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


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

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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

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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