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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.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There are 16 comments left for Creating a Delaware LLC as a Holding CompanyCorpely.com said: Wednesday, August 26, 2020
Delaware holding companies are frequently used to hold different types of intellectual property as well as investments. These companies are subsidiaries of larger companies that own the rights to any of the assets held there. The parent company gets licenses for access to those assets, which gives royalties back to the subsidiary company. The fees paid for the licensure are tax deductible. Therefore, using a holding company doesn t add much cost to the operations of the parent company.itaroalk said: Friday, December 20, 2019
Ok. I use translate and will be good ok?HBS Staff replied: Friday, December 20, 2019
We cannot guarantee the accuracy of a third-party translation program. We recommend verifying any important details. We would be happy to assist you in English (or Spanish) for any questions.Joe 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.