In today's Freedom Friday blog and email newsletter, I want to talk about a topic that I get asked about on occasion by real estate people, and that's holding companies.  Usually someone wants to buy real estate investment properties and asks what the best way to do that is.  Sometimes they ask if they should have a holding company, or an umbrella company, and sometimes they do not.  However, sometimes when I bring up the idea of a holding company, they do not know what that is.  So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “What is a holding company in 2024?”

In general, a holding company is a company whose sole purpose is to “hold” or own assets or other companies.  In real estate, a holding company may be an LLC which owns other LLCs, and each of those LLCs owns a rental property.  This structure is very common in the real estate industry.  So, why would you want to create such a structure?  Here are four (4) advantages of using a holding company:

1.  Lower Investment Costs

The first advantage of using a holding company is lower investment costs.  A holding company can buy stock in another company, and as soon as it owns 50% of the stock of the other company, it would have full control over the functions of that company at half the cost of owning the entire company.

2.    Independent Assets

The second advantage of using a holding company is independent assets.  Many holding companies own multiple subsidiaries, sometimes even owning 100% of subsidiaries.  If the holding company were a normal company producing the products of each of its subsidiaries, the costs and profits of the holding company would be similar, but the assets of the holding company wouldn't be as well protected.  If someone sued the company for manufacturing a certain substandard product, the entire company would be potentially liable.  However, when a subsidiary is sued, only the assets of the subsidiary are at risk.  The holding company itself and its other subsidiaries are separate assets and not at risk.

3.    Tax Advantages

The third advantage of using a holding company is the tax advantages.  Federal tax law allows a holding company to combine the financial records of all its subsidiaries and use losses from one to offset profits from another.  If both companies were treated independently, the net tax liability would be higher.

4.    Business Arrangements

The fourth advantage of using a holding company is for business arrangements.  For example, if you own a brewery, before you can sell any beer, you need to bottle it, and so you will want a business arrangement with a bottling company.  If you have a holding company that owns both the brewery and the bottling company, that arrangement is more profitable for everyone.  It's very common for holding companies to purchase other companies which can support one another.  This allows you to control different parts of the supply chain and decrease your costs.

Thinking about starting a small business?  Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth?  Please contact me at [email protected] to schedule a FREE strategy session.

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