What is a holding company and how to open one?

What is a holding company and how to open one?

An LLC can own another LLC, as they function both as individuals and companies.

In these cases, one of the LLCs is chosen as the main LLC, which holds a greater stake in the other companies (subsidiary companies).

Even when they are together, each Limited Liability Company must remain independent from the other. This means that each one must have its own commercial bank account, maintain its own operating rules, and keep individual financial records.

Let’s take a look at what a business holding company is and how to open one.

What is a business holding company?

A business holding company is a grouping and organization of certain commercial entities in which multiple companies are brought together. Among them, as I explained, will be the parent company or main company, which has decision-making power over the others.

The goal of a parent or main company is to establish a business group and create systems that streamline the management of the other companies within the business holding company.

What are the benefits of opening a business holding company?

1. Tax Benefits

The first benefit I want to talk to you about is regarding taxes and tax advantages.

Since LLCs are pass-through entities, the profits and losses obtained from all subsidiary LLCs are taxed according to the final owner’s tax return.

So, if some of these activities incur losses, they can offset the profits from others, thus reducing the overall tax liability.

Other benefits:

  • Inheritance and Gift Tax: Provided that the requirements stated in the Wealth Tax Law are met, companies can benefit from a 95% reduction in case of “mortis causa” succession.
  • Wealth Tax: In very specific cases, it is possible to be exempt from the Wealth Tax.

2. You Gain Protection

One of the best ways to protect your personal and business assets is by owning an LLC.

As we have explained in other articles, an LLC protects your personal assets if your company faces legal liabilities. When you place your operational businesses as subsidiaries, you add an extra layer of protection to ensure that each entity is responsible for its losses.

This way, you can ensure that your company’s assets are shielded in case any subsidiary faces bankruptcy or legal issues.

3. You Gain Financial Strength

Companies find it much easier to secure loans and investments when backed by a business holding company. In this way, parent companies can help improve the financial strength of subsidiaries.

Foreigners with LLCs within the United States can also maximize them by centralizing certain administrative services in the parent company. For example, when sharing resources like marketing, operational costs can be reduced.

Other benefits:

  • As companies expand, they reduce their production costs for goods or services. The more they produce, the lower the investment cost.
  • Greater stability and a significant reduction in economic risk or financial failure are generated.
  • Companies no longer need to turn to financial markets independently to obtain funds.

4. Better Management

Subsidiary companies will be subject to central management with clear objectives, operating strategies, and corporate vision.

When resolving disagreements, decisions will be made by the parent company, which directs processes that are most convenient for managing the business.

Other benefits:

  • More synergy, control, and efficiency, as there will be a relationship between companies and increased teamwork.
  • Certain management costs are minimized. For example, the human resources department, as everything will be managed from the parent company.

How to Open a Business Holding?

An LLC can form a business holding by acquiring shares, capital from other companies, or by opening a new company.

To convert your LLC into a business holding, follow these steps:

1: Choose the right state to register your company: if you’ve been researching this for a while, you’ll know that each U.S. state has different tax regulations and fees when it comes to opening your LLC. It’s best to do thorough research and choose the state that suits you best.

2. Hire a Registered Agent: a registered agent is a person or commercial entity that represents a company in receiving government correspondence and is required by law.

3. Get a physical address: you need a physical address to send your company’s documentation to the state.

4. Obtain your EIN: you need it to pay your taxes and hire employees in the United States. Remember that to get an EIN, you don’t need to have a Social Security Number or an Individual Taxpayer Identification Number (ITIN).

5. Submit the Articles of Organization and the Operating Agreement: these two documents contain information about your main LLC, which is included as the majority member. Learn more about the Operating Agreement.

6. Open a commercial bank account in the USA: It’s crucial to have a business bank account to manage your LLC’s finances and accounting.

Now you are ready to form a business holding

If you need guidance with any other process to create your company in the United States, don’t hesitate to contact us.

We are Rex Legal, and you can reach us here.

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