Whether you have just started a business or have been running a profitable business for several years now, adding a holding company to your current corporate structure can prove to be very beneficial. Creating a holding company (“Holdco”) is no different than creating an operating company (“Opco"); they are both incorporated companies. The difference resides in their purpose. An operating company's purpose is to carry on active business endeavours that encompass payroll, expenses, etc. The main purpose of Holdco is for reasons related to taxes.
There are many benefits to including a holding company in your corporate structure, both personally and for your corporation. We will outline several advantages below that showcase the positives of having a Holdco.
1. Asset Protection
Inserting a Holdco to your already existing corporate structure can add a layer of protection to your business. You can transfer non-essential or unneeded assets such as cash from your Opco to your Holdco. By way of transfer, you are protecting the said assets if something negative happens to your Opco, thus protecting the assets from creditors. Because the assets are now being held in an entirely different corporation that is not in debt to those creditors, they are protected from legal recourses that may be taken.
2. Qualified Small Business Shares
Small business owners of qualifying companies are in the fortunate position of being eligible to use the Lifetime Capital Gains Exemption (“LCGE”) and avoid paying taxes attributed to the sale of their shares. However, for shares to qualify for the LCGE, certain criteria must be met. One of the criteria is that the corporation cannot have excess cash. Therefore, with the addition of a Holdco to your business structure, and in certain situations, a family trust as well, you can ensure that the Opco meets this vital criterion by having a way of transferring the excess cash out of the corporation. A Holdco allows you to transfer the cash out of your Opco in the form of an inter-company dividend, which in many cases, is tax-free.
By creating a Holdco, we can transfer money from the Opco on a tax-deferred basis. This means that the money being transfer into the Holdco has only been subject to corporate taxes and no personal taxes. Thus, a Holdco becomes a valuable investment vehicle as it allows the shareholder(s) to invest with more money instead of simply investing personally with money subject to corporate and personal taxes. The Holdco can be used to invest in real estate, stock, or other businesses without using after-tax dollars.
4. Timing of dividend Payments
When multiple shareholders are involved in an Opco, the declaration of dividends can often become a contentious and stressful period. A dividend declaration entails each shareholder receiving an amount of money in proportion to the number of shares they hold. It also means personal taxes must be paid on the received amount as each shareholder is receiving additional income. Because each shareholder is not necessarily in the same financial situation and does not have the same financial goals, they might not all favour a dividend to be declared at a given time.
By introducing Holdcos to the shareholders' corporate structures, the timing of dividend payments no longer becomes a matter of contention and argument. The dividend payments will be issued directly to the holding corporations of each shareholder. Each shareholder will then decide if he would like to issue the money from his/her Holdco to themselves personally or rather keep the money in the Holdco. If the money is kept in the Holdco, only corporate taxes are to be paid. If the money is distributed from the Holdco to the individual, then personal taxes must be paid. This mechanism allows each shareholder to control the timing they receive the money attributed to the dividend declaration, without any consequences to the other shareholders.
The above information is meant to highlight certain advantages and benefits the introduction of a holding corporation may have. Whether you have just started your business or have been running a successful business for several years, implementing a holding corporation to your business structure can be beneficial. At Meditax, our experience lawyers and tax specialists can help implement a holding corporation to ensure your corporate structure meets your goals.