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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:
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.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.
There are 14 comments left for Creating a Delaware LLC as a Holding CompanyJoe M said: Tuesday, November 5, 2019
A slightly different twist from the LLC / Holding Co. model = What about a Non-Profit Corp operating subsidiaries in more than one foreign entities as 'Foreign Corporation' w/ NGO status. Is there a way of limiting liabilities in each of those environments?HBS Staff replied: Wednesday, November 6, 2019
As far as whether that strategy is best for your business, we would recommend speaking with an attorney familiar with NGOs. If you determine that you need multiple Non-Profit corporations and/or multiple LLCs, we can assist you in setting that up.Carlton said: Friday, March 29, 2019
In using multiple LLCs to separate business activities, and to use one as a holding LLC, how do you effect the ownership of the subsidiary LLCs by the holding LLC? Is this done by some type of written agreement, operating agreement, etc? Thanks.HBS Staff replied: Monday, April 1, 2019
Traditionally, the ownership, operations and management of each of your LLC's are governed by its own written Operating Agreement among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations. As a result, an LLC allows the ability to create a customized management structure. Generally, ownership of a subsidiary LLC would be specified in that LLC's Operating Agreement. For more information: https://www.delawareinc.com/blog/what-is-an-llc-operating-agreement/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
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