Using Multiple Business Entities

April 13, 2006

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Using holding and operating companies is an asset protection planning strategy that helps to limit liability in your business structure.

An ideal business structure consists of an operating entity that does not own any vulnerable assets and a holding entity that actually owns the business's assets.

With this structure, the small business owner can eliminate (or, at the very least, substantially limit) liability for both business debts and personal debts.

The operating entity conducts all of the business's activities and, thus, bears all the risk of loss. The owner's limited liability for business debts is limited to no liability at all, because the operating entity contains little or no vulnerable assets, and the holding entity is not legally responsible for the other entity's debts. In short, even limited liability can be enhanced.

At the same time, the owner's liability for personal debts is reduced because assets are within the protective framework of a business form (i.e., the holding entity).

Clearly, this strategy is more suited toward the operation of two limited liability companies (LLCs), as opposed to two corporations, where the holding LLC is formed in a state that has adopted the Revised Uniform Limited Partnership Act view preventing foreclosure and liquidation of the business interest to satisfy a personal creditor.

However, the statutory close corporation does provide another option. If it is formed as the operating entity and coupled with an LLC formed as the holding entity, you can achieve the same protections.

But two corporations will not accomplish both objectives, because the law will allow personal creditors to attach, and then vote, the owner's interest, to force a liquidation of the corporation.

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The individual owner can create and fund the holding entity. The holding entity can then create and fund the operating entity. Technically, the individual owns the holding entity, and the holding entity owns the operating entity. This is frequently the approach taken in a corporation, where the operating entity would be termed a "subsidiary" of the holding entity. However, the same approach also can be used with respect to the LLC.

Alternatively, the owner could personally create and fund both entities, so that he directly owns both entities. Or the owner could decide to use the one-entity approach, although this structure provides very little protection for your business and personal assets.

The better approach will usually be for the holding entity to own the operating entity. The multiple entities are then strategically funded to minimize vulnerable assets within the business form.

The Delaware LLC statute presents an ideal and unique opportunity to form all of the separate entities within a single LLC.

In addition, be sure to check out our Case Study -- Funding Multiple Entities