Starting a holding company can be a great way to invest in different businesses. But it can be tough to get your business off the ground if you don’t have any money to invest. You may not know where to start or how to get started.
Our guide will show you how to start a holding company with no money. We’ll provide you with everything you need to know, from registering your business to setting it up. You’ll be able to get your business up and running in no time!
Generally speaking, you can set up your holding company spending only $200, and then you can get your money back either from the bank or claim through a tax return or both. Thus, you can start a holding company with no money.
We’ll discuss this process in detail that will help you to start your holding company for free. But first, let’s focus on what a holding company really is and why do you want to start?
What is a holding company?
Simply put, it is a legal entity that owns all or most of the stock of other companies, called subsidiaries. In real life, a holding company can be a great way to consolidate power or ownership.
In the world of business simulation games, though, where you are limited in many ways by existing laws and regulations, it’s more likely that your holding company will achieve nothing but delay the endgame and diversify the liabilities creating a separate entity.
As a means of understanding what a holding company does, think of them like you would your parents: if your parents own real estate, they may rent some of the spaces out and collect that income. If they own stocks or bonds in other companies, then they may collect dividends or interest income.
The same can be said for holding companies, as they usually own majority shares in other profitable companies and collect the profits earned by those investments.
For example, Disney is a multi-billion dollar holding company that owns sub-companies like ABC and ESPN. It’s also where you may know the name The Walt Disney Co. from, as it is their parent company. Comcast, too, is another great example of this, with it owning NBC Universal. On the other side of things, you also have Rupert Murdoch’s holding company, News Corporation, which is home to Fox and the Wall Street Journal.
Why do You want to start a holding company?
The purpose of owning such a business structure varies from situation to situation and may depend on your business plan as an entrepreneur.
The first reason to start a holding company is simply separating the valuable asset away from the operating business. It will reduce risk ensuring full asset protection of your business entity.
A good example will be if a restaurant owner owns the premises where his restaurant is located. Then, it would be advisable for the business owner to register three companies. First, one for the land, which would charge rent, one for the restaurant, and finally, another as a parent company (holding company), making those two a subsidiary company under it.
This way, if the restaurant fails or gets bankrupt, the land will not be covered for settling the liabilities.
The second reason people own holding companies is to control several different businesses. One of the best examples is the world’s number one investor, Warren Buffet, His well-known holding company Berkshire Hathaway controls and earns from hundreds of different subsidiary operating companies.
He can exercise this control to appoint directors through his voting rights in the subsidiary companies using his holding company.
As of now, it’s clear that to start a holding company; you should have at least one existing company in operation. You can structure these operating companies either by starting a new business or investing in other companies. So let’s focus on how to start a holding company with no money.
How to start a holding company with no money?
You may have heard about somebody starting a multi-million dollar company in his basement. While this does happen, it’s rare and difficult to pull off successfully. It takes an incredible amount of time, energy, and know-how to build a company from scratch. Also, you’ll need a lot of support from family and friends.
However, it’s possible to start a holding company with no money. For that, you will have to follow some easy steps that will help you quickly get your small business off the ground without spending any money.
Business legality check
First, you have to make sure that your business is legal in the state where you plan on starting your business. Although this may sound like a formality, state laws do vary on how they define and treat small businesses. Some states view holding companies as a form of their own type of business, while others see it simply as a subsidiary arm of the parent company.
Choose a Name for your Holding Company
The next step is choosing an appropriate name for the new holding company. This may seem like an easy task, but there are some things you need to consider before finalizing on one particular name–especially if you want your business name to be catchy or memorable enough without being too ridiculous (e.g., “XYZ and Sons” or “123, Inc).”
You must consider whether or not the name you choose contains an existing registered trademark. If this is the case, it may be considered a violation to use such a mark for commercial purposes (e.g., “Apple Computers” and “coca-cola company, Inc.”).
You should check if the name is available or occupied by another company from the “secretary of state” website.
Choose a Business Entity
In order to start your business, you must first decide on the type of business entity you want it to be. First, there is the sole proprietorship, which is typically an individual who practices a trade or service as their own business.
This person does not contemplate growing the enterprise any more than what they would expect as a normal part of their career. In many cases, this type of business does not require the use of any legal documents to start up and make sales.
Then there is the general partnership, where two or more people may join together as co-owners. Like a sole proprietorship, a partnership also allows for a person to be self-employed without registering their business with any state or federal agency. But it would help if you formed a separate legal entity to keep yourself away from any lawsuits.
You must choose one legal entity for a holding company, the corporation (C Corp, S Corp) or the limited liability company (LLC). These two types of companies have been designed to cover your legal needs adequately. It would be best if you considered taxes and liability when choosing which legal entity to go for.
If you are a small business owner, you should choose the limited liability company as your legal entity that protects your personal assets best. When making a decision, it is important to take into account what company you already have.
If you want a tax structure that will be favourable to you, you need to form a holding company in a different state from where the operating company will be based.
The limited liability company (LLC) is also a popular choice among business owners because it offers the personal protection of a corporation but does not have complex tax paperwork.
Filing of the Articles of Organization
Now here comes the most important part. After you have decided on a business entity and name, it is time to file for one. As you are looking to start your holding company for free, you should go with forming an LLC as your umbrella company.
In order to form your limited liability company (LLC), you have to file articles of organization with the Secretary of State office in your state. States like Delaware, Mississippi, New Hampshire, New Jersey, and Washington call it “certificate of formation”. On the other hand, Massachusetts and Pennsylvania call the same document a “certificate of organization” instead.
You can complete this process online to eliminate any intermediaries. Simply you have to fill up the form available on your Secretary of State’s website and submit it. In my case, I filed LLC on the Alabama Secretary of State website.
The filing fee for an LLC can vary from state to state. The fee for LLC formation ranges between $40 and $3000. For example, in Kentucky, it’s $40, and in Alabama, it’s $200, and in Tennessee, it ranges between $300-$3,000.
Create an Operating Agreement
Once you have created your new business entity, it is important to create legally binding shareholder agreements. These documents protect you as well as the corporation’s investors by ensuring that both parties have a mutual understanding of how shares will be managed and held.
There are no special types of operating agreements needed for a holding company. It should include the business structure, terms, business operation, and issues that are specific to the industry in which the holding company is being used.
If your company is a real estate holding company, your operating agreement may state that the company’s funds can only be used to acquire real estate and that the managing member must also fulfil the role of the property manager. For hedge fund or mutual fund holdings, it may specify the company investment model.
Shareholder operating agreement provides a written contract between business owners about the conditions, terms, benefits, and responsibilities of each shareholder within the company. You can hire a business attorney to draft your operating agreement.
On the other hand, if yours is a personal holding company, you can specify the company structure to exercise your voting right on your subsidiary company. For validation purposes, you will also have to change the operating agreement of your subsidiary companies mentioning the percentage of shares and voting rights of the holding company you are forming now.
Maintain Correct Business Licenses and Permits
After creating your new business, it is time to make sure you have the correct business license and permits in place. Basically, there are two types of licenses that every business must acquire in order to operate legally; trade and occupational licenses. It’s not mandatory, but it completely depends on business activity and your industry of operation.
File a DBA
DBA or “doing business as” certificate lets the public know that your business name is not your actual legal name and may help you avoid business liability for any actions taken by another person who uses your business name.
Apply for an Employer Identification Number (EIN)
After completing all of these steps, it is time to apply for an EIN or Employer Identification Number for your holding company. This nine-digit number will identify your business with the Internal Revenue Service (IRS) and be necessary if you plan to hire employees in the future.
An intermediary business agent will charge about $100 to get an EIN, But you can get it free from the IRS website by completing an online EIN application.
Not only does this step help keep your business legally protected from any potential lawsuits, but it is also required if you plan on opening a business bank account in your company’s name.
As long as all of the proper steps have been taken when creating your new business entity, any money earned by this company will not be considered taxable income for you or any other shareholders.
Get your Expenses back by opening a bank account
Once you get your EIN, you can sign up for a business bank account. Make sure you open a separate bank account for each separate company you have under your holding company. It will help you to track effectively on your company fund.
Here comes the most exciting part: you can get your all-expense back simply by opening a business checking account on Chase bank. You can get a $300 one-time cash bonus when you open a new business checking account on Chase bank. But for that, you’ll need to deposit a total of $2,000 into your account.
Let’s Say you formed a Limited Liability Company for your holding company in Delaware, which will cost you $90. In addition, there is an extra cost of $100 for hiring a registered agent. So your total cost for starting the holding company is $190. You are getting $300 from the bank. This is how you not only can start your holding company for free, but also you can make a $110 profit.
Claim your expenses through the corporate tax return
The expenses you incur to set up your holding company are tax-deductible. However, the IRS has limits on how much you can deduct for startup expenses.
You can deduct about $5,000 for startup organizational costs if you have a $50,000 or less startup cost. But to get this tax benefit, your corporate balance sheet must declare profits on its annual report.
If your holding company is only one person LLC, then the limit for your startup cost is $5000, and it’s fully deductible. And that is quite enough to start your holding company for free.
Frequently Asked Questions:
Does a holding company have to make money?
No. It is not unusual for a holding company to operate at a financial loss, though this is usually due to the costs of acquiring its shares in other companies. Generally, a holding company will have little or no business activity of its own. Its purpose is to hold shares of different companies and to control them.
If its subsidiary companies are operating at a loss, the holding company will be in the same position. However, as long as the subsidiary makes a profit, this will be reflected in the holding company’s accounts.
Can a holding company own an LLC?
Yes. A holding company can own an LLC. Holding companies are typically used when you have capital or assets but no business to run. It protects the assets from being taken by creditors if the operating company goes bankrupt.
The holding company owns all the voting stock or ownership interest according to the percentage ownership of shares of stock in the operating LLC. Thus, the holding company would have no day-to-day operations. However, it would protect the operating company’s valuable assets from being seized by creditors of that company.
How much does it cost to open a holding company?
Generally, it will cost between $40 to $300. However, the cost will vary depending on the state you want to register your holding company, and minimum filing fee of that state, and whether you include a registered agent.
How do holding companies make money?
The two primary sources of income for holding companies are dividends and capital gains. Dividends come from the subsidiaries, and in some cases, the holding company itself. An example is dividends from corporate bonds and preferred stock.
An additional source of income for a holding company comes from capital gain on their investments in subsidiaries and other companies. These gains come about through buying, selling, or exchanging securities they hold in these companies.
Holding companies also earn from tax benefits. Tax breaks come from moving profits between subsidiaries by taking advantage of low-tax jurisdictions.
Why Do Rich People Have Holding Companies?
Holding companies have become the most preferred type of company for rich people. They use it to transfer money across borders, evade taxes, maintain the corporate veil and disguise their wealth.
Business owners often use holding companies to ensure that they can retain control over their assets even if stored in a separate company.
However, Rich people also use holding companies to take business decisions centrally and exercise their rights over other companies they own. And also avoid any bad legal experience, sometimes to hide their wealth. It also helps them to retain uninterrupted business continuity through any business crisis.