Running multiple businesses and managing them can become a hassle especially if you choose the wrong entity structure. It can be difficult to keep track of all the assets, liabilities, and investments associated with each business. This is where a series LLC or a holding company comes in.
Both offer unique advantages that make them attractive options for anyone looking for a way to streamline their operations and protect their personal assets from being tied to their businesses.
Should you go with a Series LLC or a Holding Company? If you have the same question, let’s take an in-depth look at this Series LLC vs Holding Company article. We have compared these two business entities side by side so you can make an informed decision.
What is a Series LLC?
A series LLC (SLLC) is a type of limited liability company (LLC) that allows for the creation of separate units or “series” within the company, each of which can have its own members, managers, and assets.
This structure allows the company to divide its assets and liabilities among the different series, providing a level of protection for the assets of each individual series in the event that one of the series faces legal action or bankruptcy.
What is a Holding Company?
A holding company is a company that owns the outstanding stocks of other companies known as subsidiaries. The holding company doesn’t usually produce goods or services itself, but rather uses the stocks it owns to exert control over the companies it has invested in.
Holding companies can be used to consolidate ownership of different companies including the membership units/shares of LLCs and streamline their management, as well as provide an additional layer of protection for the assets of the companies being held.
Holding Company vs. Series LLC: Major Difference
Despite the apparent similarities, a holding company and a series LLC are different in the following aspects:
Structural Difference
The major difference between a series LLC and a holding company is that in a series LLC, you file articles of organization for the mater LLC only. The articles of organization aka certificate of formation state that the master LLC has the right to create multiple LLCs under its umbrella.
You don’t need to file separate formation documents with the state for each company working under the umbrella of the master LLC in a series LLC. While you need to create a separate LLC for each company or asset working under the umbrella of a holding company.
In other words, the holding company itself needs to be registered as an LLC and each company under it also needs a separate registration either as an LLC, corporation, or any other entity.
Functional Difference
The holding company does not have direct operational roles and does not sell products or services itself. Rather, it takes financial, legal, managerial, and tax-related decisions on behalf of its subsidiaries. It does not have any direct involvement in the day-to-day operations of the companies it owns.
On the other hand, the master LLC can conduct its own business activities. It brings in revenue by handling its own business affairs and assists in directing the growth of all the series under its umbrella.
This means that the holding company only protects and manages the company underneath it without directly engaging in business operations itself. Whereas, the master LLC manages and protects the series underneath it while performing its own independent business activities.
Advantages of a Series LLC
1. Asset protection
By dividing its assets and liabilities among the different series within the company, a series LLC can provide a level of protection for the assets of each individual series in the event that one of the series faces legal action or bankruptcy. This can help to limit the potential for financial losses for the other series within the company.
2. Flexibility
A series LLC allows for the creation of separate units or series within the company, each of which can have its own members, managers, tax structure, and assets. This can provide a high degree of flexibility in terms of how the company is organized and managed.
3. Simplified administration
Because a series LLC allows for the separation of assets and liabilities among the different series, it can simplify the administrative process for the company. This can make it easier to manage the company’s finances and keep track of its assets and liabilities.
4. Cost savings
You don’t have to file separately for each business in a series LLC. It saves the filing cost. By providing asset protection and simplifying administration, a series LLC can potentially save the company money on legal and accounting fees. This can make it a more cost-effective option for some businesses.
Disadvantages of a Series LLC
1. Lack of recognition in some states
Not all states recognize the series LLC structure, which means that a company that is organized as a series LLC in one state may not be able to take advantage of the same protections and benefits in another state.
2. Limited case law
Because the series LLC structure is relatively new, there is limited case law on how it is treated in legal proceedings. This can make it difficult to predict how a court might rule on issues related to a series LLC, which can create uncertainty for the company and its members.
3. Potential confusion
The use of multiple series within a single LLC can make the company’s structure more complex, which can lead to confusion among members, managers, and outsiders. This can make it more difficult to manage the company and make informed decisions about its operations.
4. Increased compliance requirements
Because of the potential for confusion and the lack of recognition in some states, a series LLC may need to comply with a greater number of legal requirements in order to ensure that its structure and operations are valid. This can increase the administrative burden on the company and its members.
Advantages of a Holding Company
1. Consolidated ownership and control
A holding company can be used to consolidate ownership of a group of companies, which can make it easier to manage the companies and make decisions about their operations. This can also allow the holding company to exert greater control over the companies it owns, which can be useful for strategic planning and decision-making.
2. An additional layer of protection for assets
By owning the stocks of other companies, a holding company can provide an additional layer of protection for the assets of the companies it holds. In the event that one of the held companies faces legal action or bankruptcy, the assets of that company may be protected by the holding company.
3. Tax benefits
In some cases, a holding company structure can provide tax benefits for the companies it owns. For example, the holding company may be able to take advantage of tax deductions and credits that are not available to the individual companies, which can reduce the overall tax burden for the group.
4. Simplified management
By consolidating ownership of a group of companies, a holding company can streamline the management of those companies. This can make it easier to coordinate the operations of the companies and make decisions that are in the best interests of the group as a whole.
Disadvantages of a Holding Company
1. Lack of operational control
Because a holding company doesn’t typically produce goods or services itself, it may not have as much control over the day-to-day operations of the companies it owns. This can make it difficult for the holding company to influence the performance of the subsidiaries.
2. Potential for conflicts of interest
If a holding company owns the stocks of companies in different industries, there may be potential conflicts of interest between the different companies. For example, if one of the subsidiaries is in direct competition with another subsidiary, the holding company may need to carefully manage the relationship between the two companies to avoid any conflicts.
3. Liability Issues
In some cases, the limited liability protection provided by a holding company may be limited. For example, if the holding company is found to be negligent or otherwise liable for the actions of one of the subsidiaries, the assets of the holding company may be at risk.
4. Increased compliance requirements
A holding company may be subject to additional compliance requirements in order to maintain its legal status and protect the assets of the companies it holds. This can increase the administrative burden on the company and its management.
Which is Better?
In general, a series LLC offers more flexibility and protection for the assets of individual units within the company, while a holding company is useful for consolidating ownership and control over a group of companies.
Ultimately it depends on your state and the personalized needs of your business to choose the best entity for your business, We hope this series LLC vs holding company article has helped you take an informed decision.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.
