When to open a holding company
Thinking About Forming an LLC as a Holding Company? 4 Things to Consider...
are you interested in forming an LLC for
your online businesses or business today
I'm going to share with you four tips to
know how and when you need to form an
LLC as a holding company for your online
businesses let's do it hi my name is Jim
part and the founding attorney here at
Hawthorn law and we help small
businesses and online entrepreneurs to
get their legal house in order so that
they can do something that truly matters
in the world and today I'm here to share
with you four tips that you need to know
about to determine when and how you
should form an LLC as a holding company
for your online businesses and I have to
say I'm really excited about today's
video because a lot of you in Prior
videos have asked me about whether or
not I could use a whiteboard you're in
for a treat today because I am going to
be using a whiteboard as well we're
gonna test this out we're gonna see if
it works I think it'll work but anyway
we're gonna do that today and before we
go any further just remember if you
haven't already go ahead hit the
subscribe button click the bell thingy
and and like the video if you like what
I'm talking about today's question comes
actually from a viewer and today it's
from Myles he says could you create a
video discussing how to set up a holding
company I have a few side hustles that
generate income I want to expand what
I'm doing so I'm interested in learning
how I would approach that I've read that
setting up holding company to house the
other businesses is a good strategy in
terms of legal protection and for filing
taxes I've also read it is better it's a
better idea to form the holding company
prior to creating the other LLC's or
whatever structure if possible I'm not
sure what's legit and what's nonsense
could you broach that topic in a video
any guidance or common practices as a
starting point would be appreciated
Thank You Myles for the question I
appreciate it and try and answer that as
best I can
I'm gonna start by first discussing what
a an umbrella LLC also called a holding
company LLC is then we're going to talk
about the main benefits of forming an
LLC as a holding company
for your online businesses well touch a
little bit on the downsides of forming
multiple LLC's and and what can happen
if you do that because it's it's not all
it's not for everyone I'll be honest but
we're gonna talk about that and then
we're gonna finish up by talking about
when is the best time to form an LLC as
a holding company to house all your
multiple businesses are you with me on
that all right let's jump over to the
whiteboard I'm gonna test this out let's
do it okay so when we're talking about
an LLC we're really talking about here
is an umbrella LLC so I know a lot of
you been asking for a whiteboard so
we're just going to do this is this is
LL I'm gonna get used to this here this
is the first time we've ever done this
the whiteboard so it's kind of cool so
this is gonna be a low number number one
this is going to be what we call the
umbrella LLC and so the box are on that
and this is going to be this this LLC
right here is going to own all the other
LLC's so let's say you've got two other
brands that you want to own so this is
going to be I'll see you two and this is
going to be l.l.c number three okay so
this this LLC is actually going to own
this LLC and it's going to own this LLC
and so what you're going to do is you'll
form this LLC first and then you can
form these LLC's next and that's
basically what an umbrella LLC is so the
the member of this LLC is going to be
LLC number one and the member of this
LLC is going to be LLC number one and
there's all sorts of other complicated
strategies that can be used but this is
the basic idea when we're talking about
what is an umbrella LLC all right now
we're going to jump into number two
which is the main benefits of forming an
LLC as a holding company for
or your online businesses and there's
really two main benefits that we're
going to talk about here today and those
are liability protection and tax
benefits so let's start with the first
one liability protection the basic idea
here is and a good example of this is if
you own rental real estate and a lot of
people if I've had clients that owned
multiple rental properties and if you
own more than one rental property then
generally speaking you want to form a
separate LLC and also these can be
called series LLC's for each of the
rental properties you own and the reason
for that is let's say somebody gets
injured or you know maybe you went to
college students and they have a party
and somebody gets hurt and that happens
in one of your rental properties if
you've got all the rental properties in
the same LLC and somebody Sue's you for
what happened with one rental property
then all the other rental properties can
be basically attached to a judgment so
they can be they're not protected from
liability there but if you if you put
one rental property in one LLC and
another rental property in another LLC
and another rental property and another
LLC and if somebody Sue's one of those
LLC's because they got hurt in that
rental property they can't get at the
other two or three or four however many
rental properties you have because
there's a shield of protection in place
there
I mean we're assuming you're not doing
anything to pierce the corporate veil
we've talked about that in a prior video
but as long as you're not doing that
then you your liability is limited to
what's in that LLC and the same is true
for your online business so if you've
got multiple businesses that you're
operating under one single holding
company you know that the example I like
to use is Pat Flynn because he's got a
number of businesses now that he's
running under the smart passive income
brand you know he's got this switch pod
and he's got his smart podcast player
and he's got his general affiliate and
revenue that he makes so he and I don't
know what his legal structure is because
I'm not affiliated with him at all
chances are I suspect he probably has a
lawyer and and he probably has different
LLC's maybe maybe not Pat if you're
watching this you want to reach out I'm
happy to help
the idea being that you would have a
different LLC for each of those unique
businesses because if something were to
happen with the switch pod player I
don't maybe knock yourself over to
heaven with your switch Bob player it's
not a switch pop players the switch pot
switch pot he's got the smart podcast
player not to get those confused
anyway if you were to like knock
yourself over the head with the switch
pod or maybe they it swings around and
you Jam your knuckles or something I
don't I don't know how you can get
injured using that but if you did get
injured using that then then nobody you
can't sue him with the smart podcast
player if that makes sense and so if
you've got a business if you've got and
so if you've got an online business and
you have you know you've got you're
making some affiliate revenue here and
perhaps you've got some courses here and
maybe you've got some other digital
products here that you're selling or
maybe you've got you know an e-commerce
business over here you would want to
separate all those out into different
LLC's that way you know if somebody
Sue's you for something related to the
affiliate business they're not also
going to be able to get at your
e-commerce revenue from that business
does that make sense
thumbs up if you think that makes sense
click though the little like button or
comment below and say I'm getting this
that would help me sometimes it's hard
when you're making these videos you
don't know if anyone really you know
getting what you're saying or not so
that's the first main benefit of forming
the LLC's under one holding company the
second benefit is the tax is tax
protection and the tax liability I'm
going to jump back to the whiteboard
here for a second so one of the nice
things about an LLC is that it doesn't
have to form or it doesn't have to file
its own tax return unless you elect to
be taxed as an S corporation or or
--'tis down so if you like to be active
if you do an S corp or if you have
partners you need to file your own tax
return for the LLC but if you don't have
those then this is just going to go on
your 1040
and the way this will work is if you
have multiple LLC's that are that this
LLC owns then the income from those
LLC's are going to flow through to the
parent LLC and
what that means is that whatever income
this makes whatever income this makes
the taxes on that are going to flow
through to that LLC and that Alice II so
then what you'll have is the profit from
this LLC you basically have profits and
that's going to go on to your 1040 onto
Schedule C I believe I'll correct that
if I'm wrong but I believe that's
correct and so that's how the tax things
work for LLC so you've got multiple
offices but it's all going to flow
through to your apparent LLC now there's
a lot of nuances to this and this is a
gross okhla simplification of the way
this works but in general that's what
you need to know is it makes it very
easy to for tax reasons you're still
going to want to have a separate
accounting program or software for this
and a separate accounting for this that
can flows through that or at least now
if not a separate you don't necessarily
need a separate program but you're going
to want separate accounts bank accounts
for each of these LLC is to keep
everything separate and that's good and
then you'll be good with that so that's
the tax benefits and having the umbrella
LLC is you can have everything in one
and if you formed another LLC can you
tell I like using this white board if
you had another LLC again the income
just flows directly to to that so you're
good to go and so there you have the two
main benefits of forming an LLC as a
holding company you got the tax life tax
protection and the liability protection
now let's talk about some of the
downsides of forming an LLC as a holding
company for your online businesses the
first the first main downside is that
it's expensive right you're going to
have to pay a lot of money to to keep up
all these LLC's on an annual basis if
you live in like California where the
annual filing fee is I think around $800
then you'd have to pay that fee for each
one of your businesses and so that is
the first main drawback is it is
expensive to maintain
all these businesses you're also gonna
have to have a registered agent for each
of these businesses and there could be
other just corporate fees and things
associated with them so you just want to
make sure that you understand going in
what all the costs are going to be to
setting up these LLC's it's a lot easier
if you only have one LLC because you
only have to pay one annual fee and one
registered agent fee and you know you
only have to set up one but when you're
doing multiple LLC's if you get a little
bit more expensive so that's the number
one drawback and the second downside
I've always already kind of touched on
is you would need to actually hire a
registered agent for each one of the
LLC's it's not enough to just have an
LLC or a registered agent for the
Umbrella LLC you also need to have one
if you've got an umbrella you're gonna
have at least two more LLC's underneath
it possibly three and you're going to
want to have you're going to need to
have a registered agent for each of
those and typically the fees for that
are between 100 to 150 dollars a year a
lot of times it's it could be 99 for the
first year but then it goes up in the
second year that's the way we do it and
so you know that's just another fee
that's going to be attacked on to all
the other fees you're gonna have to pay
but you know it's the cost of doing
business and if you're running your own
online business and you want to do it
the right way these are the things
you're gonna need to be aware of and
then you need to pay for if you want to
do it correctly right the third downside
is that there's just gonna be a lot of
paperwork to keep track of you know here
in my office we do things mostly
paperless and that's what I would
encourage you to do too so create a good
system for how you're gonna organize all
your documents a good filing structure
you should have it all in one
centralized location whether that be on
Dropbox or box or on Google Drive or
some people use Evernote just make sure
you have a good filing structure in
place and you're going to want to have a
file for each one of your LLC's with all
your articles of organization with your
registered agent paperwork with all your
annual court notices and things like
that and usually you know even
for me here in North Carolina we can get
most that information online I believe
that's the case also in Florida so you
don't always necessarily need to have
copies of all this in hand but if you
want to you can have it's always nice to
have a central location where you've got
access to all this information the one
exception I would say to that is you
definitely want to have a copy of the
ein number of paperwork that you
received from the IRS because they're
only gonna send that out to you once if
you misplace it you're gonna have to
jump through a bunch of Hoops to call
the IRS and figure out what that number
is but typically they only send that out
one time so always make sure you've got
that in a safe place possibly in
multiple places so you don't lose it if
you use a firm like ours to set that up
for you we'll have copies of that if you
ever need to get it but that's another
thing you need to consider if you're
forming more than one LLC more than one
LLC means more than one files with
paperwork that you may keep track of and
I mean I think the big thing to take
away from all of this is that the more
LLC's you have the more complicated your
structure is going to be and the more
likely it is that you're going to need
legal help at some point from an
attorney to help you organize and figure
out exactly what you're trying to do
with all of these LLC's that's that's
again one of the drawbacks now there is
an alternative to to all of these things
what some people will do is form the
umbrella LLC and then you can have
different DBAs so for different brands
or businesses you're running you could
have a different DBA for each and that's
going to be a lot less expensive but
that means the drawback to doing it that
way is you're not going to get the
liability protection that you get with
having the multiple LLC so that's the
biggest that that's that's one option
for people if you're looking at forming
LLC is a holding company and then just
having several DBAs underneath that LLC
that is one way to do it last but not
least who should form an umbrella LLC
and when should you form that umbrella
LLC generally speaking I would say
you're ready to form an umbrella LLC if
you were a business that's big enough
where you have two distinct businesses
that have their own revenue streams and
their own systems and processes
and they're separate and distinct if
that's the case and they're both
operating under the same main holding
company I think it's time to start that
holding company as an LLC in the two
main businesses as part of that and this
is really important if you are actually
forming if you're thinking about getting
acquired or maybe you want to spin off
one of your brands at some point then
you definitely want to have two separate
LLC's at a minimum to house each of
those brands or maybe more hold on a
second who saw my coffee mug up there
that knew that I was gonna do this at
some point college football playoff baby
should have been number one we got
robbed we'll leave that right there for
you and you don't like Ohio State no
that's that's fine I'll I can still be
your friend
so other people that would be great too
or other businesses that would be in a
really good spot to form a separate LLC
or an umbrella LLC will be businesses
that are looking to to basically create
another business but they want to fund
it with revenue from your existing
business that that might be a good way
to do that second business is to start
it as a separate LLC and I know I've
talked about this in the past there are
reasons why at this point
Hawthorne law is just part of my main
law firm in the future I am considering
actually Hawthorne law as a separate
entity and making its own LLC moving
forward so that's that's something you
want to think about so if you're running
a business and you're kind of starting
another little side business where it's
starting to get some traction and
generate some revenue you might want to
use money from your existing business to
fund that business and help it grow and
that's another way to do it and you
would want to have that be a separate
LLC and I would say the last example of
someone who might want to form an
umbrella LLC is any online business
owner or a coach or course creator or
anyone like that who they have multiple
profit centers in their business that
each generate revenue for the
hub of your business and so you can
identify and say okay yes like well like
I talked about before you've got you
know an affiliate profit Center that
generates money through affiliate sales
you've got you know maybe courses profit
Center that generates money through
courses and maybe you have another one
that's an e-commerce or digital
downloads or products like that so if
you have multiple profit centers in your
business then you're getting closer to
where you may need to form multiple
LLC's if it's just you in one business
right now and you're trying to do a side
hustle to generate some additional
revenue you probably just need a regular
LLC but when you start to have multiple
revenue streams then that's when you
start thinking about whether you might
want to have multiple LLC's and have
them all under one parent company and
this is why I tell people kind of vents
on the side this is why I tell people
when they ask me this on the phone when
we do consults which should I form first
or what should the name of the LLC be
does that matter and it doesn't really
matter because if you look at this long
term and you think well at some point I
want that LLC to become the holding
company for my business then you might
want the name of the LLC to be somewhat
bland and you can always change it if
you want but you might want to be
something like you know my initials or
jwh so like jwh holding company might be
the name of a holding company for my for
my businesses it's not you can look it
up I don't have that but something like
that might be or you might want to use
the initials of your kids I've seen this
happen a lot with a lot of clients or
they do something like that
so initials are a common way to do it or
if you're a big fan of different movies
you sometimes people will make use names
from derivatives from the movies that
they like and things like that I mean as
long as you got to be careful you're not
violating any trademark or intellectual
property issues but you know you can you
can get creative with the way you want
to do that maybe a nickname you had as a
kid or something like that you can name
the holding company anything you want
and you can always create different
products and brands or you can set up a
DBA from that LLC as you're operating
your businesses the DBA so that that is
not necessarily update
like I said you can always change the
name of the LLC later it can be somewhat
of a hassle with changing bank accounts
and different things like that but for
privacy reasons that might be something
you want to do is set up the LLC is
something that's somewhat private unique
to you and then you can set up a DBA
underneath that if that makes sense
hopefully that makes sense okay once
again if you get what I'm saying
don't forget to give me a thumbs up hit
the leave a comment below and don't
forget to hit the little belt and you
see you get notified whenever we post
new videos and also I appreciate if you
could subscribe hopefully this has been
helpful to you if it has leave me a
comment below let me know what questions
you have about forming an umbrella LLC
hopefully this is jog some ideas in your
mind and got you thinking about how you
might want to do this or how you might
want to continue to build your business
moving forward into 2020 and if you're
looking for a checklist to help you when
you're forming your LLC there's a link
down below in the description to a
checklist that you can download get on
my email list and get notified whenever
I post new videos as well so that's
there to help you out if that's
something you're interested in so if you
missed my video on common mistakes
people make when forming their LLC's you
definitely want to make sure you check
that out here it's a great video it's
one of my most popular videos on the
channel and hopefully you'll find that
helpful so that you know what not to do
when you're forming your LLC thanks so
much we'll see you in the next video
[Music]
