How to Start a Conglomerate Corporation

By Edward A. Haman, J.D.

How to Start a Conglomerate Corporation

By Edward A. Haman, J.D.

Do you have the ambition to become a business magnate, running multiple companies? Doing so can be a good way to diversify your business and minimize the risk of market fluctuations in one particular industry or geographical area.

For example, Warren Buffett created Berkshire Hathaway Inc., which grew to control numerous companies involved in such diverse areas as financial services, insurance, transportation, retail goods, and utilities. Jimmy Buffett has Margaritaville Enterprises LLC, which has diversified into music recording studios and record labels, restaurant chains, hotels, casinos, vacation resorts, housing developments, and numerous retail products.

Defining a Conglomerate

There is no legal definition of a conglomerate. If you read the business organization laws of your state, you will not find a reference to one. In the business sense, a conglomerate is a group of separate entities, one of which owns a controlling interest in the others. The primary entity is commonly called the umbrella or parent company, while the others are known as subsidiary companies.

The umbrella company may entirely own a subsidiary, such as by holding 100% of the subsidiary's stock, or it may have a controlling interest by holding more than 50% of the stock, with other minority shareholders owning the rest.

Each subsidiary is operated independently of the others, but the management of each subsidiary is responsible to the managers of the umbrella company. Take General Motors, for example. The Cadillac, Buick, and Chevrolet subsidiary companies each have their own management, but their managers report to the management of the GM parent company.

Creating a Conglomerate

Technically, you don't really "start" a conglomerate. You begin in the same way that any business begins: with a single business entity, which should be organized as either a corporation or a limited liability company (LLC). You can either create this company or acquire one already in existence. You use this company to grow into a conglomerate.

You may want to organize the business in the state where you live, or you can investigate whether there may be advantages to organizing in another state with laws that are more favorable to multistate or multinational companies, such as Delaware or Nevada.

Once you have set up the primary corporation or LLC to serve as the umbrella company, you can develop into a conglomerate by creating new subsidiary businesses from scratch or by acquiring existing companies—or a combination of both methods. Acquiring an existing company may be done by an outright purchase, a merger, or a takeover.

For example, if your company manufactures a product as a wholesaler and sells to various retailers, you may decide to open your own retail store division, which may then offer products from other manufacturers. You next expand into a chain of retail stores and a separate online retail company.

Another example is someone who decides to go into the residential rental business. Sara forms a corporation that buys a house, fixes it up, and rents it to a tenant. She then buys a second house, followed by a four-unit apartment building and a few other properties. To compartmentalize her liability, Sara forms a separate corporation to hold title to each new property. After fixing up and maintaining these properties, she forms two LLCs: one that does property renovations and one that does yard maintenance. She organizes all of these businesses so that the original corporation is the umbrella corporation, which is the sole shareholder or LLC member of the subsidiary business entities. Sara now has a conglomerate.

Setting Up the Business Structures

Conglomerates are typically set up under one corporation or LLC that owns the subsidiary companies. If a subsidiary company is organized as a corporation, the umbrella company owns more than 50% of the shares of stock of the subsidiary. If the subsidiary is organized as an LLC, the umbrella company is either the single-member owner of the LLC or has more than a 50% ownership interest in the multiple-member LLC.

Some conglomerates have separate divisions that are not set up as separate entities but simply operate under a separate business name. However, this leaves the parent company liable for the debts of the division.

The Downside

While being a business-conglomerate mogul may sound glamorous and exciting, it comes with expenses and paperwork. Each subsidiary company needs to comply with state business registration laws. If they are organized as corporations, they each need to create their own articles of incorporation and bylaws, keep their own set of books, issue shares of stock, hold annual shareholder meetings, keep minutes of shareholder and director meetings, and pay formation and registration fees. Each corporation also needs to file tax documents with both the Internal Revenue Service (IRS) and the state tax agency. Similar requirements exist for an LLC.

If a subsidiary is not a separate entity from the parent company but is operating under a different name, it will probably require state or local registration to operate under a fictitious, or assumed, name.

If the various divisions are engaged in the same type of business that requires some form of licensing, a license must be obtained for each subsidiary. If the divisions are engaged in diverse types of industries, you need to know the ins and outs of each type of business and be able to manage each one.

Through a great deal of time and effort, you can reap great benefits by forming a conglomerate. It all starts with that first business entity and grows from there.

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.