Member question:

"My company has a core business with some accessory businesses — some that relate to the core business and some that don't. Do you have some advice about holding companies, the legal side of setting one up, structure, and the potential benefits or drawbacks to creating a holding company?"

Expert reply by Drew D. Larson, BrownWinick:

Holding companies can serve a variety of purposes for family businesses, though the complexity and cost of another entity should be balanced with the benefits. In general, benefits from a holding company can include: 

What is a Holding Company?

A holding company is an entity that owns equity in one or more operating businesses but generally does not have day-to-day operations of its own. Instead, it sits above the operating companies, holding their equity and providing consolidated management and control through the holding company. 

Uses for a Holding Company

There are a few different reasons that a family may want to consider setting up a holding company. 

• Separation of Liabilities. A primary benefit of a holding company and separate operating companies is to segregate the liabilities of businesses with different risk profiles, protecting them from each other. For example, a family that owns a chemical manufacturer may want to separate that liability from a trucking company that they own or from real estate investments owned by the family.

• Consolidated Governance and Succession Planning. Having a single holding company that holds the ownership of the operating companies allows the family to set consolidated rules and expectations about family governance (at the holding company level) and separate that from business governance (at the company level). It also ensures that the family’s voting power is exercised in a consolidated manner at the operating company level.

• Unified Estate Planning. By consolidating various investments through the holding company, family members can simplify gifting and estate planning by allowing transfers of just the holding company instead of each individual business or investment. 

The primary downsides of a holding company are the administrative overhead of another entity, another tax return, and the associated costs with another entity. 

Setting Up a Holding Company

The mechanics of setting up a holding company are usually pretty straightforward, with family members contributing ownership of the operating companies to a new holding company. These transfers are generally tax-free. 

The more challenging part is ensuring that all family members are on the same page about how they want to set up the holding company / family governance, and how to implement the family’s values and goals in the various governance documents. This is often interdisciplinary work, with multiple advisors assisting the family as they work through the key issues of family governance. 

For this reason, the costs for setting up the holding company can vary quite a bit. The key factors are the number or complexity of the assets being contributed to the holding company, the alignment of the family with respect to governance and management, and the number of family members that need to be coordinated. With that said, the process of setting up a holding company often serves as the framework that families use to discuss key issues and look ahead to future generations.

BrownWinick is a Founding Partner of the UNI Family Business Center.

About the expert

Drew D. Larson

Member, BrownWinick Law Firm

When people ask what I want to be known for, it is for being a lawyer that my clients actually want to call - someone who shows a deep curiosity and interest in their lives and business, who understands complex ideas and how they fit into the bigger picture, who provides support and peace of mind in times of stress and adversity, and who adds real value for others who rely on my judgment. That is a big dream, but one I work to achieve every day at BrownWinick.

My Approach
As a business lawyer, I believe that my fundamental role is to help you capitalize on opportunities that come your way and to identify and solve the problems that you face every day. I primarily serve as a general counsel role for clients. From businesses raising millions of dollars of financing, setting up an ESOP, or a business owner looking to do transition and estate planning, you need more than just someone to read and analyze the law: you need someone who can explain how the law impacts you and your goals. Having owned a family business, I know how important it is to find the right balance between formality and practicality when it comes to your legal needs. While every problem is different, the approach remains the same: understand the current situation, understand your goals, and chart the most effective path between them.

More About Me
In 2008, I received a J.D., with distinction, from the University of Iowa and was admitted to the Iowa bar in 2009. I graduated, magna cum laude, in 2006 from Iowa State University with a B.S. in Accounting and Political Science. I have been selected as a "Band 4" attorney in Corporate/M&A Law and a “Band 2” attorney in High Net Worth law by Chambers and Partners. I have also been selected for inclusion in Best Lawyers® in America in the area of Closely Held Companies and Family Business Law.

I am also involved in a number of industry organizations, being an active member of the Association of Business and Industry (including two terms on the board of directors), the ESOP Association (National Advisory Committee on Legislative and Regulatory Issues and Executive Committee Iowa/Nebraska Chapter), the Technology Association of Iowa, Leading Age Iowa, and the Iowa Healthcare Association.

I have also served in a number of roles in the community. I currently serve as a board member of Trivium Life Services, a community services and behavioral health provider based in Council Bluffs. Previously, I served as President of the Board of Directors for Bethany Life Communities, a non-profit long-term care community in Story City, Iowa, and as President of the Board of Directors for Good Neighbor Emergency Assistance of Story County, a non-profit providing emergency food, housing, and utility assistance to our neighbors in need.