How do you start a public holding company?

Answer 1

Since I have been considering taking my company public (not an IPO) this is what I have learned and will share with you.

First off, the only way you can be a public holding company that has its shares traded publicly is the following:

1. Must be a C-Corporation. Does not matter what state you file in. Most choose Delaware, but any state is fine. An LLC or LP does not work in this case because that is a private tax entity. And an LLC's units of ownership would need to be converted to shares and you would need to convert the structure of the company. Not necessarily expensive - just know your goals.

2. Must have at a minimum 50 shareholders in your company. The OTCBB and Pink Sheets require a minimum of 50. The equity the 50 hold does not matter (I believe), but you simply must have 50. If your intent is going directly to NASDAQ or NYSE, then there are minimum percentages of equity that must be held by shareholders before you would be eligible. The easiest way is to start with the OTCBB or Pink Sheets because the transfer to NYSE or NASDAQ is easier - think 2 year timeline.

3. You can go public two different ways. One is the traditional IPO. However, at this time, unless your company has $10mm or more in revenues, forget it. The second and less costly method is to simply take your company public by filing an SEC form S-1. You should find a firm that does this on a regular basis. Chances are they will charge a fee ($20k-$80k) for the work and a small piece of equity (think 1 to 4 percent). This is a better option given the uncertainty of the market and the recent history of IPOs.

4. You can choose to be a C-Corp and not be traded publicly. If you are just starting out, this maybe your preferred method. However, be aware that if you are the only shareholder of record, you'll be double-taxing yourself as a C-Corp versus being an LLC. Once you have some cash and success under your belt, you may wish to convert the LLC to a C-Corp.

5. SEC requirements. Usually, unless you hold 5-7% or more in a company, the SEC doesn't care who you are. If your holding company has $50mm or more in cash available, you will need to file SEC forms if you buy certain percentages exceeding those I just mentioned. If you're buying 1,000 shares here, and 5,000 there, don't bother. Unless you accumulate that larger percentage over time.

6. The biggest advantage to being publicly listed is either attracting additional capital in the future or selling your company. Right now, the public markets are the easiest way to attract investors. Being a private firm is killing small businesses and those that aren't publicly traded. If you will need a cash infusion, being publicly traded right now is the best avenue.

7. Expenses - Doing this as a sole proprietorship is stupid and insane. Think about all of those people that lost 50% or more in their 401(k)s. Well, if you had sold for a loss, you would be able to deduct that loss as an LLC from your taxable income. As a sole proprietorship you cannot. I am not sure if that would be true for a C-Corp. The beauty of an LLC is the ability to tax yourself as a partnership...so any net income or net loss is passed on to you - and taxed at the personal tax rate.

If this venture will cost you $100,000.00 or more the first 24 months (meaning no income), then consider an LLC. Otherwise, your losses cannot be passed on and deducted from your 1040. Consult your tax attorney or CPA - but this issue alone has saved me financially.

8. Trading expenses - Again, every $7 trading fee is an expense. Deduct all of your business expenses. Just be smart. Don't be dumb and do your tax return yourself. Get a CPA. That $250-$1,000 fee will save you 5-10 times that fee.

9. Pass-through entity. If you are a sole proprietorship, and you die, your company dies with you. Unless you have an iron-clad will, the current assets may be able to be passed on to your loved ones. However, your family could not sell your company as a sole-proprietorship. That means that your family just lost out on a 5x-10x multiple on your revenue or assets. Be smart and set up the tax structure that fits you best.