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If I started a company just to invest (my own money) in the

equity of start-up businesses, what...
If I started a company just to invest (my own money) in the equity of start-up businesses, what business structure is best?

Would I be considered a holding company?

Also what business licenses do i need to have?
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Answered in 25 minutes by:
2/1/2012
smithlaw1177
smithlaw1177, Attorney
Category: Business Law
Satisfied Customers: 151
Experience: My practice handles all sorts of business law issues such as setting up corporations, LLCs, PC, as well as dissolving corps.
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smithlaw1177 :

I can definently help you with this. What kind of business is it?

Customer:

the business would simply invest in start-ups. So i provide money to obtain an equity interest in new start-up businesses.

smithlaw1177 :

First and foremost, I would advise you to form a domestic corporation through your state's Secretary of State's Office. Once you have prepared your Articles of Incorporation and your bylaws you are presumed to be a subchapter C corporation. This means that you are taxed as a shareholder and must pay corporate tax. Also, it sounds as if you will be a holding company as defined by the IRS. The excerpt below is from Title 26 Section 542 of the US Code. This exerpt defines a holding company. Read through it and see if you believe your business would be included in this subchapter of the IRS Code.

smithlaw1177 :
(1) Adjusted ordinary gross income requirement
At least 60 percent of its adjusted ordinary gross income (as defined in section 543 (b)(2)) for the taxable year is personal holding company income (as defined in section 543 (a)), and


(2) Stock ownership requirement
At any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. For purposes of this paragraph, an organization described in section 401 (a), 501 (c)(17), or 509 (a) or a portion of a trust permanently set aside or to be used exclusively for the purposes described in section 642 (c) or a corresponding provision of a prior income tax law shall be considered an individual.


(b) Corporations filing consolidated returns
(1) General rule
In the case of an affiliated group of corporations filing or required to file a consolidated return under section 1501 for any taxable year, the adjusted ordinary gross income requirement of subsection (a)(1) of this section shall, except as provided in paragraphs (2) and (3), be applied for such year with respect to the consolidated adjusted ordinary gross income and the consolidated personal holding company income of the affiliated group. No member of such an affiliated group shall be considered to meet such adjusted ordinary gross income requirement unless the affiliated group meets such requirement.


(2) Ineligible affiliated group
Paragraph (1) shall not apply to an affiliated group of corporations if—

(A) any member of the affiliated group of corporations (including the common parent corporation) derived 10 percent or more of its adjusted ordinary gross income for the taxable year from sources outside the affiliated group, and

(B) 80 percent or more of the amount described in subparagraph (A) consists of personal holding company income (as defined in section 543).

For purposes of this paragraph, section 543 shall be applied as if the amount described in subparagraph (A) were the adjusted ordinary gross income of the corporation.


(3) Excluded corporations
Paragraph (1) shall not apply to an affiliated group of corporations if any member of the affiliated group (including the common parent corporation) is a corporation excluded from the definition of personal holding company under subsection (c).


(4) Certain dividend income received by a common parent
In applying paragraph (2) (A) and (B), personal holding company income and adjusted ordinary gross income shall not include dividends received by a common parent corporation from another corporation if—

(A) the common parent corporation owns, directly or indirectly, more than 50 percent of the outstanding voting stock of such other corporation, and

(B) such other corporation is not a personal holding company for the taxable year in which the dividends are paid.


Customer:

thank you for the informative response.

Customer:

But as a followup: 1. can i be an LLC rather than a subchapter c? and 2. back to my original question. Is there any business license requirements for me to invest my own money (such as being registered with SEC/FINRA, ect)?

smithlaw1177 :

I can answer the LLC question from a liability stand point only. I will tell you to list this question for an accountant as well. A lot of the things we do overlap. I can tell you that an LLC gives you limited liability and shields you personally from anything the company does. As far as financial benefit of LLC vs. Inc., some CPAs here in my jursidiction are very quick to have my clients stray away from LLCs due to additional tax provisions. It sounds as if you will be a holding compnay and you will have extra tax burdens so I would make sure you find you a good CPA so that you do not get in trouble with Uncle Sam! Let me research the sec question further

smithlaw1177 :

A holding company does not register with the sec as I understand it.

Customer:

wonderful

smithlaw1177
smithlaw1177, Attorney
Category: Business Law
Satisfied Customers: 151
Experience: My practice handles all sorts of business law issues such as setting up corporations, LLCs, PC, as well as dissolving corps.
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smithlaw1177
smithlaw1177, Attorney
Category: Business Law
Satisfied Customers: 151
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Experience: My practice handles all sorts of business law issues such as setting up corporations, LLCs, PC, as well as dissolving corps.

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