Do I need a holding company?

Question

If an investor creates a LLC for each Joint Venture Partnership would they then introduce a Holding Company or Trust to own all the LLCs?  This would be for buy & hold.

Daniel Chang · Answer

As in all things - it depends.

Is it necessary?  Of course not.  Does creating a holding company cause a bit more headache, paperwork, fees?  Yes.  Are there benefits in doing so?  Yes.  Does the downsides outweigh the upsides?  It depends on what you are trying to achieve.

The most common reason that I can think of to create a holding company is if there's a core group of people (ie family) that would then go out and create partnerships with others in separate investments.  So instead of Joe, Bob and Mary on every LLC as 3 individual members in addition to other partners, they can create Joe Bob Mary LLC (or trust, limited partnership, etc) as will be one member in other LLCs.

Even if you are an individual investor, but in the future, would like to gift or pass on your interests in each of the properties/partnerships in the future, creating a holding entity would be simpler, as you can just make the gift through the holding entity, rather than going through each partnership and asking for permission (in accordance with the operating agreement).

However, if it's just you as an individual, and it will just be you as an individual for the time horizon of your investments, then I see no reason to create a single member entity as a holding company.  (Unless you want to better protect your interest in each partnership from personal liability.)

My personal view point is that once you achieve certain economy of scales, it's probably better to create a holding entity.  However, if your total ownership equity is small, probably not worth it.

(Note: I'm not an attorney)

Daniel Chang · Answer

@Tom Smith

Yes a Trust can be a member of a LLC.

How you approach this depends on your friendliness with your partner in the JV.  Most standard operating agreements will contain buy/sell and restriction on transfer provisions. If no provisions are written down, then state law will apply.   Essentially, it dictates what happens and your limitations when you die, divorce, gift, sell, etc.

For example, You may enter a JV with "Mike".  However, Mike never agreed to be in a JV with your wife or your children (if you divorce or die).  Imagine that upon divorce, your wife wants half of your assets, including your asset of the JV LLC.  She would force a judgement to liquidate the LLC.  You think Mike would be happy?

So it is a good idea to establish this ahead of time.  You can spell all this out in the operating agreement.  One way to do this is, upon death/divorce, your beneficiaries will gain your equity and distributions in the JV.  However, they will not have voting privileges.

Now let's say you now have 10 JV with 10 different partners.  Then each of those JV LLC's will have different languages.  This gets kinda messy as you can tell.  So in the future, instead of in your will, saying I leave interests in entities A, B, C, D, E to your 3 children, each getting 1/3 interest, you can say, I leave Smith Family LLC to my 3 children (where Smith Family LLC then owns all the entities).

Having an entity simplifies things but doesn't change anything in reality.   As an example, if you create Smith Family LLC where you and your spouse each own 50%, and want to use that entity in your JV, Mike should request a copy of your documents and may say, "I'm not ok with your spouse owning 50% of your entity, which then owns 50% of our JV LLC".

I can go on and on, as this stuff is complicated.  Let me know if you other questions.  I'm not an attorney, but I spent quite some time studying entities, from both a legal and tax standpoint.  I found that every time I talk to an attorney about this, depending on what their agenda is, they would be biased.

I think it's great you are thinking ahead.  However, I think for your 1st JV, just spell out what you desire into the operating agreement.   Just keep in mind as long as your partners are ok with it, it's easy to transfer your JV LLC interest into another entity at a later time.

Annette D. · Answer

Thank you @David Dachtera. specifically looking for asset protection outside of the inevitable demise of death!! Haha.

David Dachtera · Answer

@Annette D.,

Yes - get in touch with an estate planning attorney.

In a nutshell, you want your "first line of defense" to be a personal trust which, in turn, is a member of your "holding" LLC and your S-/C-Corp. Upon your demise, your will should direct the trustee to change your trust's beneficiary per your wishes.

Your estate planning attorney can fill in all the blanks, or I can refer you to the law firm my investing group favors.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Annette D. · Answer

@Daniel Chang. Do you remember a Podcast regarding Asset Protection and the different layers you can build within an LLC or Trust? I cant find it and would love to reconnect and listen to it again.

Tom Smith · Answer

Thanks @Daniel Chang you seem to be an expert in this field.

Daniel Chang · Answer

@Tom Smith

No.  Your Trust would be a member of the LLC.

Example:

JV LLC has 2 members: Smith Family Trust, and Mike Trust.

Within the Smith Family Trust, the Grantor is Tom Smith.  The Trustee is Tom Smith.  The Beneficiary would be your children.

(This is just an example to give you an idea.  Obviously there are many types of trusts and many reasons to use trusts).

Tom Smith · Answer

@Daniel Chang Those are some great examples!  Thank you for clearing this up for me.  I would have never known the concerns of having family as members of my LLC when starting a JV.

I think I might keep it simple for my 1st JV and not use a LLC.

I do have a question about a Trust...  I plan on holding my properties in a Trust.  I hear a lot about using a Trust with a LLC.  What are your thoughts on this?  How would that work?  Would the LLC be both the trustee and the beneficiary?  In your opinion would something like that be worth it?

Tom Smith · Answer

thanks @Daniel Chang, awesome feedback!

I ask because I am thinking of my family.  If I die tomorrow how do they take ownership of my partnership.  I have not started a Joint Venture Partnership just yet.   When I do I'm thinking of putting my 50% ownership into a LLC or Turst (if possible) instead of in my own name.  I know you can place property into a Trust, but can a Trust own 50% of a partnership LLC?

I do plan on talking to an attorney at some point but it's great to have some idea.

Do I need a holding company?

Most Popular Reply