I want to incorporate...So what's the deal with holding and shell companies?
September 21, 2009 10:11 AM   Subscribe

I want to incorporate...So what's the deal with holding and shell companies?

Yes, YANML and YANMA, I have appointments with a lawyer and a new accountant next week as I'm getting ready to incorporate and I want to educate myself before I meet up with them.

A recent Ask Me Fi Post What are the best books to read if I'm interested in incorporating a business? prompted me to consider other options.

A holding company is a bit different from an umbrella company, I understand this, but to what benefit is multiple layers of holding company(s)?

I just heard on the radio some type of public announcement for a radio station that had to declare it's interests (or something to that affect)

Radio Station WXYZ a subsidiary of f company, owner by g company, owned by h company, owned by holding company 1, owned by holding company 2, owned by holding company 3, owned by holding company 4, owned by holding company 5 and John Doe, owned by holding company 6, owned by holding company 7 and Jane Smith

ad infinitum

I eventually heard a total of 30+ holding companies, with occasional singles or groups of names thrown into the mix.

I think I can understand one or two layers for financial or insurance reasons, but What is the point of these layers? Is it very similar or different from a larger corporation breaking down the business into "Divisions" that handle different aspects?
(Bob and Tom Corp, Outdoor Widgets Division, vs Bob and Tom Corp, Indoor Widgets Division)?

The main reason I ask is because I now run several small companies(sole proprietor) all doing fairly distinct business/services and all with their own websites and marketing but I'd like to expand a few of them in different ways like additional services or differentiated products based on the target markets. Incorporating everything and then breaking out into divisions was my initial plan. Would keeping them separate under a shell help in any way?

Since I do the majority of work and the people who work for me tend to all get paid from the same operating account, to what benefit is the holding or shell corp? (Everything I've done so far has been kosher for years with my old accountant and the IRS - unfortunately my old accountant is no longer able to perform his duties due to a serious illness) Could holding/shell possibly save me on taxes/insurance/etc?

Any other recommended reading or info?
posted by emjay to Work & Money (12 answers total) 3 users marked this as a favorite
Thes are questions for a lawyer. Frankly "I just heard on the radio" is not an auspicious way to begin planning a corporate structure. Retain the services of a competent and reputable lawyer.
posted by dfriedman at 10:22 AM on September 21, 2009

Response by poster: Dave - I already stated I would be seeing a lawyer and accountant shortly, and my questions are about the purpose behind the holding company model, not trying to mimic it. The initial push to incorporate was already underway before the holding company information was heard.
posted by emjay at 10:38 AM on September 21, 2009

Why do you want to incorporate, as opposed to having an LLC?
posted by Admiral Haddock at 10:49 AM on September 21, 2009

I could be wrong...and thank God, someone on MeFi is ALWAYS willing to point that out and correct me...but I believe that layers upon layers of companies are designed to dilute risk and ensure a toppling business venture looses momentum before hitting YOU.
posted by jefficator at 11:12 AM on September 21, 2009

Well, my understanding of the model is this:

You do a number of different things. You'd like to incorporate them because you don't want the failure/liability of one of those things to interfere with the rest. If it was one company with different divisions, any liability of one division would eat up the assets of the entire company.

So, each division becomes its own corporation. They can rise and fall independently of each other. That's probably a good thing if there is any exposure to risk at all.

I can only imagine the reason for a holding company on top of that would be so that you can maintain separation from the sub companies. Your job stops being "owner of 5 corporations" and becomes "owner of one corporation". This may lead to simplicity in finances and bookkeeping. I'm just stabbing in the dark here, but maybe something like a home office or a company vehicle would be (more easily) tax deductible when it is used in the service of one company rather than fractions of 5. It is possible there are tax deductibility thresholds that you wouldn't meet trying to split between 5 companies that you would when it's one.

So, when one of the sub-companies uses your services, those costs are charged to Umbrella Company, rather than to Emjay. And profit from the sub companies is fed up the chain to UmbrellaCo. UmbrellaCo's taxes deals with balancing the profits and losses and you, Emjay, either take a salary out of that, or UmbrellaCo pays you a dividend. It's probably simpler to pay yourself from one pot than from 5.

I doubt it's an easy way to avoid taxes in the big scale, but it may allow you to avoid taxes at the margins.
posted by gjc at 11:20 AM on September 21, 2009

Response by poster: Admiral Haddock - in the past, it's saved me an extra 7% in taxes overall.

Jefficator - Yeah, I'm not worried about risk, just looking for simplicity in paperwork, maybe less redundancy

gjc - I see it better now. I'm guessing the radio station has some serious risk/liability issues or some other complex concerns because of their industry.

Long term, I think I'm essentially looking for a shell that can hold all the sub-companies and maybe each can draw some benefits from the parent(shell) company. This might also make it easier to sell one or more of the sub-companies (if that time ever comes) and keep the remaining projects running smoothly.

I'll see what the lawyer and accountant have to say soon enough. Additional input still appreciated.
posted by emjay at 11:46 AM on September 21, 2009

Emjay, are you saying you've had corporations in the past? I'm not quite following your response. Are you talking about S corps or C corps? Are you aware of the corporate-level tax that would be due (if you form a C corp) in addition to the taxes you bear as an individual?

This is not tax or legal advice, and I am not your lawyer.
posted by Admiral Haddock at 12:47 PM on September 21, 2009

I get the feeling that holding/shell companies are for serious money (or serious money laundering, sometimes), and that those words would probably make a small business accountant giggle (or pale) a little.

But you can have more than one DBA (Doing Business As) under one corporation. This is what you'll want to ask your advisors about, and they can help you understand when it would actually make sense for a DBA to grow up and become incorporated on its own.
posted by Lyn Never at 12:58 PM on September 21, 2009

Best answer: You often end up with holding/shell companies in roll-ups. Most radio stations have been purchased by another entity, which explains it. You don't generally have layer-upon-layer in greenfield companies. Sometimes you'll have the IP (patents, trademarks) in one company and the operating company in another.

But, seriously, if you end up with an overall corporate shell, I'd love to know the story, cause there's nothing in this fact pattern that would suggest anything other than a simple S-corp or LLC for each business line.
posted by sachinag at 1:04 PM on September 21, 2009

Complicated corporate structures sometimes result from different investors / rounds of funding / joint ventures.

For instance, Alice and Bob are partners in FirstCorp. FirstCorp gets an offer from Carol to open up a new business. FirstCorp funds the creation of SecondCorp, which is a limited liability company whose members are FirstCorp and CarolCorp. See where this starts headed?

There are also times when it pays to "tweak" ownership interests. And instead of sales/transfers, a new joint venture is created...

Think about a guy who owns a construction company. His home building "company" contracts with separate companies for the provision of accounting and administrative services, for the rental of various equipment, etc. Essentially separate companies for each facet of the business. His wife has a separate company that contracts for the same services (and did essentially the same sort of stuff) -- except that because it was the wife's company bidding out on contracts, it qualifies as a female-owned business enterprise and thus has a leg up on some bids. By "adjusting" rates, it is also possible to take profits very selectively. Liability is also limited.

Also, think about intellectual property licensing. If you have a really valuable brand, it often makes sense to license the rights to use that brand to a separate company that actually "uses" it. Not just to protect the brand from liability -- i.e., if the "using" company goes under, the brand is usually not an asset; the rights to use it just expire.

I hope these examples of actual uses of holding companies help explain some of what you might be seeing.
posted by QuantumMeruit at 1:32 PM on September 21, 2009

Best answer: I knew a guy who owned 4 restaurants. Each restaurant's staff worked for one corporation that existed only for that restaurant. The management of the restaurants and the back office staff (the guy and his assistant) worked for a fifth company. There may or may not have been an umbrella corp on top of those 5. This was done to keep each corporation's headcount low, as well as for liability reasons. (We're talking revenue of maybe $6 million a year total.)

By my way of thinking, if you have more to lose than the costs of incorporating, then it is worth it to keep everything separated.

As for taxation, it depends on the type of corporation. That's for accountants to figure out for you- but double taxation isn't necessarily going to happen.
posted by gjc at 5:15 PM on September 21, 2009

Response by poster: Thanks all for the additional input. I've definitely got a little more research and questions to bring to the legal and money teams.

admiral haddock - I've had an 'S' corp in the past. But my response would have been better stated... "running the numbers and potential write-offs with the accountant, I was paying 7% less in taxes as a sole prop (for one of my businesses) than I would have paid as a corporation"

sachinag - Thanks! "rollup" was the term that explains that radio announcement best.

gjc - Your buddy's restaurant setup sounds much like what I am hoping to do(if it works for my situation). Though I'm not in that revenue range yet. Here's hoping.
posted by emjay at 7:40 PM on September 21, 2009

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