Many business owners hear the advice that they should operate with both a holding company and an operating company. While it might sound like extra paperwork, this "two-LLC" structure is a foundational strategy in Texas asset protection, designed to shield valuable assets from the risks of daily business operations.
The Holding Co. vs. The Operating Co.
The core of this strategy is the separation of assets from services. In this model, you form two distinct entities:
- The Holding Company: This entity owns the high-value assets (real estate, intellectual property, or expensive equipment) but does not interact with the public.
- The Operating Company: This entity handles the day-to-day business, signs contracts, hires employees, and provides services.
The Operating Company typically leases the assets from the Holding Company. If a customer slips and falls or a lawsuit arises from a service error, the claimant sues the Operating Company. Because the Holding
Company is a separate legal entity that wasn't operating the business, its assets are much harder for a plaintiff's attorney to reach.
Real-World Examples: Land and Equipment
This structure is particularly common in industries with high physical risk. For instance, a landowner might have a Holding Company that owns several hundred acres of Texas brush. They then create an Operating Company to run hunting excursions. If an accident occurs during a hunt, the Operating Company is the target of the litigation, while the land remains protected within the Holding Company.
Similarly, in the oil and gas industry, a company might place expensive drilling machinery in a Holding Company and lease it to an Operating Company that performs the dangerous field work. Under Texas law, these LLCs are recognized as separate legal entities, providing the necessary liability shield to discourage plaintiffs from pursuing the valuable equipment.
Tax Advantages and Service Businesses
Beyond liability protection, using two LLCs can offer tax benefits. The Operating Company can often deduct lease payments made to the Holding Company as a business expense, which can help manage the overall tax burden. This is a strategy used frequently by restaurants that own their own real estate; one company owns the real estate while the other handles the high-risk food service operations.
However, this strategy only works if the business has separable assets. If you run a pure services business—such as a consulting firm with no significant equipment or real estate—creating a second LLC likely doesn't make sense.
To help maintain protection, it is advisable to respect the corporate veil by maintaining separate bank accounts and legitimate lease agreements, as Texas law may allow liability to spread where the companies aren't truly distinct in their operations.
All information provided on Silblawfirm.com (hereinafter "website") is provided for informational purposes only, and is not intended to be used for legal advice. Users of this website should not take any actions or refrain from taking any actions based upon content or information on this website. Users of this site should contact a licensed Texas attorney for a full and complete review of their legal issues.