Let’s face it: tax season can be a nightmare, especially if you’re juggling multiple companies. But what if I told you there’s a way to simplify your life, cut through the chaos, and keep more of your hard-earned money?
Many business owners, particularly franchisees, structure their operations as LLCs to shield themselves from liability. That’s smart. You might even have one LLC per store or venture. Naturally, you’d think each LLC needs its own tax return—but here’s the kicker: filing just one return might be a game-changer.
Imagine saving thousands of dollars each year, not to mention sparing yourself the headache of managing multiple filings. If that sounds too good to pass up, you’re in the right place. Let’s dive in and explore how consolidating your tax game can make all the difference!
Does This Apply to You? Let’s Find Out!
Do you own one or more single-member LLCs (SMLLCs)? Great news—if you’re the sole owner, you might already have the option to file everything on a single 1040 return. The IRS treats SMLLCs as “disregarded entities,” meaning your LLC’s results simply “pass through” to your personal income. No extra forms, no added stress. The same applies if you and your spouse jointly own LLCs in a community property state. So, if you’re already enjoying this simplified setup, you might not need what I’m about to share—but keep reading just in case (and leave a comment if it helps!).
Now, here’s where it gets interesting. If you own multiple SMLLCs and are thinking about electing S Corp status to save on self-employment taxes—and let’s face it, this is worth exploring—you’ll lose the ability to treat your LLCs as disregarded entities. Each one will then require its own tax return, which could mean extra time, cost, and paperwork.
This is where the strategy I’m about to introduce really shines. Ready to simplify your life and save money? Let’s dive in!
The Solution: a Holding Company
Tired of juggling separate tax returns for every business? It’s not just a time drain—it’s costing you money! Filing multiple returns can lead to skyrocketing prep costs and piles of paperwork, leaving you buried in administrative headaches.
Enter the hero of this story: the holding company. Think of it as your ultimate tax-time ally. By consolidating your businesses under one roof, you can file a single tax return while still enjoying all the perks of having individual LLCs. That means less stress, less expense, and more time to focus on what truly matters—growing your empire.
Picture a holding company as a container for your individual ventures. Like any other company, it’s officially registered with the state and needs annual updates. But here’s the catch: this company doesn’t necessarily “do” anything on its own. Its purpose is to combine the results of your other businesses and act as the single point of reporting for a consolidated tax return. Instead of juggling several tax filings, you could simplify things by submitting just one!
Here’s how it works: the holding company becomes the “parent,” while your other businesses are its “subsidiaries.” It’s a proven strategy, especially for franchise owners and real estate moguls managing multiple LLCs. By bringing everything under one umbrella, you can cut down on paperwork, reduce administrative costs, and still maintain individual liability protections for each subsidiary.
While this approach isn’t for everyone, it’s highly recommended by financial and legal experts for its simplicity and efficiency. So, why not explore whether a holding company could be the game-changer your business needs?
Steps to Form a Holding Company
- Create the Holding Company
- Choose a legal structure for your holding company, typically an LLC.
- File the necessary paperwork with your state to establish the LLC.
- If electing S Corp status for the holding company, do so by filing IRS Form 2553 within 75 days of formation.
- Transfer 100% ownership of the subsidiaries to the holding company by:
- Ensuring compliance with state-specific regulations for ownership changes.
- In Colorado, for example, this means filing an online amendment to the Articles of Organization or Operating Agreement with the Colorado Secretary of State to reflect the ownership change for a filing fee of $25.
- Create and sign a Transfer Agreement with the terms of the ownership transfer. This agreement should specify the assets being transferred, the parties involved, and any conditions of the transfer.
- Update Membership Interests for Multiple Member LLCs
- This could be relatively simple or it could be a deal breaker.
- For multiple member LLCs, this is simple if the ownership of each of the LLCs is the same as that of the parent holding company. For example, if a husband and wife both own 50% of each LLC and they both own 50% of the holding company, done.
- If the percentages differ between LLC, then grouping them into a holding company is more complicated. See the section on “Ownership Mixes” below.
- File QSub Elections
- For each subsidiary LLC, file IRS Form 8869 to elect Qualified Subchapter S Subsidiary (QSub) status.
- This one-time election treats the subsidiaries as disregarded entities for tax purposes, consolidating their financial activities under the holding company.
- Update beneficial ownership records by reporting the changes to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), as required under the Corporate Transparency Act. That is, if this is not done automatically by your state’s ownership update.
Ok, that does sound like a lot, but its likely much easier than it sounds for your circumstances and potentially a DIY project. Also, these steps are one-time, not an annual event.
Unlocking the Benefits of a Holding Company: Save Time, Money, and Stress
One single tax return instead of several. That’s the power of using a holding company for your businesses. By filing just one consolidated return (Form 1065 or 1120S), you could save thousands of dollars every year while cutting down on administrative chaos. Say goodbye to managing multiple sets of financials and tracking numerous payments or refunds—streamlined simplicity awaits.
Plus, if you’re currently making separate quarterly estimated tax payments for each LLC, a holding company changes the game. You’ll only need to calculate and pay taxes for the holding company, not for each subsidiary. It’s a time-saver and a stress-buster rolled into one. And the best part? You still maintain individual liability protection for every subsidiary.
Other Factors to Consider
Ownership Mixes
Is ownership consistent across your businesses? If you and your spouse each own 50% of every LLC, for instance, it’s a breeze. The holding company mirrors this structure—50/50 ownership—and you’re good to go.
But what if the ownership gets tricky? Picture this: Uncle Nick’s company joins the mix. Suddenly, things aren’t so straightforward. You’ll need to figure out ownership percentages for the holding company, which might involve valuations and negotiations. And here’s the kicker—if Uncle Nick’s business hits hard times, he still owns his share of the holding company, including the stakes in your thriving businesses.
While these challenges aren’t deal-breakers, it’s crucial to understand the risks before diving in.
With the right strategy, a holding company could be the key to simplifying your operations, reducing costs, and staying focused on what matters—growing your businesses.
Other
A few other things to consider:
- Relevant Authorities
- You may have regulatory authorities or licensing agencies that require notification of a change of ownership.
- Who Else Needs to Know?
- Your bank loan or lease agreement may require you to provide notification of a change in ownership.
Forming a holding company is a strategic move for entrepreneurs managing multiple LLCs to save money in tax preparations. By consolidating tax filings and streamlining operations, you can focus on growing your businesses with less paperwork. Whether you’re a franchise owner or a serial entrepreneur, this approach can save you time, money, and stress.
Shane Bohlender, MBA, CPA, provides bookkeeping from $199 per month and tax services including S Corps at CPAsity.com
