Creating a Delaware LLC as a Holding Company

By Andrew Millman Tuesday, January 24, 2017

creating a delaware llc as a holding companyHow to Use an LLC as a Holding Company

You have an amazing idea for a new business. You’re ready to incorporate in order to protect yourself and your personal assets, and you’ve decided it’s time to take the next step and form a Delaware LLC for your new entrepreneurial endeavor.

Then the confusion swirls:

  • What type of business activity can I conduct with my LLC?
  • How many different businesses can I operate under one LLC?
  • Should I set up DBAs? 
  • Should I create a separate LLC for each project?
  • Will a series LLC work for me, or should I stick to multiple, traditional LLCs? 

Delaware LLCs can conduct any lawful business activity anywhere in the world. Some people explore the low-cost series LLC when they want to operate several different businesses, which is very enticing since there is only one annual Franchise Tax payment to the state of Delaware and one annual Registered Agent Fee.

However, the structure of this business entity is relatively new and unproven, so there are often many hurdles that arise when dealing with a series LLC. It is generally considered safer and smarter for people to keep their business ventures completely separate from one another by forming an LLC for each aspect of a business; in essence, what you are doing is creating one Delaware LLC as a holding company, and other, individual LLCs within it yet separate from it. 

Many people consider setting up DBAs for numerous, different business operating under the umbrella of one LLC. A DBA (Doing Business As) or fictitious name registration is simply assigning the LLC another name, or multiple other names, that may better fit the spectrum of services or products offered.

However, DBAs do not provide any type of legal separation between the different aspects of the business. If anything should happen to any one segment of the LLC, the LLC as a whole, as well as every other aspect of the business, could potentially be affected and held liable. 

As it stands today, the battle tested, proven practice of creating individual LLCs that are formed for every variant of a business is traditionally still the most highly recommended strategy by tax professionals, attorneys and business consultants all over the world.

This means that for every sector of the business, for each product line, for every service provided, for each piece of real estate held, clients will often consider creating separate, traditional LLCs. Doing so ensures that the assets, debts, and liabilities of each LLC are completely disconnected and shielded from one another in the event of any possible litigation.

When establishing multiple LLCs, it can be extremely helpful to develop a blueprint hierarchy that will coincide with the relationship of the respective LLCs. For example, people typically set up numerous LLCs for real estate development.

This framework often consists of one parent LLC at the top of the hierarchy—let’s call it ABC Holding Company, LLC. People then typically create multiple sibling LLCs, one for each piece of actual real estate—let’s call them ABC Real Estate 1, LLC; ABC Real Estate 2, LLC; and ABC Real Estate 3, LLC.

Each LLC may own, manage and be responsible for a single piece of property; thus, while all the LLCs share the same holding company—ABC Holding Company, LLC—and may possess similar structures, ownership interests, assets and liabilities, they are insulated and shielded from one another in order to protect the properties and resources of each individual LLC.

This is also considered a smart, strategic way to further protect your personal assets from your LLCs.

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There are 12 comments left for Creating a Delaware LLC as a Holding Company

Ryan said: Wednesday, February 14, 2018

Hi there - very helpful! Question... is it legal for me formulate a Delaware LLC for an investment property outside of DE? The tax advantages seem obvious, but want to make sure. Thanks!

HBS Staff replied: Thursday, February 15, 2018

We have had many clients that have used the Delaware LLC with great success to hold an asset, such as real estate, outside of Delaware. Of course you should consult an attorney or accountant, or both, to be certain.

Ford said: Tuesday, January 30, 2018

if i want to create an LLC that does not actually own other LLCs can I still use Holdings in the company name? Eg "Mycompany Holdings, LLC"? Or is there a legal requirement that the type of business the LLC does be directly related to the word used in the company name?

HBS Staff replied: Tuesday, January 30, 2018

There are no issues with the word Holdings or Holding when forming a Delaware LLC, regardless of whether the LLC owns another LLC or not.

Norma Padilla said: Saturday, October 7, 2017

I will like to star my own company building company..

HBS Staff replied: Monday, October 9, 2017

Please feel free to call us during regular business hours (9-5) at 1-800-345-2677 or Live Chat with us from our homepage so we may help you form a new company.

Mohamed abdel fattah said: Tuesday, October 3, 2017

Is it allowed for companies formed in Delaware to trade outside USA and make different business agreements without paying taxes on this business ?

HBS Staff replied: Wednesday, October 4, 2017

Other than operating business in restricted countries (Cuba, Iran, Libya, North Korea and Syria), Delaware entities can operate lawful business activities from anywhere in the world. Generally, a Delaware LLC with no U.S. Source income and no U.S. Members does not pay federal income tax. The annual fees for maintaining an LLC, after the first year, includes our $50 Registered Agent Service fee and the $300 Delaware Franchise Tax.??????? For specifics on taxation, business owners often work with their tax professionals.

Mark said: Thursday, August 3, 2017

Can you briefly explain the difference between a Series LLC vs. Holdings Co? Can a Series LLC be used as a holdings company? Would the operating agreement be the only factor in distinguishing the structure between the two entities?

HBS Staff replied: Friday, August 4, 2017

When choosing between a Series LLC and a traditional LLC to hold assets, many busieness owners choose to form the traditional LLC. Most people do not like to use the Series LLC to hold assets since the unique structure has not been tested in the courts.  Due to all the uncertainty surrounding series LLCs, many of our clients have encountered complications when trying to utilize a series LLC. You can read more about holding companies and series LLCs on our site:

https://www.delawareinc.com/ourservices/series-limited-liability-company/

https://www.delawareinc.com/blog/advantages-and-disadvantages-of-a-delaware-series-llc/

https://www.delawareinc.com/blog/creating-a-delaware-llc-as-a-holding-company/

 

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