August 24, 2023

Holding Companies: A Smart Move for High-Risk Industries like Cannabis?

Holding companies asset and liability protection for high risk industries like cannabis.

Hey, I’m Morgan Davis. I’m a cannabis attorney in Raleigh, North Carolina. Let’s talk about how to keep your business protected and thriving. So holding companies are a type of company. It can be an LLC, it can be a sick or really any type of company. But we refer to them as holding companies because they basically become the management or the financial holding entity for a series of other LLC.

And they offer a bunch of benefits, which we’re going to go through in a minute. But the number one benefit is liability protection, because what happens, this is the structure holding company. Okay, here’s your holding company and your holding company owns your operations company. So let’s say your cannabis business in North Carolina and you’ve got a whole new edibles line.

And you also have three kids at home and a house and a 401k and all sorts of other things. And you’re not sure if your business is going to be legal in the next, you know, 30 days or whatever the case may be. So this is your operations company is where you’re making all your gummies, where all the magic happens, right?

A holding company can be created that owns all of your interest in the operations company.

What does that do? It means that if someone sues operations company, they can sue you personally. They can sue a holding company. And then you own holding company. It offers you two layers of asset protection, very important in high risk industries. In addition to that, it offers you the ability to silo different projects.

So let’s say in addition to your cannabis company, you’re also a real estate investor. You don’t want one to affect the other. If you own a bunch of rental properties and something happens with one of your renters and they fall through the floor and they sue you, you don’t want them to also be able to tap into the cash cow that is your cannabis business or vice versa.

But if you’re holding company owns your ownership in both of those companies, those LLC, So Rental Property LLC and Cannabis Operations LLC, you’re holding company can get paid from both and still afford you asset protection. Asset protection. So that’s more of a trust thing. We’re not going to get into that. But if you are interested in combining this method with your estate trust planning, estate planning, give us a call. I can refer you to a great team that can help you do that and is definitely a vital part of consider of answering.

If you’re a business owner, especially in a high risk industry, what you are doing at work can directly affect your life and legacy now and in the future.

So you want to make sure that your existing assets and any assets you require you acquire are protected from your work.

In addition to the liability protection holding, companies offer you the ability to take on investors in different companies without giving away a ton of control. It allows you more versatility in structuring how you get investors, whether you give them investment in just one operation or two or three, depending on how many different things got going on, whether you’re just giving them investment in your holding company or both that way, let’s say you do only you only want them in one business and not the other or you want them to be part of the operations, but you don’t want them to own any of the IP.

So a lot of times what companies will do is they will create operations company, sorry, holding company, operations company, IP company. So this company over here owns the trademarks, owns all the proprietary information, owns your patents, owns your formulas, owns your flavoring, and leases it to your operations company. Therefore, your investor may own part of your operations company, but they can’t take any of the IP because it’s only leased from another company.

Better Financing Options

And the final thing that holding companies do is they can offer you better financing options because your operations company, which whose cash flow may flux up and down, may not be a very strong candidate when it comes to debt financing or loans from hey or loans from VC funds or other types of capital. However, if they’re backed by a holding company that basically is nothing but a cash holder and profit holder because that the cost of doing business for a holding company is pretty low, then you can get better terms because their books say this.

So a lot of people will use their holding company as a finance option. Holding companies are a fantastic tool for any business and any business owner that’s trying to prepare for not just now, but the future. They are especially important for people in high risk industries like cannabis. If you go out there and you just get in the business of cannabis, you open your business, you’re so excited and you don’t create a holding company, a LLC structure with a holding company.

You’re leaving yourself and your family open to a lot of liability and you’re not taking advantage of some of the benefits that the right corporate structure can bring. You give us a call today and we’ll talk about how to mitigate your risk and increase your options with the right corporate structure.

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