A holding company is formed the same way any other company is. Rather than directly engaging in operations, it instead owns and controls other companies. It avoids operations specifically to avoid the resulting operational risks and liabilities.
Both Wyoming LLCs and Corporations may act as holding companies. However, only LLCs provide charging order protection - not corporations. For this reason, we advise using an LLC to hold shares if protection from personal creditors is desired.
Separate valuable assets from operational liabilities and personal creditors.
The holding company acts as a bank which loans to subsidiaries when needed.
Through loans, leases, royalties, etc. income is shifted to no tax jurisdictions.
Hotels are an easy way to conceptualize holding companies. A hotel could be owned by a single company. This would be unwise, though, as a valet accident could potentially affect the land, buildings, cash and other assets.
To isolate risk, various entities would be formed with a holding company on top. The companies below would hold the assets and engage in operations. For example, land would be owned by one company, the structure another, with a third managing the property.
Operations may be further divided with restaurants, valet, maids, maintenance and other roles being filled by their own entities. This separation prevents an accident in one part of the hotel from affecting the whole operation.
Consider a company which sells hats, candles and health supplements. Each is likely to operate under a different brand. Rather than forming an LLC with DBAs, it is better to form multiple entities. If there is significant inventory, then you may form an LLC solely for holding and managing inventory.
Establishing One Company
Operating a single LLC with multiple revenue streams makes your creditor's lives easier. Assets held by a company which has operational liabilities are easier to take. An accident with a candle could bankrupt every product line. Or, if there's no accident, but the company does well instead, then mixing revenue and expenses between lines makes reaching a valuation harder.
Separating product lines makes each LLC bankruptcy remote. It also protects valuable assets, such as cash and inventory, in the holding company. A credit event with an operating company may lead to its closure, but operations continue as usual with the other companies.
The holding company is allowed to file what is called a consolidated report. This means you will not be required to keep books and file separate returns for each company. Everything can be consolidated within the holding company's filing.
Real estate is inherently risky. Accidents, treasure hunters and lapses in insurance are just some of the risks investors face. Beyond the properties, real estate investors also face personal risks which in turn risk their properties.
Many investors stop at forming an LLC and placing their rental property inside it. This presents three problems:
1) An accident at the property could easily lead to its loss.
2) There is little to no protection from personal creditors.
3) Most states don't allow anonymity.
The solutions to the above problems will be determined by your goals. For each person, there comes a point where the added complexity outweighs any extra benefit.
The next step is forming a Wyoming LLC holding company. This Wyoming LLC owns LLCs in other states which own and manage properties. This results in little increased complexity and brings significant benefits. Your Wyoming LLC has charging order protection which means personal creditors cannot seize your properties. Cash generated by the properties can be flowed into the holding company for safe-keeping, and the double LLC prevents operational creditors from seizing personal assets.
Equity Stripping: The Wyoming company may loan the down payment to the operational company. A second lien is then placed on the home. This strips the operating LLC of its equity in the home and removes any potential pay day for creditors.
Property Management: Wyoming LLCs are also used to hold the property. The property is then managed by a local property management company. You may or may not control the management company. The property management company is in charge of maintenance, operations and signing contracts. This isolates operational risks with the management LLC rather than the LLC holding the property.
Land Trusts: Revocable trusts can be formed to hold real estate in states which don't otherwise allow anonymous ownership. Hiding ownership makes it difficult to link your properties together and makes you less of a target. An LLC is the beneficiary of the trust.
The above strategies may be used separately or together. They may also be combined with asset protection trusts and 401ks. Stopping with a holding company is usually sufficient, with additional steps being taken less frequently.
Wyoming is the only state which specifically protects single member LLCs. This helps not only single owners, but less obviously holding companies since subsidiaries are often single member LLCs. Other states make it easy for a judge to assign operation liabilities to the holding company. Wyoming's laws don't allow this so long as you obey corporate formalities.
There are no taxes or tax returns. Annual reports are $50 for every $250,000 in assets.
Wyoming allows anonymous ownership. This private company can be the listed owner for subsidiary companies.
Wyoming has specific statutes meant to attract holding companies.
Holding companies were previously the domain of large, often international, corporations. Today, their adoption has spread to e-ecommerce stores and real estate investors - to name a few industries. Driving this are the reduced costs of new company formations and the evolution of U.S. business law to encourage such planning.
Holding companies may be set up in any state, but they are more effective in traditional havens such as Wyoming. This is due to laws which strengthen protections from both personal and corporate creditors while lowering taxes.