A holding company is a group of smaller companies.If you are a business owner or investor, you may want to consider forming a holding company to protect your business assets or get a more favorable tax rate.
Step 1: Determine your business needs.
A holding company is an incorporated business that holds investments.Borrowing, lending, and investment decisions are the only business activities performed by the holding company.The holding company may lend funds or lease assets to an operating company that does business.Tax reduction and asset protection are the two most common benefits of a holding company.A holding company can provide a reduced tax rate by incorporating in a state with a more favorable tax structure, or it can protect company assets from loss to the operating company.Before forming a holding company, you should think about the benefits you want to achieve.The US has a famous holding company.GEICO and Coke are some of the operating companies that are invested in by the company.The holding company is able to borrow at lower rates than other businesses because it has a diverse group of businesses.The business profits greatly from the increase in the stock value of businesses it invests in.The high value assets of the operating company can be protected with a holding company.By forming a holding and operating company, a single person can protect both their personal and business high value assets from the debts of the business.
Step 2: Do you know your business structure?
There are two forms for a holding company, the corporation and the limited liability company.The form you choose can affect your taxes and liability.Most small business owners choose to form an limited liability company as the corporation structure doesn't provide the same asset protection.What type of company you already have, if any, and what form of holding and operations company will suit your needs should be considered.If you want a more favorable tax structure, you may want to form your holding company in a different state than the operating company.A business attorney can help you set up a company in another state.One holding and one operating company can be formed to maximize asset protection.The agent for each can be the same person, but you have to create a separate entity for them.If you maintain the holding and operating companies as separate legal entities, they will not be liable for debts of the operating company.
Step 3: There is an application for a business.
You will form your holding company according to the laws in your state.You will need to register your company with the state by giving your name, address, and the name of your business agent.If your holding company is not already incorporated, you should do this.The purpose of your company, the names of the officers, and how business decisions will be made should be stated in your articles of incorporation.As you make changes to your business, you should update the articles of incorporated.
Step 4: You can create a bank account for your company.
The holding company and the operating company have separate bank accounts and accounting records.If you want to open a business account for your holding company, you need to provide your new company tax ID.You will use the funds if you deposit all of them.
Step 5: The holding company should be funded.
To invest in the operating company, you should fund the holding company.The wealth of your companies should be stored in the holding company and you can lend money to the operating company to fund operations.If your operating company was already started before the holding company, you should file a transfer of assets to that company.
Step 6: You should keep accounting records for your transactions.
Maintaining accurate accounting records is important for operating and holding companies.Maintaining legal distinction between entities requires separate accounting records.The holding company has to claim income from the company in lease or rent revenue in order to cover the cost of owning the asset.At the end of the year, you can account for all the transfers that took place between your holding and operating companies.
Step 7: All operating activities should be performed through the operating company.
All business activities must be performed through your operating company, not your holding company.The sale of groceries or clothing is one of the operating activities that drives revenue in a business.The holding company should never be involved in the operating activities of the company.When a holding company is held liable for the debts of an operating entity, it's calledpiercing the corporate veil.When the operations of the two companies are so intertwined, the holding company is held responsible to pay the operating company's debts.The operating company funds should be used to pay all employees who perform operating functions.
Step 8: The holding company can be used to invest and finance.
The holding company can act as a lender or lessor to the operating company in order to own the assets of the business.The holding company will get cash flow back from the operating company each month.Rent can be charged to the operating company by the holding company, as well as loan money and collect interest payments.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.The cash is not subject to the operating company's liabilities if it is on the holding company accounts.Many holding companies use the financial security of the diverse investment to invest in multiple businesses.The holding company earns income on the investment growth of the smaller companies, as well as any interest or lease revenue it earns.Keep separate bank accounts and records for each company so that you can track your activity and report on it.
Step 9: You have to pay taxes and franchise fees.
You will file tax returns for the holding and operating company.If you need an accountant, file your taxes annually.You may be required to pay state franchise fees for your companies.If you don't know what taxes and fees apply to your business, you should consult a business attorney.