About a year ago I started a company (an LLC - "parent company") that starts companies. I am 100% sole owner of the parent company. The premise is to form a team of designers, developers, and business folks around a business concept and run them through the process of de-risking the business (finding and acquiring customers). Once product/market fit is found, the idea is to spin the project out into its own entity/company (C corp) and continue the process of company building (E,g. raising money etc).
Our second project is ready to move onto the next phase and be spun out. My logic of starting the parent company was always to have my equity portion of the spun out company be owned by (refer back to) the parent company instead of having it under my personal name. [Side note - the other team members of this company would also get a percentage in the newly spun out company.]
From an accounting prospective does this approach make the most sense? Are there any flaws in this strategy?
There are three angles to look at this structure from: 1) Is it the best way to set things up to hold your investment from a legal perspective? 2) Is the it the best way to minimize your taxes? and 3) Is the best way to set things up from an accounting (i.e. bookkeeping) perspective? In your question above, you initially ask about tax, but then ask about accounting at the end, so I'll address all three.
The first angle is best answered by your attorney, and it sounds like they've already advised you in this regard. I will say that the structure you've described is one I've seen used often and seems to work well from a legal perspective.
For the second angle, it is imperative that you engage an experienced tax CPA to advise you, and do it right away if you haven't already. Know that sometimes the best legal structure is not always the best structure to minimize taxes, and vice versa. These two sometimes work at cross purposes and you'll have to strike a compromise based on which is more important to you. For instance, having the sub as a C-Corp is likely excellent from a legal perspective due to the liability protections afforded by a C-Corp. However, it may not be ideal from a tax perspective as the subsidiary C-Corp pays taxes on income and then the income is taxed again when it is distributed to your LLC.
I am neither an attorney or a tax CPA, my expertise is in the third angle, how to set up your financial accounting to track your financial results in a way that gives you useful information you can use to make decisions. From a financial accounting (i.e. bookkeeping) perspective, this setup should serve you well. It segregates the revenue and expenses from the new project from the operations of your own LLC, allowing you to separately measure the operations of both. Of course having two separate entities to track is more time consuming, and therefore involves more expense for accounting. But it's necessary based on the fact that you are going to have a different ownership structure and different owners for the spun out entity than the original LLC.
In summary, I'm not an expert on legal or tax matters, I know just enough to know that you need good advisors talking to each other and you in each of these areas. From a financial accounting perspective, I think your set up is a good one because it segregates operating cash flows and allows for different ownership classes. I can consult with you if you need some guidance in how to set up the recordkeeping properly. However the legal and tax questions should take precedence over financial accounting.
Helpful? Let me know if you need additional clarification, happy to help answer further questions. Also let me know if you'd like to set up a call to discuss further.
Experience: I work in finance, corporate structuring and startup strategy, especially around holding structures, spin-outs, equity allocation, and tax-efficient ownership setups for founders.
Answer:
Structuring a “parent company that creates and spins out new companies” is a very common model. From a strategic and accounting perspective, your logic is sound — but there are a few important nuances to get right so that the structure truly reduces tax liability and simplifies future fundraising.
Here’s the way to think about it:
1. Owning equity through the parent company generally does make sense
Having the parent (LLC/Holding) own your equity in each new spin-out:
• separates your personal tax situation from the company’s
• avoids triggering personal taxable events when equity is created
• consolidates ownership in one corporate vehicle
• simplifies cap tables for investors
• protects your personal name from being directly on every subsidiary cap table
This model is extremely common among serial founders, studios, incubators, and venture builders.
2. The usual tax advantages
If structured correctly:
• Equity issued to the parent LLC is not a personal taxable event.
• Gains from future exits can be taxed at the entity level, where you may have more structuring flexibility.
• You avoid “founder stock → personal → transfer” complications later.
In many jurisdictions, pulling equity into a parent later is expensive — but doing it from the start is clean.
3. Accounting perspective — what matters
Accountants typically look for:
✔ a clean separation between ParentCo and Spin-OutCo
✔ proper IP assignment (ParentCo often owns or licenses IP to the spin-out)
✔ correct valuation when shares are issued (ideally very low at incorporation)
✔ clear treatment of founder services vs. equity
✔ no disguised compensation flowing to individuals through the wrong entity
As long as all of this is documented, your structure is standard and acceptable.
4. Flaws to avoid in this strategy
There are some common pitfalls:
1. Failing to formalize IP transfer
If the idea, brand, code, or contracts were developed in the parent, the spin-out needs a proper assignment or license agreement.
2. Issuing shares to employees personally while yours sit in the parent
This can create imbalance later. Better: parent holds founder equity; employees receive equity in Spin-OutCo through an option pool.
3. Not thinking ahead about investor expectations
Investors want a clean cap table.
Complex cross-ownership, revenue sharing, or unclear IP rights can slow a deal.
4. Creating unnecessary tax filings for the parent
If the parent is active (generating income, billing services, etc.), it must file accordingly.
Many founders mistakenly leave ParentCo dormant with no bookkeeping.
5. Does this strategy reduce taxes?
It can — but only if:
• the parent’s structure is tax-efficient,
• equity is issued at a very early low valuation,
• and the parent is not used for personal income or mixed activities.
It’s not automatically a tax shield, but it can meaningfully optimize your tax outcomes when structured correctly.
6. Is your plan reasonable?
Yes.
A parent/holding company owning the equity of multiple spin-outs is a well-established, clean structure used by studios and serial founders worldwide.
It protects your personal position, simplifies future fundraising, and often improves the tax outcome — as long as you avoid the pitfalls above and document everything properly.
If you want, I can walk you through the exact structure (ParentCo → Spin-OutCo equity issuance, IP assignment, option pool setup, and valuation timing) and help you test the tax implications for your specific setup.
