How to Form an Umbrella Corporation

By Ari Mushell, J.D.

How to Form an Umbrella Corporation

By Ari Mushell, J.D.

You are an entrepreneur and have successfully started a handful of businesses. Now you want to bring the businesses together under one roof by establishing an umbrella corporation. Creating an umbrella corporation to contain subsidiaries can be beneficial because it provides both flexibility and tax simplification.

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An umbrella corporation can provide financial backing to subsidiaries while allowing them to remain independent. If one subsidiary corporation struggles while another one performs well, money flowing into the umbrella from the succeeding entity can then backstop the struggling entity. This also provides a subsidiary with the ability to leverage the good name of the umbrella while it remains a separate entity. To form an umbrella corporation, you must determine its form, organize additional subsidiaries, file your paperwork, and draft or amend existing paperwork.

Entity Types

When forming an umbrella corporation, you must structure it so that the umbrella can hold ownership of the subsidiaries. Decide which form the umbrella should take, and then see if that form fits into a tiered umbrella structure. The basic business forms that you should consider for an umbrella structure are a C corporation, an S corporation, or a limited liability company, or LLC.

C Corporation

A C corporation is a business organization that can issue stock on the open market and has a number of formalities. C corporations are owned by shareholders who purchase shares in the corporation on markets such as the New York Stock Exchange. There are a number of requirements and formalities associated with creating this structure, including drafting articles of incorporation, drafting by-laws, identifying board members and officers, and holding regular board meetings.

S Corporation

An S corporation is like a C corporation in that it is shareholder-owned and involves a number of formalities. However, unlike a C corporation, S corporation shares cannot be sold on the open market, and a number of restrictions exist regarding eligible S corporation shareholders. Additionally, S corporations differ from C corporations in that C corporations are subject to double taxation; S corporations have pass-through taxation, which means corporate profits are not taxed at the corporate level. Instead, profits and losses pass through to shareholders, who pay taxes individually.

LLC

An LLC, like an S corporation, has pass-through taxation but does not have the formalities associated with S and C corporations. In addition, an LLC can own another LLC and can be a shareholder in a C corporation. An LLC cannot be a shareholder in an S corporation. Because an LLC cannot issue shares, it has no mechanism to raise capital through share issuance. Keep this in mind when making your umbrella and subsidiary determinations.

Forming Subsidiaries

In addition to forming an umbrella corporation, you must form subsidiary companies. You need to determine the structure of the subsidiaries. Note that:

  • A C corporation can hold shares in another C corporation or be a member of an LLC.
  • An LLC can hold shares in a C corporation and can be a member of another LLC.
  • A C corporation and an LLC cannot be shareholders of an S corporation.
  • An S corporation can be a shareholder in a C corporation or a member of an LLC.
  • An S corporation cannot be a shareholder in another S corporation.

You cannot structure your umbrella/subsidiary scheme where the subsidiaries are S corporations because the umbrella cannot be a C corporation, S corporation, or LLC.

Once you've determined the form of your organization, you must file paperwork with the Secretary of State. The Secretary of State in each jurisdiction has different rules for what must be filed based on entity type.

Bridging an Umbrella Corporation and Its Subsidiaries

To bridge, you should draft or amend the articles of incorporation or articles of organization with respect to subsidiaries reflecting the umbrella/subsidiary relationship. The articles of incorporation of the subsidiary should indicate that it is owned by the parent umbrella corporation. For instance, if an LLC is the umbrella for C corporation subsidiaries, the C corporations' articles of incorporation should state that the LLC owns a certain amount of shares in the corporation and that the LLC's members hold board of directors' seats.

An umbrella corporation can be advantageous. You will need to follow formalities when organizing both the umbrella and the subsidiary entities. You will also need to link the subsidiaries to the umbrella.

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.