- Holding Company vs Series LLC: What’s the Difference?
Holding Company vs Series LLC: What’s the Difference?
Author: Real Estate Holding Company
Holding companies are business entities that are formed with the intent of owning another entity. Oftentimes holding companies are formed as a corporation or limited liability company (LLC). They do not make products or sell them, they do not even provide services. The entire existence of the company is to purchase and hold other companies.
This provides a lot of benefits including those with taxes, liability, and control. Similar to that of a holding company is a Series LLC. It is a type of limited liability company offering protection that sounds similar to a holding company. Despite this, there are some main differences to compare.
What Is a Holding Company?
A holding company is a business entity that owns or holds controlling interest in other businesses, known as subsidiaries. The main purpose of a holding company is to streamline management of the separate subsidiary companies, as a holding company typically does not produce goods or services of its own.
It’s the subsidiaries of the holding company that carry out operations and assume any of the associated risk. Also, keep in mind that the subsidiaries of a holding company can extend beyond other companies. A holding company can own assets like real estate, securities, intellectual property, equipment, and more.
What is a Series LLC?
As compared to a standard LLC, a Series LLC is a limited liability company in which each “series” is its own separate entity. For example, these series will be separated to ensure legal liability. If a lawsuit is filed, then it will not affect the other Series. This is similar to a holding company and is often used in situations of real estate.
Series LLCs can also purchase and own items. This includes intellectual property and other items, such as real estate. In real estate, Series LLCs will be formed. Each property will be one series, to avoid liability between the various entities. For example, if a rental property is sued because someone is hurt on the property, or there is a tenant’s rights violation, it will not affect the other “Series”.
A series LLC is a form of LLC that’s structured to hold multiple interests or business lines underneath a single company. In this way, the series LLC serves as an umbrella company over multiple subsidiary companies. Each series is separated as its own LLC, which provides liability protection. If one series were to experience any legal complications it would not impact the assets of any other series.
Forming a series LLC is very similar to that of forming a regular LLC. However, in the case of a series LLC, the articles of formation must include an authorization to form a series. Note, however, that the series LLC is not an available option in every state. The states where it is currently available include: Alabama, Arkansas, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Virginia, and Wyoming.
What is the Difference between a Holding Company vs Series LLC?
Although there are similarities between a Series LLC vs Holding Company, they are different. Holding companies are financial organizations. They control other companies by obtaining (through purchase) at least 51% of other companies. These companies are referred to as subsidiaries. Holding companies can hold LLC groups that are or own assets.
If the owner of the holding company wants to shelter an asset underneath the holding company, a new LLC would need to be formed. This is where it is comparable to a Series LLC, but not exactly the same.
For example, Series LLCs are easy to establish. As compared to creating multiple LLCs, a Series LLC is created through a master LLC and creating the Series off of it. By having a master LLC, it can handle business on its own and even generate revenue. Holding companies cannot do this, and simply act as a holding company shell. Master LLCs have more control of their business and operations and can push growth without compromising the operating agreement.
At first glance, it may appear that a holding company and a series LLC are practically the same entity type. While the two do share similarities, most notably a head company at the top of their structuring, there are some important distinctions between them, as well.
For starters, holding companies do not actively participate in their own business operations. Instead, their purpose is to own controlling interest in other companies, which are referred to as subsidiaries. When a holding company wants to add a subsidiary it must form a distinct LLC for that particular asset.
When it comes to a series LLC, however, note that it’s typically easier to establish when compared to that of a holding company. Rather than requiring the formation of multiple LLCs, there is simply the establishment of a master LLC. Unlike with a holding company, the master LLC can conduct its own business operations, as well as direct the growth of a series beneath it.
The primary advantage of a series LLC is the manner in which it protects the assets of each series while also protecting each series from the others. In addition, this structure also offers asset protection against potential liabilities related to the master LLC.
With a series LLC, there remains the possibility for a series to share certain duties or costs with another series. However, there can be no sharing when it comes to bank accounts and maintaining financial records. Each series must keep its own bank account and records. Failure to do so could open the series LLC owner up to liabilities.
Another unique characteristic that series LLCs enjoy are that the assets within a given series can be held in the name of that specific series or in the name of the master LLC. It’s also worth noting that series LLCs tend to have simpler structuring when compared to a holding company with multiple subsidiary companies, making them slightly easier to manage.
When it comes to deciding between a series LLC or holding company, it’s best to consult an attorney or accountant with experience in this area. While both entity types are great options for managing multiple companies or other assets, an expert can detail the specific cost implications of setting up either approach for your business.
What are the Advantages of Starting a Series LLC?
One main advantage of a Series LLC is that it protects the assets of each Series individually. Additionally, assets that are within each Series LLC can be held in more than just that Series. They can also be held in the name of the main (master) LLC.
If liabilities occur, the other Series LLCs are protected. The same can be said should an issue arise with the master LLC, all the Series are independent of one another. If you are the manager of a Series LLC, you will need to ensure that each is actually separate. Costs and duties may be shared, but the bank accounts and any records of finances cannot be. This would cancel out the liability.
Whoever creates the master LLC has full freedom in creating the operating agreement. This will provide structure and also safety in the event of a lawsuit. It is also a lot easier than that of other company structures which can make business operation extremely quick and easy.
When to Start a Series LLC over a Holding Company
Both a Series LLC and a holding company have their place in the world of business. If you own multiple businesses then a series LLC is something that you might want to pursue. It provides liability protection and a method of organization.
If you run a small, single business, this may not be needed. If you run a small business then you, most likely, do not have multiple entities that require individual, limited liability protection. In this case, it would be unnecessary to start a Series LLC and would cost you more in formation costs than you would need to spend for protection.
When to Use a Series LLC
The series LLC structure isn’t the right choice for every business owner. For example, if you’re the owner of a single business, there isn’t any need for a series LLC or a holding company for that matter. A standard LLC or corporation will achieve all of the asset and liability protections that you may need.
Business owners should really only consider a series LLC if they own multiple businesses. When the number of businesses you own begins to expand, so too does the administrative work, compliance requirements, tax reporting, and more. Instead of running each of your businesses as completely separate entities, the series LLC structure allows you to bring them all under the same overarching company, which in turn allows you to reduce overhead and streamline management.
Even though all of the businesses are brought under the same LLC structure, each business retains the ability to implement their own management style and address matters specific to their industry and location. This autonomy extends to risk and liability, as well. In this way, if one company were to be sued, the other companies in the series LLC structure would not be at risk.
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