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Holding Company and Operating Company

Article ID: 364
Last updated: 23 Nov, 2018
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By Jason Watson ()
Posted November 23, 2018

This is one of the most common situations where you own two entities that do business between themselves. For example, you are a typical poor accounting firm with the usual high maintenance clients, and you feel that everything would be better if you also owned your own office building. You would create an LLC as the holding company which owns the building, and another LLC (and probably taxed as an S Corp) for the operating company.

This allows for some excellent ownership separation. For example, if you and your father-in-law own the building, he doesn’t have a stake in your accounting firm, and vise-versa. You might also want to make one of your key employees a business partner in your operations, but he or she should not have a stake in the building. Chinese Wall.

This arrangement can also reduce self-employment taxes or payroll taxes since this conduit changes the color of money. Huh? Your accounting firm’s income is earned income, taxed both at the self-employment tax level (or payroll tax level) and the income tax level. However, you reduce this earned income by the amount of rental expense and that subsequent rental income on the other end is considered passive, and only taxed at the income tax level. Beauty. You must have a lease and the rent must be market rates.

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