How to start a holding company
Once the decision has been made to use a holding company-operating company structure, the next question is how do you get started? For a new business venture, you will have to form at least two business entities (one parent company and one subsidiary company) and maybe more. For each entity to be formed a number of important decisions must be made. This includes the following four key decisions:
1. What type of business entity should be formed?
Whether to use a corporation, LLC, or other entity type for the parent company and subsidiary companies will depend on a number of factors. Although corporations and LLCs both provide the key characteristic of limited liability they differ in other areas like how they are managed, how they can split financial interests, and how they are taxed.
2. How should the entities be taxed for federal income tax purposes?
This generally means, should it be a separate taxable entity or a pass-through entity. Once again, the answer depends on many factors.
3. Where should each entity be formed?
Any state can be the formation state. And the holding company and its subsidiaries do not have to be formed in the same state. In making this decision it is important to remember that each company that is doing business in a state other than its formation state will have to qualify to do business in that foreign state.
4. What name should be chosen for each entity?
The name of each parent company and subsidiary company must meet the requirements of the governing statute. The statutes typically require certain words or abbreviations that indicate the entity type, restrict certain words or phrases, and require that the name be distinguishable on the records of the filing office from the names of other domestic and foreign business entities. Checking the availability of the desired names, and reserving them before filing the formation documents, are always good ideas.
5. Who should be the registered agent?
Less talked about but just as important is the choice of registered agent. That is the agent required by statute to be appointed by a corporation, LLC, or other business entity to receive service of process and official communications. An important decision is whether to select an individual — like an employee, owner or lawyer — or a professional registered agent. A professional registered agent is a service company that provides the registered agent to many business entities and has expertise in doing so.
Becoming a holding company through a merger
In addition to forming a new entity to act as a holding company, an existing operating company can restructure itself to become a holding company through a merger. In the case of a corporation, the merger would generally require a meeting and shareholder approval. Delaware and a few other states have a provision under which a publicly traded corporation can become a holding company without a stockholder vote.
Under the Delaware provision, for example, (Sec. 251(g) of the General Corporation Law), the operating company must merge with a direct or indirect subsidiary in a merger in which each share of stock in the operating company is converted into an identical share of stock in the holding company.
Once the transaction is completed, the operating company’s stockholders will hold shares in the holding company and the holding company owns the stock of the surviving operating company. There are additional protections in place for the stockholders.
A holding company and the Corporate Transparency Act
The Corporate Transparency Act(CTA) requires all corporations, LLCs, and other entities created in the United States by the filing of a document with the Secretary of State or similar office or created under the laws of a foreign country and registered to do business in the United States by the filing of a document with the Secretary of State or similar office, to file a beneficial ownership information (BOI) report with a bureau of the U.S. Department of Treasury called the Financial Crimes Enforcement Network (FinCEN), unless the corporation, LLC or other entity qualifies for an exemption. Companies that have to file a BOI report are called reporting companies.
Among the ways the CTA impacts holding companies are the following:
- The holding company may be a reporting company, meaning it will have to file an initial BOI report, reporting information about the company, its beneficial owners, and for reporting companies created or registered on or after January 1, 2024, its company applicants.
- The holding company’s subsidiaries may be reporting companies, meaning they will have to file an initial BOI report as well.
- The individuals who meet the definition of a “beneficial owner” must report their personal information – consisting of their legal name, date of birth, residential street address, and a unique number and the issuing jurisdiction from their current passport, driver’s license, or state ID, and an image of the document from which the unique number is taken.
- Holding companies and subsidiaries that are reporting companies have to file an updated BOI report upon changes in the information the company reported about itself, about who its beneficial owners are, and upon a change in the personal information it reports about any beneficial owners.
Conclusion
To sum it up, a holding company is a parent company that owns and controls other companies and in many cases does not produce any goods or services or conduct business operations of its own. Holding companies and operating companies are used by businesses of all sizes and in all industries. Doing so has several advantages, including helping businesses mitigate the risk of losing assets to creditors.
Keep in mind, it is a complex structure and not right for every venture.
Nevertheless, it is an option business owners and lawyers may wish to familiarize themselves with if they have not done so already.
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Having the right registered agent for your company helps to keep your business entity in good standing.
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