A holding company provides benefits which are impossible to provide via a single business entity. Holding companies are created the same way other companies are, and may be either LLCs or Corporations. Instead of engaging in operations, they merely own and control other companies and assets. The company can engage in operations via subsidiaries or sister companies when needed. Assets may also be loaned or leased to third parties. The intent is to isolate liabilities, provide anonymity where possible and minimize taxes when feasible.
Who Might Use a Holding Company?
There are multiple scenarios when a holding company may be useful. An E-commerce company may open a subsidiary for product lines to ease individual sales and isolate risk. In the case of real estate investment, holding companies can separate the physical property from property management. This prevents catastrophic losses due to lawsuits. Families can use a holding company to manage disparate interests and make it possible to file consolidated tax returns. Some people decide to use LLCs to pass on their assets instead of traditional estate planning. Any industry that has valuable assets, as well as risks, can use a holding company to minimize those risks.
Advantages of Holding Companies
One of the biggest advantages of a holding company is isolating risk by keeping assets separate from operations. This can assist with a range of assets, from trademarks to real estate to cash. Holding companies also provide consolidated filings for taxes since subsidiaries are not required to file returns, just their parent company do. Holding companies can also reduce taxes by shifting income to a lower-tax jurisdiction. Finally, they allow for assets to be titled anonymously via an anonymous LLC.
Notes on Operating Companies
Operating companies might have to file tax returns in additional states. For example, if the operating company manages a property in a different state, you will need to register in that state as a foreign entity and file a tax return as well.
Generally, companies that "transact business" within a state must register there as a foreign entity. Most states consider having employees, renting offices, having physical storefronts, and managing property as doing business. They typically do not consider opening bank accounts, owning property, holding meetings, having clients, or having contractors or suppliers in a state as doing business in the state.
Sister-Sister and Parent-Child Structures
Holding structures typically have one of two structures. Parent-child structures involve parent companies overseeing the children companies, with the latter participating in operations. Parent companies frequently have management contracts. In sister-sister or sibling structures, holding companies have several subsidiaries or series LLCs to hold assets plus a different operational company.
Holding Companies for E-Commerce
E-commerce is another ideal business for setting up holding companies in Colorado because of the anonymity as well as the ability to divide product lines among entities. You can also form different entities to sell the same product to different customers in the same market and to assist with risk management.
Colorado Holding Companies Vs. Other States
A holding company can choose its location since most states do not consider holding or leasing assets as transacting business. Common locations for holding companies include Colorado, Delaware, Wyoming, and Nevada.
Colorado does not require holding companies to complete an annual report, saving time as well as money spent on fees. The state additionally allows anonymity. This makes Colorado the best choice for those placing a priority on anonymity.
Delaware attracts large corporations. This state also does not focus on asset protection. It also has high fees.
Nevada was the previous leader. That is not the case anymore due to reduced anonymity and increased fees.
Wyoming has a low annual report fee of $50. It allows anonymity and has statutes that protect SMLLCs (in this case, subsidiaries).
Registering Foreign Entities
Sometimes, you cannot avoid registering in a given state. In this case, run operations there as much as possible while avoiding holding any assets in the state. That process isolates valuable assets and operational risks.
Operating companies can lease assets to function on an as-needed basis. Those concerned about privacy have several options. Some states let you list an owner as an entity that is out of the state to make the LLC anonymous. In other cases, you will need a signature or name. You could then retain anonymity by hiring nominee services for signing public forms.
Holding Companies for Investment in Real Estate
Real estate is a business ideal for a holding company structure since there are both operational risks and valuable assets. Separating them can reduce business and personal risks. The benefits increase even more by forming a company that is anonymous and then managing properties via a unique LLC.
Companies can use a Colorado trust within a holding company structure for added asset protection. A trust will allow you to separate an asset's economic benefit from its ownership. As the asset belongs to the trust, no one can take the asset from you although you can still reap its benefits.
Holding company structures can provide benefits that outweigh the cost and time associated with their implementation. To learn if a holding company can work for you, contact us to schedule a consultation with our experienced Colorado attorneys through the contact link on our website.