California Holding Company Structures: Parent/Subsidiary Corporations for Real Estate and Operating Businesses
If you own multiple California businesses or hold both operating companies and real estate investments, you’ve probably heard that a holding company structure might make sense for liability protection, tax planning, or operational flexibility. The theory sounds straightforward: create a parent company that owns subsidiary entities, segregating different business lines and real estate holdings into separate legal containers while maintaining centralized control at the top.
The reality in California is more complex. The California Franchise Tax Board doesn’t simply let you park a Delaware parent company above your California operations and call the parent’s income “out of state.” The Board of Equalization doesn’t ignore changes in ownership of real estate holding entities just because those changes happen at the parent level. And choosing whether your holding company should be a California corporation, a foreign corporation qualified to do business here, or an LLC taxed as a partnership creates materially different tax consequences that can cost you tens of thousands of dollars annually.
This guide examines when holding structures actually make sense in California, how to choose between a domestic California parent versus an out-of-state parent, why the Franchise Tax Board’s unitary business rules often pull your carefully structured entities back into California’s tax net, and what property tax reassessment traps await real estate holding companies that don’t understand the Board of Equalization’s Legal Entity Ownership Program.
California holding company structures can provide meaningful liability protection, operational flexibility, and tax planning opportunities when designed correctly for your specific business needs. But they’re not one-size-fits-all solutions, and the California-specific tax and property tax consequences often surprise business owners who assumed that forming a Delaware parent would automatically pull income outside California’s reach. If you’re considering a holding structure for your California business or real estate holdings, consult with a California attorney who understands both the corporate law mechanics and the FTB and BOE rules that govern how these structures actually get taxed. Schedule a consultation to discuss whether a holding company structure makes sense for your California business.
This article provides general information about California holding company structures. Tax and corporate law change frequently, and this information should not be relied upon as legal or tax advice for your specific situation. Always consult with qualified legal and tax professionals before forming business entities or restructuring existing businesses.
What Is a Holding Company and Why Use One?
A holding company is simply an entity that exists primarily to own interests in other entities rather than to conduct operating business itself. The parent holding company owns 100% of the stock in subsidiary corporations or 100% of the membership interests in subsidiary LLCs. The subsidiaries conduct the actual business operations, own the real estate, employ the workers, and generate the revenue. The classic use cases for holding structures in California include entrepreneurs who own multiple lines of business and want to segregate liability between them, real estate investors who hold rental properties in separate entities while maintaining common ownership at the parent level, and private equity or family office structures where a top-level entity controls a portfolio of operating companies and real estate investments. The theoretical advantages are straightforward. First, liability segregation: if one subsidiary gets sued, the plaintiff can’t easily reach up to the parent or across to other subsidiaries, assuming you maintain proper corporate formalities. Second, operational efficiency: centralized ownership at the parent level means you don’t need multiple sets of equity holders signing off on decisions at each subsidiary. Third, estate planning and exit flexibility: you can transfer interests in the parent rather than unwinding each subsidiary separately when you sell the business or pass it to heirs. But these advantages exist anywhere in the United States. What makes California different is that both the tax and property tax consequences of holding structures are harsher here than in most states, and the Franchise Tax Board’s treatment of parent-subsidiary groups creates outcomes that often surprise business owners who assumed that simply incorporating a parent entity in Delaware would keep income “offshore” from California taxation.The Core Question: California Holding Corporation or Out-of-State Parent?
When you decide to create a holding structure, your first fork in the road is whether the parent entity should be formed in California or formed in another state. Most business owners instinctively lean toward Delaware, Nevada, or Wyoming for the parent on the theory that forming the parent outside California keeps it outside California’s tax jurisdiction. This instinct is sometimes correct and sometimes wrong, depending on what the parent actually does and how the Franchise Tax Board views the relationship between the parent and its California subsidiaries.Forming a Domestic California Holding Corporation
A California parent corporation is formed by filing Articles of Incorporation with the Secretary of State using Form ARTS-GS. The filing fee is $100, and if you submit it in person at a Secretary of State field office, you pay an additional $15 counter fee. The Articles require you to list the corporation’s name, its agent for service of process (either an individual with a California street address or a registered corporate agent), and the number of authorized shares. You can use the standard purpose clause stating the corporation is formed for “any lawful business” or specify a more limited purpose if you have a particular reason to do so. Once the Articles are filed and your corporation exists, several automatic consequences follow. The corporation must file a Statement of Information annually using Form SI-550, due in the month of the corporation’s initial registration and then every year thereafter in that same month. The filing fee is currently $25. This is distinct from LLCs and nonprofit corporations, which only file Statements of Information every two years. More significantly, every California corporation doing business in California owes the Franchise Tax Board a minimum annual franchise tax of $800. This is true even if the corporation has zero income. For a holding corporation that generates no revenue directly and simply owns subsidiary stock, you’re still paying $800 annually to the Franchise Tax Board as long as the corporation is registered and doing business in California. The $800 minimum tax is due by the 15th day of the 4th month of the corporation’s first taxable year and annually thereafter. The advantages of forming the holding corporation in California are primarily about clarity and simplicity. If your business operations, management team, board meetings, and principal office are all in California anyway, forming the parent here aligns your legal structure with the economic reality. You avoid any ambiguity about whether the parent is “doing business” in California or whether it should have qualified as a foreign corporation. The Secretary of State and Franchise Tax Board view the parent as unambiguously subject to California jurisdiction, which eliminates certain compliance risks but also means you’re locked into California’s regulatory and tax framework. The disadvantages are cost and tax exposure. You’re guaranteed the $800 annual minimum tax. If the parent corporation generates any California-source income beyond simply holding subsidiary stock—for example, if it licenses intellectual property to its subsidiaries, charges management fees, or conducts any other active business—that income is taxed at California’s corporate income tax rate of 8.84% on the net income attributable to California. And if the parent and its subsidiaries are viewed as a unitary business, the Franchise Tax Board will require combined reporting and apportion the entire group’s income using California’s single-sales-factor formula, which can pull a larger portion of the combined income into California’s tax base than you might expect.Out-of-State Parent with California Subsidiaries
The alternative is to form the parent entity in Delaware, Nevada, Wyoming, or another business-friendly state, leaving the California subsidiaries as separate entities qualified or registered here. Delaware is the most common choice for corporate parents because of its well-developed corporate law, Chancery Court precedent, and investor familiarity. LLCs are often formed in Delaware or Wyoming for their flexibility and minimal annual fees. The perceived advantage is that an out-of-state parent avoids California’s $800 minimum tax and potentially avoids California taxation altogether if it has no nexus or presence in California beyond merely holding subsidiary stock. California Corporations Code Section 2105 requires a foreign corporation to obtain a certificate of qualification before transacting intrastate business in California. If the parent corporation truly does nothing in California—its board meets in Delaware, its officers are based outside California, it has no California property or payroll, and it merely holds stock in subsidiaries that themselves are separately registered or qualified in California—then the parent arguably is not transacting intrastate business in California and does not need to qualify under Section 2105. Similarly, Revenue and Taxation Code Section 23101 defines “doing business” in California for franchise tax purposes. A corporation is doing business if it actively engages in any transaction for financial or pecuniary gain in California or meets certain factor-presence thresholds. For 2024, those thresholds are: California sales exceeding $711,538 or 25% of total sales (whichever is less); California real and tangible personal property exceeding $71,154 or 25% of total property (whichever is less); or California payroll exceeding $71,154 or 25% of total compensation (whichever is less). These thresholds are adjusted annually for inflation. If your Delaware parent corporation has no California property, no California payroll, and no direct California sales, it may not meet the factor-presence threshold for “doing business” and therefore may not owe California franchise tax. This sounds ideal. You form a Delaware parent, it owns 100% of the stock in your California operating subsidiary and California real estate LLCs, and the parent itself isn’t subject to California tax because it has no California presence beyond passive stock ownership. The problem is that this analysis ignores the Franchise Tax Board’s unitary business doctrine and combined reporting rules. Even if the parent corporation itself has no California nexus, if the parent and its subsidiaries are engaged in a unitary business, California requires the parent to file a combined report that includes the income of all members of the unitary group and apportions that combined income using California’s apportionment formula. This can pull income that you thought was “in” Delaware or another state back into California’s tax base because California apportions based on where the sales, property, and payroll of the entire unitary group are located. Whether a parent and its subsidiaries are unitary depends on whether they constitute a single trade or business with functional integration, centralized management, and economies of scale. A passive holding company that merely collects dividends from subsidiaries and does nothing else is less likely to be unitary. But a parent that actively manages its subsidiaries, provides shared services, licenses intellectual property across the group, or otherwise integrates operations with its subsidiaries will likely be viewed as part of a unitary business. This means that forming a Delaware parent doesn’t automatically shield income from California taxation if the FTB concludes the parent and California subsidiaries are unitary. You still benefit from avoiding the qualification requirement under Section 2105 if the parent truly doesn’t transact business in California, but you may end up filing combined reports and paying California tax on the apportioned share of the group’s income anyway.California Tax Consequences: Nexus, Apportionment, and Factor-Presence Thresholds
Understanding how California taxes holding companies requires distinguishing between three separate concepts: whether the parent entity is “doing business” in California for franchise tax purposes, whether the parent must qualify as a foreign corporation under the Corporations Code, and whether the parent and subsidiaries are part of a unitary business requiring combined reporting. The “doing business” analysis under Revenue and Taxation Code Section 23101 is what determines whether an entity owes California franchise tax. The statute defines doing business as actively engaging in any transaction for financial or pecuniary gain or profit in California. The courts have historically applied this broadly to capture most commercial activity with a California nexus. But in addition to the general standard, Section 23101(b) creates bright-line factor-presence thresholds that automatically trigger doing business status if any one threshold is exceeded. For taxable years beginning in 2024, a corporation is doing business in California if: its California sales exceed $711,538 or 25% of total sales, whichever is less; or its California real and tangible personal property exceeds $71,154 or 25% of total property, whichever is less; or its California payroll exceeds $71,154 or 25% of total compensation, whichever is less. These dollar amounts are indexed annually, so you need to check the FTB’s current-year guidance to see the exact thresholds for your filing year. If your out-of-state parent corporation has zero California sales, zero California property, and zero California payroll, it does not meet any of the factor-presence thresholds. If it also is not actively engaging in transactions in California—for example, it doesn’t license IP to California customers, doesn’t manage California operations directly, and doesn’t have officers or board meetings here—then it arguably is not doing business in California under Section 23101. But this doesn’t end the analysis. Even if the parent itself is not doing business, California’s combined reporting rules may still pull it into California’s tax net through its relationship with subsidiaries that are doing business here.The Unitary Business Problem and Combined Reporting
California follows the unitary business principle for corporate income taxation. If two or more corporations are engaged in a single unitary business, California requires them to file a combined report that includes the business income of all members of the unitary group, regardless of whether each member individually is doing business in California. The combined business income is then apportioned to California based on the group’s combined sales, property, and payroll factors. This is fundamentally different from the federal consolidated return regime. Federal consolidated returns are elective and based on an affiliated group owning 80% or more of the voting stock. California combined reporting is mandatory when the unitary relationship exists and is based on functional and economic integration, not just ownership. Whether a parent holding company and its subsidiaries are unitary depends on the three-factor test derived from case law and codified in California Code of Regulations, Title 18, Sections 25106.5 through 25106.5-10: unity of ownership, unity of operation, and unity of use. Unity of ownership exists when there is common control, typically through stock ownership. Unity of operation exists when centralized management, functional integration, and economies of scale are present. Unity of use exists when the activities constitute steps in a vertically integrated business or are part of a single trade or business. FTB Legal Ruling 95-7 addresses intangible holding companies and provides guidance on when such companies are unitary with their operating subsidiaries. A pure passive holding company that merely holds stock, collects dividends, and has no active involvement in subsidiary operations is less likely to be unitary. But if the holding company actively manages subsidiaries, provides financing, licenses IP, shares officers and directors, or otherwise integrates with subsidiary operations, the FTB will likely view the structure as unitary. Legal Ruling 95-8 addresses the characterization of income from intangibles as business income versus nonbusiness income. If dividends, interest, or capital gains from subsidiary stock are part of the holding company’s unitary business income, that income is subject to apportionment. If they are nonbusiness income, they may be allocated directly to the state of commercial domicile or based on other allocation rules. For most parent-subsidiary groups where the parent actively manages the subsidiaries or provides shared services, the FTB will treat the structure as unitary. This means California requires a combined report using Form 100W. The combined report includes the income of all unitary members, apportions that combined income using the group’s combined sales factor under California’s single-sales-factor formula, and assigns California tax based on the apportioned share. California’s single-sales-factor apportionment formula means that 100% of business income is apportioned based on the ratio of California sales to total sales. For purposes of sales other than sales of tangible personal property, California uses market-based sourcing: sales are assigned to California if the benefit of the service or intangible is received in California. This includes licensing income, management fees, and other receipts from intangibles. The practical consequence is that forming a Delaware parent above your California operating company does not automatically remove income from California’s reach. If the parent receives management fees from the California subsidiary or licenses IP to the subsidiary, those receipts are likely assigned to California under market-based sourcing because the benefit is received here. And if the parent and subsidiary are unitary, the combined reporting and apportionment rules may assign a significant portion of the parent’s income to California even if the parent itself has no direct California presence. This doesn’t mean out-of-state parents are worthless for tax planning. It means you need to structure them carefully to genuinely be non-unitary, passive holding entities with no active management role and no functional integration with California operations. That’s difficult to achieve in practice if you’re the same person owning and running both the parent and the subs.Real Estate Property Tax Traps: LEOP and Change in Control
For holding companies that own California real estate, either directly or through subsidiary LLCs or partnerships, the single biggest trap is California’s property tax reassessment rules. Proposition 13 limits property tax increases to 2% annually based on the original assessed value until a change in ownership occurs. When a change in ownership happens, the property is reassessed at current market value, potentially causing a massive increase in annual property taxes. Revenue and Taxation Code Section 64(c) treats a change in control of a legal entity that owns real property as a change in ownership of that real property. A change in control occurs when more than 50% of the ownership interests in the entity transfer. For corporations, ownership interests are voting stock. For LLCs and partnerships, ownership interests are interests in capital and profits. The Board of Equalization administers the Legal Entity Ownership Program (LEOP) to track changes in control of entities owning California real estate. If your holding company structure involves parent entities owning subsidiary LLCs that hold real property, any transaction that results in more than 50% of the parent’s ownership changing hands can trigger reassessment of all California real property owned by the subsidiaries, even though the subsidiaries’ direct ownership of the property hasn’t changed. For example, suppose your Delaware holding company owns 100% of the membership interests in three California LLCs, each of which owns a separate apartment building. You sell 60% of the stock in the Delaware holding company to a new investor. This is a change in control of the Delaware parent under Section 64(c) because more than 50% of the ownership interests changed. Because the Delaware parent owns the California LLCs, and the California LLCs own real property, the BOE will view this as a change in ownership of the real property under Section 64(c)(1), triggering reassessment of all three apartment buildings. The reporting requirement applies even if the change in control is ultimately excluded from reassessment. Within 90 days of a change in control or change in ownership of a legal entity holding California real property, the entity must file Form BOE-100-B (Statement of Change in Control and Ownership of Legal Entities) with the county assessor. Failure to file triggers a 10% penalty on either the taxes on the new base year value (if reassessed) or 10% of the current year’s taxes if no reassessment occurs. This penalty applies even if an exclusion from reassessment is available; the reporting obligation still exists. The LEOP rules create a hidden trap for holding structures because many business owners don’t realize that transactions at the parent level trigger reporting and potential reassessment at the subsidiary property level. If you’re restructuring ownership, bringing in new investors, or selling a portion of your holding company, you need to model the property tax consequences before signing anything. There are exclusions from reassessment for certain transfers, including transfers between original co-owners, certain proportional transfers, and transfers involving legal entity reorganizations that don’t result in a change in beneficial ownership. But these exclusions are narrowly construed, and you need to qualify specifically under the applicable exclusion provision to avoid reassessment. The BOE does not grant equitable relief or overlook technical failures to comply with the exclusion requirements. For real estate holding companies, this often argues in favor of using LLC structures rather than corporate structures at both the parent and subsidiary levels, because LLC interests can be gifted, transferred to trusts, or restructured with more flexibility under the reassessment exclusion rules than corporate stock in certain circumstances. But the exclusion analysis is fact-specific and depends on the nature of the transfer, the identity of the transferor and transferee, and compliance with all technical requirements.Corporation vs LLC as the Holding Vehicle: Tax and Practical Considerations
When deciding whether to use a corporation or an LLC as your holding entity, the tax consequences differ significantly depending on whether you’re holding operating businesses or real estate, and whether you’re planning an exit or intergenerational wealth transfer.Corporate Holding Companies
A C-corporation holding company is taxed as a separate entity. If the parent corporation earns income directly—from management fees, licensing income, or interest on loans to subsidiaries—that income is taxed at the corporate level at California’s 8.84% rate plus federal corporate tax. If the parent receives dividends from its wholly-owned corporate subsidiaries, those dividends may be eligible for the dividends-received deduction (generally 100% for dividends from 80%-or-more-owned subsidiaries at the federal level; California follows this with modifications). This avoids double taxation of operating income at the subsidiary level and again at the parent level when dividends are paid up to the parent. But when the parent corporation eventually distributes cash to its shareholders, that distribution is taxed again at the shareholder level as a dividend. And if you sell the stock in the parent corporation, the shareholders pay capital gains tax on the gain (long-term capital gains rate if held more than one year). This double-tax structure is the classic C-corp disadvantage for small businesses and closely held companies. Corporate holding structures make sense when the goal is to use corporate stock as the equity currency for investors or employees, when you’re planning to eventually go public or sell to a strategic acquirer that wants to buy stock rather than assets, or when you want the flexibility to retain earnings at the corporate level and reinvest them without triggering shareholder-level tax. Corporate structures also work well when the holding company will be actively involved in treasury functions, centralized services, or licensing IP to subsidiaries, because these activities generate income that benefits from the lower federal corporate tax rate after the Tax Cuts and Jobs Act. Corporate structures are less attractive for real estate holding companies because of the double taxation on appreciation. If the parent corporation sells appreciated real estate or liquidates appreciated real estate held by a subsidiary, the gain is taxed at the corporate level. Then when the cash is distributed to shareholders, it’s taxed again at the shareholder level. This makes corporate holding structures uneconomical for real estate unless there’s a specific reason to use them, such as qualifying for installment sale treatment or taking advantage of like-kind exchange rules that are no longer available for personal property but remain available for real property.LLC Holding Companies
An LLC holding company taxed as a partnership or disregarded entity avoids the corporate-level tax. If the LLC is a single-member LLC owned by an individual, it’s disregarded for federal and California tax purposes, meaning all income and deductions flow through directly to the owner’s individual return. If the LLC has multiple members and is taxed as a partnership, income and deductions are allocated to members according to the operating agreement and reported on the members’ returns. For California purposes, an LLC doing business in or organized in California owes the $800 annual minimum tax even if it’s disregarded or taxed as a partnership for income tax purposes. The minimum tax is due by the 15th day of the 4th month of the LLC’s first taxable year and annually thereafter. In addition, if the LLC’s California-source gross receipts exceed $250,000, it owes an additional annual fee ranging from $900 (for receipts of $250,000 to $499,999) up to $11,790 (for receipts of $5 million or more). This gross receipts fee applies to LLCs, limited partnerships, and LLPs, but not to corporations. LLC holding structures work well for real estate because appreciated real property can be sold without triggering entity-level tax. The gain flows through to the members and is taxed once at the individual level. Similarly, if the holding LLC distributes appreciated property to members, the distribution may be tax-free at the entity level under Section 731, with the members taking a carryover basis in the distributed property. LLC holding structures also provide flexibility for estate planning and intergenerational transfers. You can gift LLC membership interests to family members or trusts, discount the value of minority interests for gift and estate tax purposes, and structure distributions and allocations of income and loss in ways that are difficult or impossible with corporate stock. The disadvantages of LLC holding structures are less access to institutional capital (most venture capital and private equity funds prefer corporate stock because of their own tax issues with unrelated business taxable income), more complex tax reporting (partnerships file Form 1065 and issue K-1s to members, which can be burdensome for large groups), and California’s LLC gross receipts fee, which can become expensive for high-revenue businesses. For multi-tiered real estate holding structures where a parent entity owns multiple property-owning LLCs, the parent is often structured as an LLC itself to maintain pass-through taxation throughout the structure. For operating businesses where the goal is equity financing, employee stock options, or an eventual sale to a larger corporation, the parent is often a C-corporation, with real estate assets held in separate LLC subsidiaries to avoid corporate-level tax on real estate appreciation.Common Holding Structures and When to Use Them
Most California holding structures fall into one of several patterns depending on the nature of the underlying businesses and the owner’s goals.Operating Business with Separate Real Estate Holdings
A common structure for entrepreneurs who own an operating business and also own the real estate where the business operates is to form a holding company that owns two separate subsidiaries: an operating company (often an LLC or S-corp) and a real estate LLC. The operating company leases the premises from the real estate LLC at fair market rent. The advantages are liability segregation (slip-and-fall lawsuits at the property level don’t threaten the operating business’s assets), separate sale or financing of the real estate (you can mortgage the property without affecting the operating business), and flexibility for the operating business to relocate or expand without unwinding real estate ownership. The disadvantage is added complexity and compliance costs, including the need to document and charge fair market rent to avoid IRS or FTB recharacterization issues. If you use a corporate parent, you’re paying at least $800 annually for the parent plus $800 for the operating subsidiary if it’s a California corporation, plus $800 for the real estate LLC. If the parent and subsidiaries are unitary, you’re filing combined reports and apportioning income across the group. If you use an LLC parent, you avoid the corporate-level tax but owe the LLC’s $800 minimum tax and potentially the gross receipts fee if revenues are high enough.Multi-Property Real Estate Holding with LLC Silos
Real estate investors often create an LLC parent that owns 100% of the membership interests in multiple single-purpose LLCs, each of which owns one rental property. The goal is to segregate liability so that a lawsuit at one property doesn’t expose the other properties, while maintaining centralized ownership and control at the parent level. This structure is effective for liability purposes if you maintain separate books and records for each LLC, don’t commingle funds, and observe formalities. For California tax purposes, each LLC owes the $800 minimum tax separately. The parent LLC also owes $800, so a four-property structure with a parent and four property LLCs costs $4,000 annually in minimum taxes before any gross receipts fees. The property tax trap here is LEOP. If you later sell a portion of the parent LLC to a new investor or transfer more than 50% of the parent’s interests to family members without qualifying for an exclusion, all four properties may be reassessed simultaneously because the change in control of the parent constitutes a change in ownership of all the subsidiaries’ properties under Section 64(c).Out-of-State Parent with California Operating Subsidiaries
For venture-backed startups or businesses that will eventually seek institutional capital, the typical structure is a Delaware C-corporation parent that owns 100% of the stock in California subsidiary corporations or LLCs that conduct operations in California. The Delaware parent is often the entity that issues stock to founders, employees, and investors, maintains the cap table, and holds the IP. If the Delaware parent is genuinely non-operational—it doesn’t employ anyone in California, doesn’t license IP directly to California customers, doesn’t manage the California subsidiaries actively, and has no California property or payroll—it may not owe California franchise tax under the factor-presence thresholds. But if the parent and subsidiaries are unitary, the parent still files a combined report and pays California tax on the apportioned share of the combined income. Practically, most venture-backed startups that start with a Delaware parent and California operating subsidiary end up unitary because the parent provides management oversight, holds the IP and licenses it to the subsidiaries, or employs the C-suite executives who manage the subsidiaries. This makes the Delaware parent subject to California combined reporting even though it has no direct California presence.Compliance Requirements and Ongoing Costs
Forming a holding structure creates ongoing compliance obligations at both the state Secretary of State level and the Franchise Tax Board level. For a domestic California corporation, you file a Statement of Information annually using Form SI-550 within the anniversary month of incorporation. The filing fee is $25. For foreign corporations qualified to do business in California, the same annual Statement of Information requirement applies. For California LLCs, you file a Statement of Information every two years using Form LLC-12, due within 90 days of formation and then biennially in the month the LLC was registered. The filing fee is $20. At the FTB level, every corporation and LLC doing business in or organized in California files an annual tax return and pays at least the $800 minimum tax, due by the 15th day of the 4th month of the entity’s first taxable year and annually thereafter. LLCs with gross receipts exceeding $250,000 also pay the annual LLC fee in addition to the minimum tax. If the holding company and its subsidiaries are part of a unitary business, you file a combined report using Form 100W rather than separate standalone returns. This requires consolidated financial statements and allocation of income and deductions across the group, which adds accounting complexity and cost. For holding structures involving real estate, you monitor LEOP and file BOE-100-B within 90 days of any change in control or ownership that affects entities owning California real property. Failure to file triggers a 10% penalty even if no reassessment ultimately occurs. The all-in annual cost for a simple holding structure with a California parent corporation and two operating subsidiaries is at least $2,425: $800 minimum tax for the parent, $800 for each subsidiary, and $25 for the parent’s Statement of Information. If the subsidiaries are LLCs rather than corporations, add $20 for each LLC’s Statement of Information. If any entity has California gross receipts exceeding $250,000, add the LLC fee. If you’re using a CPA to prepare combined reports, add professional fees of $3,000 to $10,000 depending on complexity. For structures involving real estate, add property taxes, BOE-100-B filings, and the cost of monitoring changes in control whenever ownership interests change hands at any level of the structure.Is a Holding Structure Right for Your California Business?
Holding structures make sense in specific circumstances where the benefits of liability segregation, operational flexibility, or estate planning justify the added cost and complexity. They generally do not make sense for small single-business owners who don’t have materially different business lines or real estate holdings to separate. You should consider a holding structure if you own multiple distinct businesses and want to protect each from the other’s liabilities, if you own both an operating business and valuable real estate and want to separate them for financing or sale purposes, if you’re building a multi-property real estate portfolio and want to segregate liability property-by-property, or if you’re planning estate transfers of a business to heirs and want to structure partial transfers of interests at the holding company level rather than dealing with each subsidiary separately. You should avoid holding structures if you’re running a single small business with no distinct lines of business or real estate to separate, if you can’t afford the added $800 to $2,400 in annual minimum taxes per entity, if you’re not prepared to maintain separate books and records and observe formalities for each entity, or if you’re a real estate investor flipping properties frequently and don’t need long-term asset segregation. The decision between using a California parent versus an out-of-state parent depends on where your business actually operates and where your management is located. If you’re based in California, have California employees and customers, and your board and officers are in California, forming a California parent is cleaner and avoids the question of whether you should have qualified the foreign parent. If you genuinely have a multi-state business with management and operations outside California, an out-of-state parent may reduce your California tax exposure, but only if you structure it carefully to avoid unitary treatment and combined reporting. The decision between a corporate parent and an LLC parent depends on your exit strategy and financing plans. If you’re seeking venture capital or planning an eventual IPO, use a corporate parent. If you’re holding real estate or building a family business you plan to pass to heirs, use an LLC parent.Practical Checklist for Forming a California Holding Structure
If you decide a holding structure makes sense, here’s the sequence of steps to implement it correctly: First, decide whether the parent should be a California entity or formed out of state. If out of state, choose Delaware for corporate parents or Wyoming/Delaware for LLC parents based on investor preferences and ongoing fees. Second, decide whether the parent should be a corporation or LLC based on your tax planning goals, exit strategy, and whether you need stock-based equity compensation. Third, form the parent entity. For a California corporation, file Form ARTS-GS with the Secretary of State. For an out-of-state corporation or LLC, file with that state’s secretary of state and then determine whether you need to qualify in California under Corporations Code Section 2105 or register as a foreign LLC. Fourth, form the subsidiary entities or transfer existing entities to the parent’s ownership. For new California corporations, file Form ARTS-GS. For new California LLCs, file Form LLC-1. If you’re transferring existing entities to the parent, draft contribution agreements documenting the transfer of stock or membership interests to the parent in exchange for parent equity. Fifth, obtain federal EINs for all new entities and register with the FTB. For corporations, this happens automatically when the Secretary of State forwards your Articles to the FTB. For LLCs, register online through the FTB’s website or file Form FTB 3522 and pay the $800 minimum tax within the first year. Sixth, file initial Statements of Information. Corporations file Form SI-550 annually. LLCs file Form LLC-12 within 90 days of formation and then every two years. Seventh, draft operating agreements or bylaws for all entities. Even though California doesn’t require you to file operating agreements or bylaws with the state, you need written governance documents to establish management authority, distribution rights, and procedures for major decisions. This is especially critical in holding structures where the parent owns subsidiaries, because you need clarity on whether subsidiary managers can act independently or require parent approval for certain decisions. Eighth, document any intercompany transactions properly. If the parent charges management fees to subsidiaries, provide services, or licenses IP, document those arrangements in written agreements at arm’s-length rates. If subsidiaries lease real estate from a real estate holding company, execute written lease agreements at fair market rent. The FTB and IRS will scrutinize related-party transactions, and you need contemporaneous documentation showing the business purpose and fair pricing. Ninth, maintain separate books and records for each entity and observe corporate formalities. Don’t commingle funds between entities. Each entity should have its own bank account, its own accounting records, and its own tax returns. This is essential both for liability protection (to prevent piercing the corporate veil) and for tax compliance (to demonstrate that the entities are truly separate and not mere instrumentalities of a single owner). Tenth, monitor for LEOP events and file BOE-100-B within 90 days of any change in control or ownership affecting entities that own real property. Even if you believe an exclusion from reassessment applies, you must still file the form to document the exclusion. Failure to file triggers the 10% penalty regardless of whether reassessment ultimately occurs.Frequently Asked Questions
If I form a Delaware holding company above my California operating business, does that reduce my California taxes?
Not necessarily, and in many cases it makes no difference at all. If the Delaware parent and California subsidiary are engaged in a unitary business—meaning they have functional integration, centralized management, and economies of scale—California requires combined reporting that includes the parent’s income and apportions it using the group’s combined sales factor. Since most parent-subsidiary relationships involve active management and integration, the FTB treats them as unitary and taxes the apportioned share of the combined income regardless of where the parent is incorporated. The Delaware parent can reduce California taxes only if it genuinely is a passive holding company with no active management role, no California employees or property, and no functional integration with the California subsidiary. This is difficult to achieve in practice because most business owners actively manage their subsidiaries and use the parent for treasury functions, IP licensing, or centralized services, all of which create a unitary relationship. Additionally, even if the parent avoids combined reporting, you’re still paying the $800 minimum tax annually to the California subsidiary. The Delaware parent may avoid the California $800 minimum if it’s not doing business in California, but if it provides services to the California subsidiary or receives market-based sourced income from California customers, the FTB may still assert nexus. You should model the tax consequences with your CPA before assuming that a Delaware parent saves California taxes.Can I avoid California property tax reassessment by transferring ownership at the parent holding company level?
No, and this is one of the biggest traps for real estate holding structures. Revenue and Taxation Code Section 64(c) treats a change in control of a legal entity that owns California real property as a change in ownership of the property itself. If more than 50% of the ownership interests in the parent change hands, and the parent owns subsidiary LLCs that own real property, the Board of Equalization views this as a change in ownership of all real property owned by the subsidiaries, triggering reassessment. There are exclusions from reassessment for certain types of transfers, such as transfers between spouses, certain parent-child transfers, and transfers that qualify under the original co-owner exclusion. But these exclusions have specific technical requirements, and you must qualify precisely under the exclusion language. The BOE does not grant equitable relief for transactions that almost qualify or would have qualified if structured slightly differently. If you’re planning to sell a portion of your holding company, bring in new investors, or transfer interests to heirs, you need to model the property tax consequences before executing the transaction. In some cases, restructuring the transaction to qualify for an exclusion or transferring interests over time to stay under the 50% threshold can preserve the low Proposition 13 assessed values. But you need professional advice before signing anything because there are no do-overs once the transfer occurs.Should I use a corporation or LLC as my holding company?
The answer depends primarily on what you’re holding and what your exit strategy is. If you’re holding operating businesses and plan to eventually raise venture capital, sell to a strategic acquirer, or go public, use a C-corporation as the parent because institutional investors expect corporate stock and most M&A transactions are structured as stock purchases of corporate parents. If you’re holding real estate or building a family business you plan to pass to heirs, use an LLC as the parent because the pass-through taxation avoids the double tax on appreciation that occurs with C-corporations. When you sell appreciated real estate held by a corporate structure, you pay corporate-level tax on the gain plus shareholder-level tax when the cash is distributed. With an LLC structure, you pay tax only once at the member level. The hybrid scenario is using a corporate parent for operations but LLC subsidiaries for real estate. This gives you corporate stock as the equity currency while avoiding corporate-level tax on real estate appreciation. But you still pay the $800 minimum tax for each entity, and if the group is unitary, you file combined reports that include both corporate and pass-through entities, which adds accounting complexity.What are the ongoing costs of maintaining a holding structure in California?
The baseline cost for a California holding structure is the $800 annual minimum franchise tax for each corporation and LLC in the structure. If you have a parent corporation and three subsidiary corporations, that’s $3,200 annually in minimum taxes before any income taxes or LLC gross receipts fees. If any of the LLCs have California gross receipts exceeding $250,000, add the annual LLC fee, which ranges from $900 to $11,790 depending on the revenue level. You also pay annual Statement of Information fees: $25 per corporation annually, $20 per LLC every two years. If the entities are part of a unitary group, add CPA fees for preparing combined reports, which typically run $3,000 to $10,000 depending on the complexity of the structure and the number of entities included in the combined group. For real estate holding structures, add property taxes, potential BOE-100-B filings when ownership changes, and monitoring costs to ensure you don’t accidentally trigger reassessment through changes in control at the parent level. If you’re using separate counsel to draft intercompany agreements, operating agreements, and contribution agreements when forming the structure, add legal fees of $5,000 to $25,000 depending on complexity. The total annual cost for a modestly complex holding structure with a parent and three subsidiaries is typically $5,000 to $15,000 in taxes, fees, and professional services. This is worthwhile if you have meaningful liability segregation needs or tax planning benefits, but it’s not cost-effective for small single-business owners who simply want to “look professional” by having a holding company structure.Do I need to qualify my Delaware holding company as a foreign corporation in California?
It depends on what the holding company actually does. California Corporations Code Section 2105 requires a foreign corporation to obtain a certificate of qualification before “transacting intrastate business” in California. Transacting intrastate business generally means engaging in repeated and successive transactions of the corporation’s business in California other than in interstate commerce. If your Delaware holding company merely holds stock in California subsidiaries, has no California employees or property, no board meetings or officers in California, and no direct transactions with California customers, it likely is not transacting intrastate business and does not need to qualify. The mere act of owning stock in California subsidiaries does not itself constitute transacting business in California. However, if the holding company employs people in California, maintains an office here, has board meetings in California, or provides services directly to California customers or subsidiaries, it may be transacting intrastate business and should qualify under Section 2105. If the corporation transacts intrastate business without qualifying, it cannot bring suit in California courts to enforce contracts related to that business, and it may be subject to penalties. As a practical matter, if your management team and operations are all in California anyway, it’s often cleaner to simply form a California corporation as the parent rather than forming a Delaware corporation and then qualifying it in California. You end up paying the California $800 minimum either way once you qualify, and you avoid the ambiguity about whether you should have qualified earlier.Can I use a series LLC to hold multiple California properties?
California does not have a series LLC statute, so you cannot form a California series LLC. You can form a series LLC in a state like Delaware or Texas that recognizes series LLCs, but California does not recognize the separate liability protection of individual series. Instead, California treats each series as a separate entity for purposes of determining whether the series is doing business in California. If you form a Delaware series LLC and each series holds California real property or conducts business in California, each series likely needs to register as a foreign LLC in California and pay the $800 minimum tax separately. This defeats much of the cost savings you were trying to achieve by using a series LLC. Additionally, the liability protection of series LLCs is still not fully established even in states that recognize them, and there’s uncertainty about how courts in non-series-LLC states will treat series in litigation. For California real estate holding structures, the standard approach is to form a separate California LLC for each property rather than attempting to use series LLCs. This gives you clear liability segregation, established case law supporting limited liability, and no ambiguity about how California regulators will treat the structure. The cost is the $800 minimum per LLC, but that’s a known and predictable expense rather than risking an IRS or FTB recharacterization of a series LLC structure down the road.What happens if I transfer my California business to a holding company after I’ve already been operating for years?
Transferring an existing business to a new holding company structure is treated as a contribution of assets or stock to the parent in exchange for equity in the parent. For tax purposes, this can be structured as a tax-free reorganization under Section 351 if you transfer property to the parent corporation in exchange for stock and you control the parent immediately after the exchange (at least 80% ownership). For LLCs, the transfer may be tax-free under Section 721 if you’re contributing appreciated assets to a partnership. For California property tax purposes, transferring real property from yourself individually to an entity you control, or from one entity to another entity you control, may trigger reassessment unless an exclusion applies. The legal entity change-in-ownership exclusion applies if you transfer real property from yourself to a legal entity or between legal entities in which you hold the same proportional ownership interest before and after the transfer. But this exclusion is technical and requires careful structuring to qualify. If you transfer an existing operating business to a new holding company structure, you also need to update contracts, licenses, permits, and bank accounts to reflect the new ownership structure. If the business has debt, you may need lender consent to transfer ownership. If you have employees, you need to handle the transfer of employment relationships and comply with WARN Act requirements if applicable. The cleanest time to form a holding structure is at inception before you have contracts, licenses, permits, and employees to transfer. But many business owners don’t think about liability segregation and holding structures until they’ve been operating for years and accumulated significant value, at which point the restructuring becomes more complex and potentially triggers tax consequences. You should work with both a tax advisor and a business attorney to structure the transfer correctly and avoid unintended tax liabilities or loss of contract rights.If my parent company provides management services to subsidiaries, is that a unitary business?
Yes, almost certainly. One of the key factors in determining whether entities are unitary is whether there is centralized management and functional integration. If the parent company actively manages subsidiaries, provides shared services like accounting, HR, or treasury functions, or employs C-suite executives who oversee subsidiary operations, the FTB will treat the structure as unitary. This means you file California combined reports that include all members of the unitary group and apportion the combined income using the group’s combined sales, property, and payroll factors. The parent’s management fee income is included in the combined group’s business income and subject to apportionment rather than being treated as standalone income sourced only to the parent’s state of formation. The unitary business concept is not necessarily bad—it’s simply the reality of how California taxes integrated business operations. If your parent and subsidiaries genuinely are operating as a single coordinated business with shared management and resources, combined reporting often results in a fair apportionment of income based on where the business actually operates. The problem arises when business owners assume that simply creating a Delaware parent “offshore” from California will pull income out of California’s reach, not realizing that the unitary business rules bring it right back in. If you want the parent to be genuinely non-unitary with its California subsidiaries, it needs to be a passive holding company that does not provide management services, does not employ executives who oversee subsidiaries, does not hold or license IP to subsidiaries, and simply receives dividends from subsidiaries without active involvement in their operations. This is difficult to achieve in closely held businesses where the owner is personally managing all the entities in the structure.How do I know if I need to file a combined report in California?
You need to file a combined report in California if your corporation is part of a unitary business with one or more other corporations, regardless of whether those other corporations are separately doing business in California. The test for whether corporations are unitary is whether they constitute a single trade or business characterized by functional integration, centralized management, and economies of scale. FTB Publication 1061 provides detailed guidance on combined reporting and includes examples of unitary and non-unitary relationships. Generally, if you have a parent corporation that actively manages subsidiary corporations, shares officers and directors, provides financing or treasury services, licenses IP across the group, or otherwise integrates operations, the FTB will treat the structure as unitary and require combined reporting. The combined report is filed on Form 100W and includes the business income of all unitary members, even those not separately registered or doing business in California. The combined income is apportioned using the group’s combined sales factor, and each member’s tax liability is computed based on its share of the apportioned income. If you’re uncertain whether your structure requires combined reporting, consult with a California tax professional who has experience with combined reporting. The penalties for failing to file combined reports when required can be substantial, and the FTB actively audits parent-subsidiary structures to identify taxpayers who should be filing combined reports but aren’t.Can I use a holding company structure to protect assets from lawsuits?
Yes, but only if you maintain proper formalities and the structure genuinely segregates operations and assets between entities. The whole point of subsidiary entities is that creditors of one subsidiary cannot reach assets of the parent or other subsidiaries without piercing the corporate veil. But courts will pierce the veil if you commingle funds, fail to observe corporate formalities, undercapitalize subsidiaries, or treat the entities as mere instrumentalities of a single owner. To preserve liability protection in a holding structure, you must maintain separate bank accounts for each entity, keep separate books and records, file separate tax returns, properly document all intercompany transactions at arm’s-length rates, never commingle personal funds with business funds or funds between entities, hold separate board meetings and document decisions in minutes, and capitalize each subsidiary adequately for its business purpose. If you create a holding structure but then treat all the entities as a single pool of money, transfer funds between entities without documentation, or fail to observe formalities, a plaintiff can argue that the separate entities are a sham and that the court should disregard the corporate form and hold you personally liable or hold the parent and other subsidiaries liable for one subsidiary’s debts. The liability protection of holding structures is real and valuable, but it’s not automatic. It requires ongoing discipline to maintain proper formalities and documentation. If you’re not prepared to do that work, a holding structure provides a false sense of security without actual asset protection.California holding company structures can provide meaningful liability protection, operational flexibility, and tax planning opportunities when designed correctly for your specific business needs. But they’re not one-size-fits-all solutions, and the California-specific tax and property tax consequences often surprise business owners who assumed that forming a Delaware parent would automatically pull income outside California’s reach. If you’re considering a holding structure for your California business or real estate holdings, consult with a California attorney who understands both the corporate law mechanics and the FTB and BOE rules that govern how these structures actually get taxed. Schedule a consultation to discuss whether a holding company structure makes sense for your California business.
This article provides general information about California holding company structures. Tax and corporate law change frequently, and this information should not be relied upon as legal or tax advice for your specific situation. Always consult with qualified legal and tax professionals before forming business entities or restructuring existing businesses.