How Do I Create a Holding and Operating LLC?

By Edward A. Haman, J.D.

How Do I Create a Holding and Operating LLC?

By Edward A. Haman, J.D.

A limited liability company (LLC) offers protection of your personal assets from liability for business debts. But this still leaves business assets vulnerable to claims for business debts, personal injury, and property damage. However, you can achieve some degree of business asset protection by creating a separate LLC holding company.

Find out about the nature of holding and operating LLCs and how they are created, as well as some of the advantages and disadvantages of a holding company.

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Holding Company Basics

An operating LLC conducts the business that is your primary focus—the goods or services that the company provides. The business of the holding LLC is simply to own assets and lease them to the operating LLC.

The purpose of creating a holding LLC is to protect business assets from the creditors of the operating LLC. Basically, the idea is that creditors of the operating LLC cannot get at the assets because the operating company does not own them—it only leases them from the holding LLC.

On occasion, courts allow a creditor of an operating LLC to attach assets of a holding LLC. This generally occurs when there is not a clear distinction between the two companies, such as where funds are commingled, one company does business using the other company's name, or there are questionable transfers of funds or assets between the two. This same extension of liability can occur with a parent and subsidiary arrangement.

The operating and holding LLCs don't need to have the same members or managers. Having one or more different members or managers can actually help to set the two companies apart as separate and distinct entities.

Having operating and holding companies is not the same as setting up a subsidiary company. With a subsidiary company, the parent company owns the subsidiary company. In contrast, an operating company and a holding company are two separate and distinct entities, where neither has an ownership interest in the other.

It should be noted that an operating company, a holding company, or both, may also be structured as a corporation. As with any business entity, there are various factors to consider in choosing whether to structure an operating or holding company as a corporation or an LLC.

Asset Ownership

The main function of a holding LLC is to have the title to business assets. There are two situations that can affect how the holding company obtains title.

The first situation is where you have not yet started your business and have yet to acquire any business assets. In this case, you can form your operating LLC and your holding LLC at about the same time and have the holding company acquire the business assets.

The second situation is where you currently operate a business—which will be the operating LLC—and have already acquired some business assets. In this case, you need to form the holding LLC and then transfer ownership of the assets from the existing operating LLC to the new holding LLC. Depending on the nature of the asset, this may require preparing and executing real estate deeds, vehicle title transfers, or bills of sale.

This can pose some problems if any assets to be transferred are secured collateral for a loan. If the loan was made to the operating LLC, it's likely that you'll need the lender's permission to transfer ownership to the holding LLC.

Regardless of whether an asset is owned by the operating LLC or the holding LLC, it will not be protected from a creditor with a secured claim on the asset.

Creating Holding and Operating LLCs

Basically, setting up operating and holding LLCs will double the time, cost, and effort of setting up and maintaining one LLC. For each LLC, you'll need to:

  • Choose a name. The names for each LLC should be sufficiently different so as to avoid any confusion between the two.
  • Choose a registered agent. You may use the same registered agent for both.
  • Create Articles of Organization.
  • File the Articles of Organization, and any other required documents, with the appropriate agency and pay the required filing fee.
  • File any required annual reports and pay any filing fees.
  • Maintain accounting and other required records.
  • Set up a bank account.
  • File tax returns.
  • Create an LLC operating agreement.

Depending on the geographic location and nature of the business, either or both LLCs may also need to obtain business licenses.

You will also need to create one or more lease agreements, setting forth the terms and payment amounts for the assets that the operating LLC will rent from the holding LLC.

Determining whether a holding company is a good idea requires consideration of the following factors:

  • The degree of risk that accompanies your type of business.
  • The cost of setting up, registering, and operating two separate LLCs.
  • Whether there are currently assets that are subject to a secured loan.

For many small businesses, the time and expense of creating and maintaining two LLCs may not be justified. But, especially if the nature of your business carries serious risk of lawsuits, or you have expensive assets to protect, creating a holding LLC can add a level of asset protection.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.