Holding Entities

In the multiple-entity approach, the holding entity is where all wealth is located within the business structure. But because the holding company conducts no business activities, it has almost no exposure to liability, and therefore these assets are protected.

The small business owner or owners create the holding entity, then in turn the holding entity creates and owns the operating entity, where actual business operations (and risks) occur. Limited liability for the operating company runs to the holding entity and is limited to its investment in the operating entity, stopping short of the owners of the holding company because they do not own the operating company. One holding entity may be used to operate many different operating companies, but care should be taken to keep each operating company and its activities separate from one another.

When funding the entities, ideally, a business's most valuable assets should be owned by the holding company and leased to the operating company, which secures the assets from creditors and provides a way of taking vulnerable cash out of the operating company.

Further, the holding entity can loan money to the operating company to buy other business assets, but it should secure the collateral for the mortgage with liens that run to the holding company. Again, the assets are secured because the holding company is a priority lien holder, and vulnerable cash is taken out of the operating company through loan repayment (see our discussion on executing loans and liens).

When properly structured, the multiple-entity approach is successful because it seeks to maximize wealth within the entity with no liability issues, and minimize assets with the entity taking all the risks. And because the holding company itself, and not its owners, creates and funds the operating company, the holding company is liable for the operating company's debts, but only up to the amount it has invested, if it is in a business form that offers limited liability, such as the limited liability company (LLC).