Holding Company vs Operating Company Structure
A holding company and operating company structure puts valuable or stable assets, such as real estate, equipment and intellectual property, in one entity and the risky day-to-day business in another. The operating company leases or licenses what it needs from the holding company at documented terms. If the operating company is sued, the valuable assets sit in a separate entity. It only works if both entities are run as truly separate businesses.
The basic setup
- Operating company (OpCo). Employs people, signs customer contracts and carries most day-to-day risk.
- Holding company (HoldCo). Owns real estate, equipment, trademarks, cash reserves or investments.
- Lease or license. OpCo pays HoldCo rent or a royalty for use of the assets.
You own both, directly or through a parent entity. A lawsuit against OpCo targets OpCo's assets and insurance, not HoldCo's property.
What goes where
| Asset | Typical home |
|---|---|
| Employees, customers, vendor contracts | Operating company |
| Building and land | Holding company, often a separate LLC per property |
| Equipment and vehicles | Holding company, leased to operating company, subject to lender terms |
| Trademarks and software | Holding company, licensed to operating company |
| Cash reserves | Holding company, within reason |
Making it real
- Sign a written lease at a fair market rent, and actually pay it.
- Keep separate bank accounts, books and tax filings as the structure requires.
- Hold each entity out to the public in its own name.
- Do not drain OpCo to the point it cannot pay its bills, which looks like a fraudulent transfer.
- Check lender consent. A loan may restrict a transfer of assets or interests.
Risks and limits
Courts look through structures that are not respected in practice. If the owner treats the entities as one pocket, a creditor can argue they should be treated as one. Transfers of assets to HoldCo after a claim is foreseeable can be undone under fraudulent transfer law. See fraudulent transfer law and timing. Personal guarantees can reach through the structure as well. See personal guarantees.
Tax and cost
Separate entities mean separate records, and Texas franchise tax reporting may apply to each, often as a combined group. A tax advisor should confirm how the structure is taxed and whether the entities must file a combined report. The structure is most useful when the business has real exposure and the assets are worth separating. See also single-member LLC weaknesses.
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Book Free ConsultationFrequently asked questions
Does a holding company protect my building?
If the building sits in its own entity and the operating company is sued, the creditor generally cannot reach the building, provided the entities are respected.
Does the operating company have to pay rent?
It should, under a written lease at a fair rent, so the arrangement is real and documented.
Can I set this up after a lawsuit starts?
A transfer made after a claim is foreseeable risks being reversed as a fraudulent transfer.
Will my lender allow it?
Not automatically. Check your loan documents for restrictions on transferring assets or ownership.