Do you run multiple businesses? Do you plan to expand the number of companies you manage? While a standard LLC, a professional LLC, or a corporation may work well for a single business, you’ll find that administration tasks and compliance rules will expand right along with your portfolio.
By establishing a holding company or a series LLC, you can gain both tax benefits and asset protection. But which structure is right for you? This article will examine what holding companies and series LLCs provide, as well as their pros and cons to help you decide.
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What is a series LLC?
A series limited liability company, known as a series LLC, is a form of a limited liability company that provides protection from liabilities arising from the other series. Each series serves as a separate LLC, with the original LLC often called the base, parent, master, or umbrella LLC.
The primary goal of the series is legal liability protection, meaning if a lawsuit is filed against one business in the series, it will not impact the others.
Let’s say you purchase 10 real estate properties over the next year and do not set up a series LLC. For a few years, everything runs smoothly, but then a slip and fall accident occurs on the porch of one of your properties. The tenants sue you.
In most cases, insurance kicks in at this point. However, the tenant’s insurance company can claim you were negligent because you should have known a dangerous condition existed. If the lawsuit ends in a settlement or judgment, it can be executed against any property in your LLC.
However, if you have a series LLC in place, the settlement or judgment can only impact the property involved in the lawsuit. Your remaining properties are legally separated.
Pros and cons of a series LLC
In addition to the legal liability protection, here are some other advantages of a series LLC.
- Easy to manage. Separate LLCs require separate administrations. A series LLC allows you to use one administration team.
- Less complicated at tax time. One tax return can include all the LLCs in the series.
- Can save on expenses. The initial starting fee for a series may be higher than for a separate LLC, but you can add other LLCs to the series without paying additional start-up fees. Also, depending on your state’s regulations, the rent paid by one cell to another in the series might not be subject to sales tax.
- State-limited. Not every state allows you to form a series LLC. Additionally, the states that do allow them have differing rules. You’ll need to check with your state and the states in which you conduct business to find out their current regulations.
- Separate agents. You may need separate registered agents for each LLC. States vary on this requirement, which can lead to additional time and expense.
- Separate accounting. Each LLC in a series must have its own bank account and accounting structure, which can get complicated.
What is a holding company?
Another option if you own multiple business ventures is to establish a holding company. A holding company exists for the sole purpose of owning assets in its operating companies, known as subsidiaries. The assets can include real estate, intellectual property, and equipment.
It does not participate in the buying and selling of any products and services, nor does it perform other operational roles. Instead, a holding company makes management, financial, legal, and tax decisions on behalf of its subsidiaries.
A holding company may be set up as an LLC.
Here is an example of when a holding company would benefit you as a business owner. Let’s say you own a horse farm that has been struggling financially and has been unable to pay its veterinarian, trainers, and other stable employees.
Suppose these individuals decide to sue the horse farm. In that case, their suit will only impact the subsidiary that owns the horse farm, not the assets of the apartment building, restaurant, or other businesses that are subsidiaries of your holding company.
Pros and cons of a holding company
As with a series LLC, the main benefit of a holding company is asset and liability protection. Here are other advantages of this structure.
- Easier operations. A holding company can be more affordable and easier to manage than separate LLCs. The company needs to control its subsidiaries, but it doesn’t need to own all shares or membership interests.
- Financial strength. The company often is able to obtain loans at a lower interest rate than its operating companies could on their own.
- Less risk. Because operating companies are separate legal entities, there can be less risk in investing in new ventures.
Here are some disadvantages of a holding company.
- Management challenges. The managers of the subsidiaries of a holding company do not have a legal say in the running of their businesses. Sometimes conflicts can arise.
- Additional fees. The holding company and each subsidiary must pay formation fees and, in most cases, handle annual reports and franchise tax obligations.
- Regulatory complexity. Holding companies are legal in all 50 states, but regulations vary. The rules for operating a holding company can be quite complex.
Is a series LLC or a holding company right for you?
As you can see, there are some similarities and some differences between series LLCs and holding companies. If you are in a state that does not allow you to operate a series LLC, then your choice is easy—you’ll want a holding company. However, if your state allows both structures, the decision may depend on your individual situation.
Generally speaking, it’s easier to set up a series LLC than a holding company. However, it’s best to consult your legal and financial team to fully understand the implications of each option.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.