🏢 California Holding Company Structures

Not necessarily, and often 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. You should model the tax consequences with your CPA before assuming that a Delaware parent saves California taxes.

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.

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.

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.

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.

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.

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.

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.

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.