When contemplating incorporation or analyzing the ownership structure of a business, you may have heard of a “holding company.” You’ve heard that holding companies are utilized in the corporate structure of many organizations, but you don’t know what they are or why you would need one. This article will explain what a holding company is and why it may be advantageous to establish one.
What constitutes a holding company?
To begin with, a holding company is a corporation that is typically employed to keep investments, typically shares of another corporation. A holding company’s primary function is to hold beneficial ownership of another business or to be a partner in a partnership, not to sell goods or services. This varies from an operating corporation in that it is primarily used to generate income for active enterprises.
What advantages does a holding company offer?
Holding companies are utilized for various purposes that might aid in the development or maintenance of a firm. Here are several reasons why you might require a holding company.
Asset protection is a benefit that comes with having a holding company. By transferring a portion of your operating firm’s assets to the holding company, holding companies can be employed as an additional layer of security. Since these assets are distinct from your primary functioning firm, they may be safeguarded from creditors in the event of a disaster.
In addition, a holding company separates the ultimate shareholders from the operational firm. In certain cases, this may protect your personal assets, such as your home, in the event that your operating company is sued.
Even if you’re in a low-risk business, many operational firms are intrinsically exposed to a variety of hazards due to their operational activities. Setting up a holding company in Canada may be a valuable component of an overall asset protection strategy.
Another benefit of having a holding company is the many tax advantages that come with having one. If the holding company owns a specific percentage of outstanding shares of the operating company, the operating company can pay tax-free dividends to the holding company. By investing these surplus profits corporately rather than personally, tax reductions are attainable. Without a holding company, a shareholder would receive surplus profits in the form of dividends, pay personal income tax, and have less capital remaining for investment.
The amount of tax savings can vary depending on variables such as personal income, the type of earned income, and the province. Due to recent changes in rules governing how much investment (or passive) income a corporation can receive, the complexity of attaining these savings has grown, but it is still worthwhile to take advantage of any possibilities that present themselves.
What disadvantages does a holding corporation have?
Possessing a holding company in Canada can be advantageous when attempting to expand your firm. The most significant disadvantages are the initial set-up expense and ongoing regulatory requirements for holding companies.
Holding corporations incur additional start-up costs and expenses associated with the ownership of a secondary firm, such as annual corporate tax compliance costs. Due to the restricted activity within a holding company, these compliance costs may not be large, and in the majority of cases, the advantages would surpass the compliance costs.
When should I create a plan?
Prior to selecting whether or not to establish a holding company in Canada, you must evaluate your reasons for doing so. If your running firm generates excess cash and you wish to invest it while potentially deferring taxation, a holding company may be worthwhile. If your operating company is in a sector with significant litigation risk and you have substantial personal assets, a holding company may be advantageous. As long as you have the funds to cover the establishment charges, the major drawback associated with establishing and managing a holding company can be readily overcome.
A corporate group can benefit from establishing a holding company in Canada, but it may not be a suitable idea for everyone. Due to the multitude of legal and tax-related considerations you must make, it is recommended that you get assistance from a legal or accounting specialist before establishing a holding company in your unique circumstances. With the right guidance, a holding company may offer you the financial tools to expand your firm, as well as tax savings, asset protection, and numerous other potential benefits.