How To Structure Your Holding Company
A holding company is one that exists for the sole purpose of owning and managing the stocks and assets of other companies. It is not usually involved in administering the day to day operations of the companies it manages and it does not actually perform any other typical business function like manufacturing or selling anything. It provides oversight and is what might more familiarly be called an ‘umbrella’ or ‘parent company’. Think about the holding company in the sense of taking responsibility for executive supervision, support, for setting risk management parameters, and also getting the right people in the right positions to comply with business strategy.
Holding companies are commonly used under limited liability companies (LLCs). LLCs are designed to protect owners from personal liability from creditors and other litigators. For instance, in the event of bankruptcy or defaulting on a loan, creditors or litigators can only make claims against the business itself, and not against the owners of the business. This set-up is particularly useful in businesses that are owned by a sole-proprietor or if it is a small partnership with just about three people or less. In case of litigation, it could possibly be devastating for a single individual or for three individuals to bear responsibility or financial obligation for the entire business and this is why they usually use LLCs.
A holding company can be very useful to your business because it helps you to add another layer of protection for your assets in your limited liability company. What it actually does is it creates separate subsidiaries for each company asset.
For instance, if you own three businesses, instead of having all your businesses under one LLC, you can have them each under their own subsidiary LLC. Having all three of them together under one LLC does help you manage your liabilities a lot better but the fact that they are all together still poses some type of a risk. When you have them separated into these subsidiaries, you get to keep the main benefit of what an LLC should do while also expanding your liability protection. It means that if one of your individual businesses is sued or put at risk, the other two businesses will remain free from liability while that single business is in its holding company.
This type of set-up is particularly useful if you are involved in real estate and have a lot of properties to manage. A popular holding company is Johnson & Johnson. Although we are very familiar with the brand, it does not actually produce anything but the holding company does own stakes in more than 250 other subsidiary companies.If this type of structure is something you want to pursue for your business, then be sure to get legal advice on how to properly set up your business holdings. Legal advice will ensure that you actually benefit from the liability protection you are seeking and that you do not end up leaving your business at risk.
