As the tax busy season approaches and we prepare our returns, it’s a good time to review some concepts so let’s break down what it means to have a Holding Company.
Basically, a Holding Company’s function is to hold assets. A good example of a true holding company is a Family Limited Partnership (FLP), or a Family Limited Liability Company (FLLC). These are simple forms of holding companies that just hold assets. The other purpose of an FLP or FLLC is to remove assets from someone’s taxable estate. However, that is a different article for a different day.
A holding company can be used for many purposes. For example, let’s say that you want to remove the assets from your business, to either shelter them from creditors or for tax reasons. You would form a holding company that holds the assets and the operating company would then rent those assets from the holding company. This would separate the liability between the operating company and the holding company and wouldn’t put any assets at risk. The downside is that most states charge a sales tax on the rental of business property — which is honestly “de minimus” compared to the benefits it provides.
Most holding companies are taxed as partnerships because if the assets are being rented, the income or loss is passive in nature anyway. Plus, you would reap the benefits of capital gains tax when the company sells any assets. You can also set these LLCs up with managers that in essence act as the general partners of the LLC without the liability associated with that classification.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.