A famous holding company in the US is Warren Buffett’s Berkshire Hathaway. Berkshire Hathaway is a holding company that lends to and invests in operating companies, including GEICO and Coke. [1] X Research source The holding company can borrow at lower rates than other businesses because it has ownership in such a diverse group of businesses. At the same time, the business profits greatly from the increase in the stock value of businesses it invests in. A holding company may also be suited for the owner of a small business, as the holding company can provide asset protection for the high value assets of the operating company. In this way, by forming a holding and operating company, a single person can protect both their personal and business high value assets from creditors of the operations of the business.
If you are seeking a more favorable tax structure, you may consider forming your holding company in a separate state than the operating company. You should consult a business attorney for help setting up a company in another state. To maximize asset protection, you can form two LLCs, one holding and one operating company. You must create a separate entity for each, but the agent for each can be the same person - you. As long as you maintain the holding and operating companies as separate legal entities, the holding company will not be liable for debts of the operating company.
Your articles of incorporation should state the purpose of your company and its objective, the names of the officers of the company, and how business decisions will be made. Update the articles of incorporation as you make business changes.
If your operating company was already started before the holding company, start by selling all of the valuable assets of the operating company (such as land, buildings, large equipment, intellectual property, etc) to the holding company by filing a transfer of assets. [4] X Research source
The phrase “piercing the corporate veil” is commonly used to describe when a holding company is held liable for the debts of an operating entity. This happens when the operations of the two companies are so intertwined, the holding company is held responsible to pay for the debts of the operating company. [6] X Research source All employees who perform operating functions should be employees of the operating company, and should be paid using the operating company funds.
You should aim to have most of the cash between the businesses stored with the holding company, where it can earn interest, and loan to the operating company when necessary. So long as the cash is on the holding company accounts, it is not subject to liabilities of the operating company. Many holding companies invest in multiple businesses, by owning stocks in multiple businesses and securing low interest using the financial security of the diverse investment. The holding company earns income on the investment growth in the smaller companies, as well as any interest or lease revenue it earns. Remember to always maintain separate bank accounts and records for each of the companies, so that you can track your activity and report on it.
