Remember, professionals can form an LLC, limited liability partnership (LLP) or a corporation only if all of the owners are licensed within the same profession. Keep this in mind if you're a professional (physician, dentist, attorney) forming a holding entity and an operating entity.

Only the operating entity has to meet this requirement. The holding entity, which will contain nearly all of the wealth of the business, will not be engaged in the practice of any profession. Thus, children or other family members, for example, can still be co-owners of the holding company, even when it is formed by professionals. This allows the use of a family LLC as an estate planning tool. However, in this case, the professional would have to form each entity directly, because the holding entity could not be the owner of the operating entity.

If the entities were being formed within a single LLC in Delaware, for example, the holding entity would have to be formed as a separate LLC in this situation. Each operating entity could still be formed within the single LLC.

Strategies that rely on the use of an operating entity and a holding entity also are used by large businesses. For example, one of the fast growing areas in corporate finance is called "securitization."

A corporation, the operating company, sells its receivables to a second corporation, which is created as the holding company. The only real asset of the holding company is the receivables it purchases. The holding company sells stock to the public, in effect allowing the public to buy an interest in the receivables, through the purchase of the stock. This is termed securitization. This trend started with the sale of mortgages by banks, an ironic choice of words in today's economic environment! Large corporations now sell accounts receivable in this way.

The holding company (the master LLC so to speak) is insulated from liability for all of the activities of the operating company that created the accounts receivable. Commentators have said that, if it were not for the creation of a holding entity, securitization could not work, because the risk of liability exposure from the operating entity's activities would be too high to enable this kind of stock offering to the public. (Commentators or false prophets...that's for history to determine.)

At this same time, the operating entity has protected its assets against the claims of its creditors. Cash that is brought in from the sales of the receivables is quickly drawn off to pay the operating entity's expenses, including the salaries of its owners. The small business owner might use a version of this strategy in withdrawing assets from the operating entity, but only after careful thought and planning.