The legal structure of a business entity determines its ownership, control and earnings distribution. The limited liability company and holding company, sometimes referred to as a holding group due to its controlling interest in one or more separate legal entities, are two such legal structures. These legal structures are unique in terms of the statutes that govern their ownership and control, as well as the parameters used to influence the entities' operation.
Limited Liability Company
A limited liability company, or LLC, is a legal entity that combines elements of both a partnership and a corporation, with the owners of the LLC known as members. An operating agreement establishes the structure of the LLC and addresses the interests of its members, the distribution of profits and losses, and the contributions of its members to the entity. An LLC offers the limited liability protection of a corporation, in addition to the ability to pass through profits or losses to the members.
Profits and losses pass through the LLC to its members. As a result, the IRS considers the entity's earnings as the personal income of the members, and, as such, only taxes this income one time. The LLC also limits the exposure of its members to liability for debts incurred by the entity or the acts of its members. The limitation of each member's liability relates to the member's personal investment in the company or to an amount specified in the entity's operating agreement. In addition, the records that an LLC must maintain and the reports that it must file are less burdensome than some other legal structures are.
A holding company, or holding group, is a legal entity that has assumed a controlling interest in one or more separate legal entities in order to determine the policies and management of the subsidiaries in which it invests. As a result, any creditor or liability claim against one subsidiary is a claim against this one subsidiary rather than a claim against the parent company and its remaining subsidiaries.
Holding Group Advantages
The advantages of a holding company, or holding group, include the ability to leverage a small investment in a subsidiary in order to gain control of the policies of the subsidiary while allowing the operations of the group to remain decentralized. The holding company may financially benefit from risks assumed by its subsidiaries, while limiting the group's liability that may result from the assumption of those risks. A holding company may also benefit more than other organizations in the access of the capital necessary to conduct large-scale operations. In addition, the access to borrowed funds and the ability to interrelate a number of individual holding companies enables the management of the holding group to acquire a large volume of assets with a relatively small investment.
- "Dictionary of Finance and Investment Terms, 8th edition"; John Downes, et al.; 2010
- "Encyclopedia of American History, 6th edition"; ed. by Richard B. Morris, et al.; 1982
- "Mergers, Acquisitions, and Other Restructuring Activities, 5th edition"; Donald M. DePamphilis; 2010