below.
Frequently Asked Questions
What is a family holding company?
A family holding company is used to manage family investments in other companies, real estate, equities, and other investments. The holding company is generally utilized as part of an estate plan.
What is the largest family-owned company?
The largest family-owned company is difficult to define, and often changes, but contenders include Walmart, Volkswagen, Berkshire Hathaway, Exor, and more.
Can a holding company be a family office?
A holding company can be a family office, for those with significant assets this is generally done via a Private Family Trust company meant to manage wealth across generations.
Can a family trust be a holding company?
A family trust can be a holding company, but generally, it's advisable for the holding company to be held by a family trust. The relative merits of each should be discussed with a business and trust attorney.
FAQs
Setting up a family personal holding company lets you keep control of your assets while transferring ownership of most of them out of your name. This is how it works, you establish a corporation giving yourself a relative majority of the stock and dividing the rest among the family members.
Can a holding company protect assets? ›
Using holding and operating companies is an asset protection planning strategy that helps to limit liability in your business structure. As noted earlier, the ideal business structure consists of an operating entity that does not own any vulnerable assets and a holding entity that actually owns the business's assets.
What is the best business structure for asset protection? ›
Corporation. A corporation provides significant protection for personal assets because it creates a “wall” between you, the person, and your business (and its liabilities) by creating a new and separate entity.
What is a family holding company? ›
Basically, a family holding company is an LLC or a limited partnership that's established to hold assets for the benefit of family members.
What type of business protects personal assets? ›
Limited liability company (LLC)
LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits.
Can a family office be a holding company? ›
A holding company can be a family office, for those with significant assets this is generally done via a Private Family Trust company meant to manage wealth across generations. A family trust can be a holding company, but generally, it's advisable for the holding company to be held by a family trust.
What can a holding company not do? ›
Many holding companies don't manufacture anything, sell any products or services, or conduct any other business operations.
What is the safest company structure? ›
Limited Liability Company (LLC)
Liability – The greatest benefit of an LLC is its liability protection. Without a lot of aggressive work in the courtroom, if your business is involved in a lawsuit or judgment, your personal assets will likely not be seized.
What is a company's most valuable asset that must be protected? ›
In any industry, people are a company's most valuable asset. A recent article in TCI magazine addresses the importance of equipping your people so they can best carry out the objectives of your organization.
What is the best asset protection? ›
Limited liability companies (LLCs) and Family Limited Partnerships (FLP) Transferring assets into a limited liability company (LLC) or family limited partnership (FLP) keeps them separate from your personal property. Both options allow you to retain control over the property while protecting it from creditors.
In a family business, two or more members within the management team are drawn from the owning family. Family businesses can have owners who are not family members. Family businesses may also be managed by individuals who are not members of the family.
Why use a holding company for LLC? ›
If you're a small business owner in charge of several companies—for example, if you own three stores across town, each one its own LLC—a holding company helps to minimize risk and shield against cascading losses.
Why would a holding company own a house? ›
A holding company is a financial vehicle for owning and controlling other assets, such as real estate, stocks, or companies. Using a holding company creates legal separation between the assets and the owners, and reduces the liability for the owners if one of the holdings encounters financial trouble.
Can personal creditors go after my LLC? ›
Creditors May Foreclose on California LLC Members
Unlike many other states, California's LLC law does not provide that a charging order is the exclusive remedy of LLC members' personal creditors. Rather, it allows a creditor to foreclose on the debtor-creditor's LLC interest.
Does a trust protect your assets from a lawsuit? ›
A living trust does not protect your assets from a lawsuit. Living trusts are revocable, meaning you remain in control of the assets and you are the legal owner until your death. Because you legally still own these assets, someone who wins a verdict against you can likely gain access to these assets.
Does an S Corp protect your personal assets? ›
An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities. Creditors cannot pursue the personal assets (house, bank accounts, etc.) of the shareholders to pay business debts.
How does a holding company protect you? ›
Liability protection
Placing operating companies and the assets they use in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.
What are limitations of holding company? ›
Disadvantages of holding company
It's Hard to Market Stocks: Parent businesses may find it difficult to sell subsidiary assets at times. Even though the firm usually doesn't want to, it compels them to keep the assets. The firm finally loses profits as a result of it.
Why would someone start a holding company? ›
Privacy: A holding company gives you the ability to maintain ownership of multiple companies without being personally listed as an owner. A holding company would use its own tax identification number, which would limit the exposure of the owner's social security number on record with the entities it owns.
Should I put my holding company in a trust? ›
A trust has a better tax advantage than a holding company. In a holding company and trust, you can transfer the surplus business income tax-free and defer your personal income tax payments. You can also avail of the lifetime capital gains exemption in both cases.
