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Overview of Delaware holding companies
What is a holding company?
A Delaware holding company is a special type of business entity – usually a corporation or LLC – that doesn’t conduct any operations, or ventures, or engage in the trading of products and services. Instead, it is formed for the maintenance and management of intangible investments or the intangible investments of corporations or business trusts.
Particularly, intangible investments may include, but are not limited to:
- Securities, bonds, notes, and other debt instruments (including the debt obligations of affiliated corporations)
- Trademarks, patents, and other intangible property
- Similar types of intangible assets
How does it work?
You can create a holding structure by forming a company and limiting its activities only to the maintenance and management of intangible assets.
You can also form a holding company to provide funding to newly formed companies and make them your subsidiaries. With one or two subsidiaries, you’ll have more protection against risk and could strengthen business operational efficiency.
Some of the subsidiaries owned by holding companies can trade or conduct business, which are called operating companies. Other subsidiaries hold shares of stocks, financial instruments, intellectual property, real estate, vehicles, machinery, or anything else of value that is used by the operating companies.
What are the types of holding companies in Delaware?
Common types of holding companies in Delaware include investment holding, management holding, and intellectual property holding.
- Investment holding company: Exists for the sole purpose of holding investments and owning shares in other companies. The income of an investment holding company comes from dividends, interest, and capital gains.
- Management holding company: Manages the operations of one or more subsidiaries. This type of holding company is common in Delaware because it can help businesses minimize liability and reduce taxes.
- Intellectual property holding company: Owns patents, trademarks, and other types of intellectual property. These holdings are used to generate revenue from licensing and other forms of royalty payments.
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What are the popular uses of a holding company?
Holding companies in Delaware can be used by businesses of all sizes and in all industries, but are typically suitable for enterprises with multiple business units.
Centralize multi-division business with a holding company
Imagine you’re running a company that manufactures and sell different consumer goods, including laundry detergent, toothpaste, vitamins, and others.
Rather than forming one corporation with different divisions, you can structure your business under one holding company with several subsidiaries. Each product unit could be operated as a separate subsidiary in which the holding company owns a controlling interest. This is considered a great way to centralize your company activities and increase efficiency in administration and may even attract potential investment.
Intellectual property holding company (IP holding company)
You can use a holding company to hold different types of patents, trademarks, or copyrights – to protect or to manage, sell, and/or license to third parties. By doing so, you can leverage your IP rights while keeping them separate from operational liabilities, litigants, and creditors who might want to take it.
Let’s say you have a trademark for your business – “New Way LLC” and you also develop copyrighted materials to market your products and services. So, you form a separate IP holding company called “NW Intellectual Holdings LLC” to manage your intellectual properties.
After that, you can use NW Intellectual Holdings LLC to license your trademarks and copyrights back to New Way LLC, or to any 3rd party, who will pay licensing fees and/or royalties to your NW Intellectual Holdings LLC.
If a lawsuit is filed against New Way LLC, the IP held in the holding company will be protected and not be subject to New Way LLC creditors.
The pros and cons of Delaware holding companies
Advantages of a holding company
A Delaware holding company is an effective tool to shield your passive income from state taxation, saving your company significant amounts of state money every year.
Under Delaware corporate income tax legislation, corporate entities in Delaware whose operations are limited to the management of intangible assets of corporations or business trusts registered as investment companies under the Investment Company Act of 1940 are exempt from taxation.
The collection and distribution of the income from such investments or tangible property physically located outside this State are also exempted.
Keeping assets in a holding company can provide great protection. For instance, if the asset is owned by the holding company, it is likely to be out of the reach of creditors should your firm be at risk of insolvency.
This is particularly crucial if your business is new and there is a higher risk of disruption. In addition, the holding company can license the assets and property rights to succeed in trading ventures, ensuring business continuity.
Ease of funding and financing
A holding company normally has better financial strength and can borrow money at a lower interest rate than operating companies and subsidiaries.
If you operate in high-risk industries like cryptocurrency, insurance, or construction, Delaware holding companies can make it easier for you to get funding from investors. Banks are more likely to lend money to a group of companies with different businesses than they would to a single business with the same high-risk profile.
Low administration costs
If your holding company holds a complete portfolio of assets, this will simplify management and save a lot of money. Additionally, it will be simpler to allow the transfer of assets and property rights if the business is sold.
Commercially speaking, it might also make sense to keep control of the intellectual property rights after selling the company and grant a license to the new owner to generate continued income (without much ongoing effort).
Disadvantages of holding company
There are some drawbacks to using a holding company and subsidiaries, including the following:
Lack of management ability
As your holding company control numerous type of assets, you may not have enough knowledge of each type of asset and property controlled by your company. As a result, the overall management of the company may suffer, and you may not be able to make informed decisions about the best way to use your resources and respond to competition and market conditions.
A holding company structure can make your business more complex, especially with financial reporting, because you may have to consolidate the financial statements of your subsidiaries.
This can make it more difficult for investors and creditors to understand your business’s financial condition and performance. You may need to hire additional personnel, such as accountants and lawyers, to help you comply with regulations and manage your affairs.
With several subsidiaries to keep track of, the usage of holding corporations adds a level of complexity not seen in the single-entity structure, which makes monitoring and managing all elements of your organization more difficult.
You may also find it challenging to strike the right balance of control and autonomy with your subsidiaries. While decentralization can result in a lack of coordination across your firms, excessive centralization can inhibit innovation.
How to incorporate a holding company in Delaware?
To create a holding company in Delaware, you must first meet all the requirements below:
- Not conducting any activities except maintaining and managing intangible assets
- Not purchasing any property that is unnecessary to the management of intangible assets
- Maintaining a sustainable amount of capital to ensure operations
- Keeping up with all fees, filings, and payments required
- Maintaining separate records and bank accounts
- Filing annual tax returns
The process of incorporating a holding company can be done in 2 important steps:
Step 1: Choose your business structure
Delaware offers many structures for businesses, but the two most popular are LLCs and corporations.
After considering several factors such as the nature of your business, asset protection needs, limited liability, and tax implications, you should decide on the business structure that works best for you.
Step 2: File your paperwork
After choosing your business structure, you’ll need to file the necessary paperwork.
For a corporation, you’ll need to file the Delaware Certificate of Incorporation, while an LLC will require the submission of a Certificate of Formation.
The Delaware Division of Corporations will review your paperwork to make sure it’s complete and in compliance with Delaware law. Once it’s approved, you will receive a stamped Certificate of Formation/Incorporation, declaring that your company is officially formed in Delaware!
Below is a summary to help you understand the concept of a holding company in Delaware:
- A holding company doesn’t conduct any activities except maintaining and managing intangible assets (e.g., stock, patent, trademark, and more)
- Other than owning assets, a holding company can be used to centralize operations of multiple subsidiaries
- Common types of holding companies in Delaware include investment, management, and intellectual holding
- Advantages of the holding company include tax exemption, assets protection, ease of funding, and low administration cost
- The incorporation process consists of 2 simple steps: choosing a business structure and filing paperwork with the relevant authority
If you have any questions or queries about the holding company, feel free to drop us a message via email@example.com or chat with our friendly consultant for practical advice!
Planning to incorporate in Delaware?
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Frequently Asked Questions
Why are holding companies in Delaware?
The Delaware General Corporation Law is the most favorable to businesses and shareholders. Delaware has a long history of being business-friendly, and its corporate law is constantly evolving to meet the needs of modern businesses.
What states allow holding companies?
Delaware, Nevada, and Wyoming allow businesses to incorporate as holding companies.
Can a holding company be a S corp?
S-corp (S corporation) refers to a type of federal tax designation, not a formal business structure. This means that you can’t just choose to incorporate your holding company as an S corp – you must first register it as a corporation or an LLC and meet specific guidelines by the Internal Revenue Service (IRS) in order to qualify for S-corp status.
What is the difference between a holding company and an LLC?
An LLC is a business entity that offers personal liability protection to its owners. A holding company is a company that derives 100% of their income from passive economic activity.
While holding refers to a company’s status, indicating the nature and main activity of the firm, an LLC indicates a legal corporate structure.
Holding companies can be structured as LLCs, but they don’t have to be.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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