The limited liability company (“LLC”) has quickly become the favored business structure for many small businesses. This is due to its ability to combine many of the best features of both partnerships and corporations, such as operational flexibility, limited liability for all of its members, and pass-through taxation.
A natural development that comes with this trend is the desire to continue reaping these same benefits and use an LLC as a holding company.
Ownership in an LLC is reflected in Membership. The LLC Members own Membership Interests or Units, and these membership interests or units may be owned by any “person” (which legally means an individual, partnership, or corporation). So this in effect means that an LLC can “own” other LLCs. With a few restrictions LLCs can also own shares in corporations. This is true for Subchapter C Corporations “C Corps.” However, for S Corps, the general rule is that an LLC cannot own an S Corp unless it is a single-member LLC. This paves the way and lays the foundation for the ability to use an LLC as a holding company.
How does the holding company work?
A holding company is a company that owns other companies’ membership interests (if it is an LLC) or outstanding stock (if it is a corporation). The main purpose of the holding company is to own the interests or shares in the other companies. The holding company votes on the action. Meanwhile, the operations of providing goods and services are left to the companies below, which are called “operating companies” or “subsidiaries.” The holding company controls policy and management of the operating company through its voting rights associated with its membership interests or shares. There is value in this structure because it further enhances liability protection in certain situations, by separating operations and decision-making from assets. Notably, the holding company may actually own equipment or property that the operating company needs, however, the holding company can lease the equipment or property to the operating company.
Avoid Corporate Veil-Piercing Business Practices!
Although there may be a number of benefits to using an LLC as a holding company, it is important to keep a formal and accurate and separate accounting of finances and assets. One of the reasons people like LLCs is because of the flexibility and relaxed protocol. However, this is one area that must not be relaxed in the context of a holding company. Missteps here, such as by taking accounting short cuts, not properly documenting transactions between the entities, or commingling funds to name a few, can result in loss of the LLC’s limited liability protection in legal disputes. Avoid actions that give the perception that the companies are truly one in the same.
Talk to a business attorney to determine if an LLC is the right business entity for you. Your attorney can help you:
Set up a Florida LLC (or an LLC in another state when it is more appropriate)
Assess whether the benefits of using an LLC as a holding company outweigh potential drawbacks
Prepare the operating agreement and other organizational documents for your LLC.
**** This article is for educational purposes only and to provide a general understanding of the law, not to provide specific legal advice. By reading this blog post you understand that there is no attorney client relationship between you and TLA LAW. This blog or any article on the website should not be used as a substitute for obtaining competent personalized legal advice from a licensed attorney in your state.