Establishing a Holding Company or Trust for Your Existing Company: A Strategic Approach

As a business owner, you may reach a point where considering the establishment of a holding company or trust for your existing company becomes a prudent strategic decision. This article aims to provide insights into the process of setting up a holding company or trust, highlighting their benefits, considerations, and steps involved. Understanding these concepts will enable you to make informed choices and maximize the potential of your business.

I. Understanding Holding Companies and Trusts

A holding company is an entity that controls and manages the assets and operations of other companies, known as subsidiaries. The primary purpose of a holding company is to create a structure that centralizes ownership, management, and control over various subsidiary entities. On the other hand, a trust is a legal arrangement where assets are transferred to a trustee who holds and manages them on behalf of beneficiaries.

II. Benefits of Establishing a Holding Company or Trust

  1. Asset Protection: A holding company or trust can shield your existing company’s assets from potential risks and liabilities. By separating ownership from operations, you can safeguard valuable assets while maintaining their accessibility for the benefit of your company.
  2. Tax Efficiency: Depending on your jurisdiction, a holding company structure may provide tax advantages, such as reduced tax rates on intercompany dividends, capital gains, or potential tax deferral strategies. Careful planning with tax professionals is crucial to optimize the tax benefits within legal frameworks.
  3. Succession Planning: Establishing a holding company or trust facilitates efficient succession planning. It allows for the seamless transfer of ownership and control of your business to the next generation or chosen individuals while minimizing potential disruptions.
  4. Diversification: By setting up a holding company, you can broaden your business interests and investments. It enables you to enter new markets, diversify revenue streams, and manage risk effectively through a portfolio of subsidiary companies.

III. Considerations before Setting Up a Holding Company or Trust

  1. Legal and Tax Advice: Consultation with experienced legal and tax professionals is paramount before establishing a holding company or trust. They can guide you through the intricacies of corporate law, tax implications, compliance requirements, and the suitability of these structures for your specific circumstances.
  2. Purpose and Structure: Determine the purpose of your holding company or trust. Assess whether you require a pure holding company to centralize ownership or a more complex structure involving various entities. Define the ownership and control relationships between the holding company, existing company, and any future subsidiaries.
  3. Jurisdiction and Regulations: Research the legal and regulatory frameworks governing holding companies and trusts in your desired jurisdiction. Consider factors such as political stability, tax laws, corporate governance practices, and privacy regulations when selecting the most suitable jurisdiction for your structure.
  4. Financial Implications: Analyze the financial implications of establishing a holding company or trust, including setup costs, ongoing maintenance expenses, potential tax savings, and the impact on your existing company’s financial statements. A comprehensive financial assessment will provide clarity regarding the economic feasibility of the structure.

IV. Steps Involved in Establishing a Holding Company or Trust

  1. Research and Planning: Conduct extensive research and seek professional advice to gain a thorough understanding of the legal, tax, and financial aspects of holding companies and trusts. Define your objectives, determine the structure, and select the appropriate jurisdiction.
  2. Legal and Tax Compliance: Engage legal and tax professionals to assist with drafting legal documents, including articles of incorporation, shareholder agreements, trust deeds, and other relevant agreements. Ensure compliance with all regulatory requirements, including registration and reporting obligations.
  3. Asset Transfer: Transfer ownership of your existing company’s assets to the holding company or trust as per legal and tax guidelines. Ensure the proper valuation of assets and follow established procedures for transfer to avoid any adverse consequences.
  4. Operational Integration: Once the holding company or trust is established, integrate the operations of your existing company and any subsidiary entities. Implement appropriate governance structures, such as boards of directors and management teams, to oversee the activities of each entity effectively.
  5. Ongoing Management and Compliance: Establish robust management and compliance mechanisms to ensure the smooth functioning of the holding company or trust. Adhere to reporting obligations, maintain accurate records, and comply with legal, tax, and regulatory requirements in all relevant jurisdictions.


Establishing a holding company or trust for your existing company can be a strategic move to enhance asset protection, optimize tax efficiency, enable seamless succession planning, and promote diversification. However, careful planning, thorough research, and professional guidance are crucial throughout the process to ensure compliance with legal and regulatory requirements. By leveraging the advantages of holding companies and trusts, you can create a robust corporate structure that sets the stage for future growth and success.

Video Transcript

“I have an existing LLC. I am interested in properly converting that to a holding company if possible, or creating a new holding company and then putting everything I have under a trust. Can you help me with setting these up properly, or can you recommend someone that can do both for me?”

All right. There are kind of two parts to this. The second part is about finding an attorney who can do this. And generally, you are going to want to look for an attorney who has experience in setting up trusts and businesses. Often business attorneys don’t deal with trusts because trusts are a vehicle typically used by estate planning attorneys and often estate planning attorneys don’t work with businesses like LLCs and corporations, at least the new ones don’t. So what you are looking for is somebody who has experience with both, or you might use an estate planning attorney who works closely with a business attorney and they can quickly talk and figure out how to do this. It is important that you have an attorney in your state put this together so you are welcome to contact my office. My email address is [email protected] and we can try to help point you in the right direction. But unless you are in Minnesota, I wouldn’t typically be the right attorney for this.

If You Have an Existing Company, How Should You Set Up a Holding Company or Trust for It, and What Are the Considerations That Are Involved?

Well, let’s talk through this. If you have an existing LLC, that means that LLC has activity and usually, when there is activity, it means there is a possibility of getting sued. What do I mean by activity? For example, an LLC might have contracts. And it might breach those contracts at some point. An LLC might have employees, and it might get sued by employees for improper payment of wages, or discrimination or some other employment law. The LLC uses a brand and it is possible that LLC could get sued for trademark infringement of somebody else’s brand because your brand is confusingly similar to someone else’s brand. So whenever you have an ongoing LLC, it is not a good idea to use that LLC as a holding company. What you typically do is start a fresh LLC. By the way, it could be an S Corp as well, but usually holding companies are LLCs. And that becomes the holding company. And then, you transfer your ownership of the operating LLC into the holding company. So, instead of you being the owner or shareholder, the holding company becomes the owner or shareholder of that LLC that you have been operating for a while. There is one other way to structure this and that is for you to own the active or operating LLC, and you also own a holding company.

What Is the Purpose of a Holding Company?

Now, for those who are unfamiliar with holding companies, you might be asking, “Why would someone set up a holding company? What is the purpose behind that?” A holding company’s purpose is to hold assets so that if the operating company gets sued, it may go down in flames, but the assets are in a separate company where they are held and protected.

I will give an example, a kind of real-life example. Imagine that you have a fitness gym. People go lift weights, they have exercise classes, etc. And as part of having that gym, you need to buy fitness equipment. And let’s assume that that equipment is worth $200,000. If you have that in a single LLC, where then somebody sues you for getting hurt at the gym, that lawsuit, if you lose it, they can end up getting all the equipment. So what gyms often do is they will have all the equipment owned by a holding company. And then that equipment is leased to the operating company. So let’s say you had a gym called Fire Gym, and then you have a separate holding company called Green Acre Holding Company. Fire Gym would sell memberships, Fire Gym would hire the employees, and Fire Gym is on the branding, but Fire Gym owns very little. Fire Gym might own some computers, some t-shirts, and some other branded stuff, but the owner’s goal is to keep the assets in Fire Gym very low. Now, you might say, “Well, what about the money? Because all the members are paying the money.” That is absolutely true. Members are paying money into the gym. And so as that money accumulates, you have a couple of options. Option one, pay a profit distribution to the owner. That means the money is paid out essentially as dividends on a stock. It is essentially a profit distribution that is paid out to the owner. And then it is no longer available to somebody who sues you in a lawsuit. Another common practice is for the company to be paying lease payments for the equipment that is being leased from Green Acre Holding Company. Because remember, Green Acre Holding Company owns all the equipment. It is made that equipment available to Fire Gym, and the gym now has to pay lease payments for that. And so that is another way to move money properly out of an operating LLC into a holding company.

The other common way to move money into a holding company is to have a management company, and typically, you won’t have the holding company actually do the management. You will have a separate management company managing all of this, and money can be paid out of the gym to the management company. So there are a few different ways to move profits if you will, or proceeds from the gym and all the membership fees to one of these other entities that protects that money.

So to recap here, you set up a fresh LLC as a holding company. You need to then properly move the assets to it. Now I say properly, that means you actually have to have a contract for the sale of those assets. And there needs to be a lease agreement between the two. One of the problems with setting up this sort of structure is the legal fees. You have to pay an attorney to draft all the contracts because if you don’t have proper contracts between companies, courts have said you are not following the formalities of two separate companies. You are not treating it like two real companies. And because you are not treating it as separate companies, a court won’t either. In other words, if you are not keeping separate bank accounts for the holding company and the operating company and you are not having proper contracts, and you are not properly tracking who owns what, then a court will pierce the corporate veil, which essentially means allow the liabilities or debts or obligations of the operating company to transfer over to the holding company. And now all of your assets in the holding company are exposed.

How to Use a Trust to Protect Your Assets

There are revocable trusts and irrevocable trusts. And those are two distinct categories of trust. A revocable trust is used for your estate planning. It means that you can revoke it or change it at any time. An irrevocable trust cannot be revoked by you, it cannot be changed by you, it cannot be modified by you. And an irrevocable trust allows you to have some separation between you and your assets. Why would anyone ever do an irrevocable trust? Because they can’t change it. Here is why. Because if you get sued, the court or the creditor can step into your shoes and make changes to a trust that is revocable but not changes to a trust that is irrevocable. And so, an irrevocable trust can be a valuable tool for protecting your assets from your creditors. A revocable trust can protect assets from your beneficiary’s creditors but not your own. So we are using a lot of legal terms here. Let’s talk through a little example to try to make this more simple.

Imagine that you set up a revocable trust and you put your home into that revocable trust. If you get sued, and you lose and the judge says you owe a million dollars (and let’s say your home is worth a million dollars, just for simple math here) as a general rule, the equity in that home or at least a portion of it is exposed to the creditor. And you know what, home isn’t a great example because a lot of states have exemption laws that exempt a home residence. So let’s say you have a cabin because that is an even cleaner example. You own a million-dollar cabin, the creditor can force a sale of that cabin because the creditor won a million-dollar judgment against you. The creditor has a right to go after your assets, and if you don’t freely pay that million dollars, they can go after assets that you own like your cabin. And that is true even if that cabin is in a revocable trust because you have the right to pull assets out of that trust, revoke the trust or change the trust.

But if you have an irrevocable trust, that is a trust that you cannot change, and you have put your cabin into that, the creditor is limited in going after that. The creditor and the judge can only order you to do what you have a right to do under the trust documents. So for example, let’s say you set up an irrevocable trust, and under this trust, you cannot change the trust, and let’s say you are not the trustee so you don’t have the right to manage the trust. Let’s say it is your daughter and let’s say you are not a beneficiary of the trust either. The beneficiaries are your daughter and son. In that case, you have given up the cabin to the trust, the daughter manages the trust. You don’t. The daughter and son benefit from the trust. You don’t. If somebody steps into your shoes, there is no way to pull that cabin back out. And that is why a creditor who may have the right to everything you own, does not have a right to something that is in that trust because you have no benefits coming out of that trust. That at a really high level is how a trust can be used to protect assets from creditors.

Now you can’t wait until you get sued and just put your cabin in a trust to try to protect it. That can be considered a fraudulent conveyance. And there is a fraudulent conveyance act that prevents that sort of transaction just to prevent creditors from getting something. But if you are setting this up in advance of the threat of a lawsuit, generally, that transaction will not be undone. The assets will not be disgorged by a court, and that transaction will be respected and preserved, which means the creditor can only get from you what you have. You don’t have that cabin anymore.


As you can see, this whole concept of using LLCs and trusts and holding companies to minimize risk; it is complex. I don’t recommend people do it on their own because you are too close to the situation. There is a lot of value in having a third party analyze your circumstances who is a little bit removed from the situation and not emotional about it. So if you are thinking about using a trust or a holding company to minimize your risk, I strongly recommend that you consult with an attorney in your state who has experience using trusts and holding companies and designing what that plan looks like. How much should that cost? Usually, just pay for an hour of time. So you don’t need to pay thousands of dollars to get a design put together. You can typically pay a good attorney for one hour of time and that attorney can ask questions about your circumstances, figure out your concerns, your risks, and your needs, and then put together an outline or a plan of what that would look like. And then you can decide whether to pay that attorney to implement the plan or not. Typically, you are going to spend a few thousand dollars setting up any entities and trust that is needed. When I say a few thousand dollars, I am guessing it is going to be somewhere between three and $10,000, depending on how many things you need and what the relationship is between the different entities and trusts.


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