Businesses that have developed significant assets often choose to hold those assets in a separate, sometimes subsidiary company. Doing so can provide liability, taxation, and organizational advantages. From real estate and equipment to intellectual property, many businesses large and small are structured as a series of connected companies.
Liability protection and tax mitigation are key reasons businesses hold assets in a separate company. It can keep the assets of your business protected from the liabilities of the operations. The asset holding company is not responsible for any of the activities of the business and so the liability of the operations of the business is less likely to reach the assets of the holding company. Additionally, the character of the income changes, resulting in potential income tax savings.
The owners of the company holding the assets are not necessarily the same as the owners of the operational business. Often, the assets are held by a group of investors that lease these assets to the operations company. In other cases, the asset holding company is a wholly-owned subsidiary of a parent company and the operations are conducted through another subsidiary. Large companies like Berkshire Hathaway operate using this model.
Different business structures have different taxes, so holding the assets of the business in one structure and housing the operations in another can have tax advantages. Discuss the specifics of your setup with legal and accounting experts to determine the best route for your operations. Particularly if your business is taking on money from outside investors, they may have certain structures they prefer for comfort, liability, and taxation purposes.
Having your business operations organized into discrete buckets also provides cleanliness of ledgers for your finances and can help you operate your different businesses separately. A larger company that is a manufacturer and also distributes may split those two functions into separate entities and allow each to operate and grow on their own. A smaller services company starting a separate product line may want to form their product as a separate company to help keep the income and operations of the two separate.
Forming an asset holding company is similar to forming any other company. You file your basic incorporation documents with the Secretary of State, adopt your operating agreement or by laws, and get an EIN from the IRS. The details in your operating documents will vary depending on the purpose and structure of your company, whether you have a parent company holding subsidiaries, or the investors holding the assets are different from those running the operations. Bringing an attorney in to help you structure the company, draft the documents, and transfer the assets helps you to maximize the benefits associated with this structure. An attorney will also provide you with an operational roadmap for the future of the company.
The attorneys at Virtus Law Firm can help you explore options for structuring your entities to provide the best advantages. As real estate investors and business owners, we’ve been exposed to many available options, the best practices, and know what really works. Call us today at 612.888.1000 or send us an email at firstname.lastname@example.org to set up a consultation.