Organizing as a limited liability company, or LLC, is popular among small business owners because an LLC has the protections of limited liability. The protections of limited liability generally prevent creditors of the LLC from holding the owners of an LLC personally liable for LLC debts. Some business owners take the process of asset protection one step further by utilizing the holding and operating LLC structure. Under the holding and operating LLC structure, all business assets are held by the “holding LLC,” which leases those assets to the “operating LLC” for business purposes. When done properly, creditors of the operating LLC are unable to use holding LLC assets to satisfy the debts of the operating LLC.
Create a holding LLC and operating LLC. Creating an LLC generally requires filing a document, called an articles of organization, with the state agency responsible for registering business organizations. You will need to create separate names for your holding LLC and operating LLC. However, you may use the same registered agent for both of your LLCs. While costs vary by state, the filing fee for creating each of your LLCs ranges from $50 to $350.
Transfer all business assets into the holding LLC. Transferring all business assets into the holding LLC requires drafting an asset transfer agreement. Set forth all of the business assets and their value. Indicate that they are being transferred to the ownership of the holding LLC. Have all members of holding LLC and owners of the business assets sign the asset transfer agreement.
Create a lease agreement permitting the operating LLC to use the assets of the holding LLC. Set forth that the ownership of business assets will remain with the holding LLC. Indicate that the operating LLC has rightful use of the business assets, and set forth the lease payments paid by the operating LLC to the holding LLC. Have all members of both the holding LLC and operating LLC sign the lease agreement.
Maintain the formalities of both the holding LLC and operating LLC. Generally, state LLC laws require each LLC to pay an annual tax or franchise fee and file either an annual or semi-annual report with the state business organization registration agency. Additionally, the holding LLC and operating LLC must maintain their own accounts. Any funds transferred between the holding LLC and the operating LLC must be accounted for. Failing to maintain these formal requirements for an LLC may result in a judge piercing the corporate veil, and allowing creditors of the operating LLC to use holding LLC and personal assets to satisfy their debts.