How to Form an Umbrella Corporation

by Terry Walcott
If you own a corporation, you may wish to own subsidiary companies, by forming an umbrella corporation.

If you own a corporation, you may wish to own subsidiary companies, by forming an umbrella corporation.

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A corporation is a legal entity formed under state law that has an identity separate from its owner-shareholders. An umbrella corporation is a standard corporation that owns and controls one or more subsidiary corporations. A subsidiary is a corporation that is at least majority-owned by another corporation — in this case, an umbrella or parent corporation.

Step 1

Investigate the corporate form of conducting business and the umbrella corporation corporate structure, and determine whether they are best suited to accomplish the goals of the prospective business enterprise. Corporations are permitted to own property, including other companies, and can enter into a wide variety of business, financial and legal transactions. Benefits of a corporation include the protection of owner-shareholders from personal liability for company debts and liabilities, the ability to raise investment capital through the sale of stock to investors, and the ability to transfer stock ownership by simply endorsing the corporation’s stock certificate.

Step 2

Form a corporation that will serve as the parent or umbrella company by filing articles of incorporation with a state business registrar — usually, the Secretary of State — and pay the required fees. Elect the board of directors of the parent company, and draft and adopt corporate bylaws. Draft and pass a corporate resolution that establishes the parent as a holding company, and authorizing the holding company to form subsidiary corporations.

Step 3

Incorporate a subsidiary corporation and place a provision in the articles of incorporation, prohibiting changes to the board of directors without parent company approval. Elect the subsidiary’s board of directors, and draft and adopt corporate bylaws. Include a prohibition against changes to the board of directors without the parent-umbrella company’s approval in the bylaws. Place assets from the parent-umbrella corporation into the subsidiary, in exchange for 100 percent of the subsidiary’s stock. The parent should own all of the subsidiary’s capital assets and lease those assets to the subsidiary.

Step 4

Form additional subsidiaries as approved by the board of the parent corporation. Note that all corporations in an umbrella structure must be C corporations. They cannot be S corporations because the Internal Revenue Code strictly prohibits a C-corp from having an ownership interest in an S-corp.