Advantages of an LLC Holding Company
Our firm’s business attorneys are approached by clients all the time asking what is an LLC holding company. Since, we are asked this question so frequently, we thought it would be helpful to provide online readers with a few advantages of using an LLC holding company for intangible assets including your LLC’s intellectual property, which includes its websites, trademarks, copyrights, patents, bank accounts, stocks, etc. You can also use LLC holding companies for tangible assets such as vehicles, boats, real estate, etc.
What is an LLC Holding Company?
When an LLC is formed to be a “holding company”, it conducts no operations other than “owning” another company and or its assets. The term holding company comes from the fact that the business has one job: to “hold” assets. The company where operations or the daily and routine business activities actually occur, and where most of the employees and liabilities are, is called an “operating company”. Therefore, when you form an LLC holding company, you will generally also form a separate or subsidiary LLC to be an operating company.
What are the Advantages in Using an LLC Holding Company?
There are numerous advantages of using an LLC holding company including, increased asset protection and risk management, geographic and economic diversification, and tax benefits. Holding companies are not just for Fortune 500 companies, but can also be used by and benefit small business owners. Let me explain how this works and why this is helpful for small business owners.
Asset Protection and Risk Management
LLC holding companies maximize asset protection and diversify risk of loss. Let’s say you own an LLC in Wisconsin. The Wisconsin LLC sells a product or service, and all the intangible assets are owned by it. If a person is injured or the LLC default’s on a loan, the injured party or the creditor can sue the LLC and potential force the sale of its intangible assets to pay the judgment. Now let’s say your Wisconsin LLC establishes a subsidiary LLC in Delaware to which it transfers ownership of its intangible assets, especially its intellectual property. The Delaware LLC becomes a “holding company” holding and owning the intellectual property and then licenses the use of those assets back to the parent, which pays the holding company a royalty fee typically, some percentage of sales or licensing fees. Here, if an injured party or creditor would sue, it would be highly improbable that either could attach the holding company’s assets. Thus, the holding company’s intangible assets and royalty income would be protected and the risk of loss of company’s assets and or revenue would be minimized.
Geographic and Economic Diversification
Small businesses should consider establishing an LLC holding company in a state with pro-business regulations, comprehensive case law on LLCs, favorable economic policies toward businesses, and beneficial tax treatment. Having your operating company in one state and your holding company in another state, also known as geographic diversification, helps to diversify risk of loss including, legal, business, and operational risk, and in turn improves return on investment. Economic diversification refers to diversifying revenue streams. LLC holding companies diversify income sources through royalty, licensing, and leasing agreements with the operating company.
Potential Tax Advantages
LLC holding companies receive royalty or licensing fees from the operating company. Those fees, in most states, are deductible expenses. So in the example above, if your operating company is in Wisconsin, and your holding company is in Delaware, you would receive a tax benefit, since royalty fees derived from licensing intangible assets are not taxable in Delaware. Therefore, the revenue generated by the Wisconsin operating company is a deductible expense when paid to the Delaware holding company, and since Delaware does not tax royalty payments, there would be no state income tax on the royalty income produced in Delaware. In this example, you may be able to reduce your state income tax obligation in Wisconsin by over 7%.
It is important to emphasize that when utilizing a holding company and or using an intangible asset transfer program that the business decisions made by the LLC must be in good faith, at arm’s length, and for a legitimate business purpose that is not solely based on tax considerations. By using an LLC holding company and an LLC operating company, you can diversify your risk of loss, maximize the protection of your intangible assets, and obtain tax benefits. When considering where to establish your LLC holding company, you should choose a state that will provide maximum asset protection, has a pro-business legal and political landscape, and it will provide tax benefits. Contact Subhan Law Office, LLC, at (414) 223-5718 or email us at firstname.lastname@example.org to learn more.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Author: Attorney Ili J. Subhan
Subhan Law Office, LLC © 2016 All Rights Reserved.