How Do I Create a Holding and Operating LLC?

By Brette Sember, J.D.

How Do I Create a Holding and Operating LLC?

By Brette Sember, J.D.

Setting up your small business as an LLC offers you the advantage of limited liability protection, which means business creditors generally cannot reach your personal assets if they are collecting a debt against your LLC. If you're deeply concerned about protecting your assets, there is an additional step you can take: creating holding and operating LLCs.

Woman holding pen over paper in office

What Are Holding and Operating LLCs?

Holding and operating LLCs are two separate LLCs that work together. The holding LLC owns all of the business assets, which are then leased to the operating LLC to use for business purposes. The result is that the creditors of the operating LLC are not able to reach the assets of the holding LLC when they are collecting a debt.

How to Form Your Companies

To set up this business structure, you must form two separate LLCs within your state. Follow these steps:

  1. Choose separate names for the holding and operating LLCs.
  2. Create and file Articles of Organization for each LLC with the appropriate state agency.
  3. Select a registered agent for each LLC. (You can use the same one for both.)
  4. Pay the filing fee required by your state.
  5. Create an operating agreement for each LLC.
  6. Obtain necessary business licenses for each LLC.

Now that you've set up your company structures, you can begin protecting assets.

Asset Management

Remember that the point of this business structure is to shield the operating LLC from creditors. Because of this, you want to transfer all business assets into the holding LLC. To do this, you need to create an asset transfer agreement, which should include:

  • A statement that the assets are being transferred into the ownership of the holding LLC
  • Signatures of all the members of the holding LLC and owners of the business assets

The next step in protecting the assets is to create a lease agreement that will allow the operating LLC to use the assets from the holding LLC. This agreement should:

  • State that the operating LLC has the right to use the assets
  • Include the lease payments due from the operating LLC to the holding LLC
  • Be signed by all members of both LLCs

Once these steps have been taken, you're ready to begin running your business under the new structure, although there are some points that you should keep in mind.

Fulfill Your Obligations

Once you've set up both LLCs, it's important that you keep them separate. Run them as completely separate businesses. Make sure each LLC meets all state obligations when it comes to annual filing or tax fees as well as filing yearly reports with the state agency.

Each LLC should maintain separate accounting books. If you transfer funds from one LLC to another, you need to account for them. If you commingle funds or fail to keep the companies completely separate, this could allow creditors to "pierce the corporate veil" and access the assets of the holding company, as well as your personal assets, to satisfy debts of the operating LLC.
