Planning the sale of your business?
Before you start to actively market the sale of your business, have you organized your affairs via a holding company structure?
Holding companies are a common term that some people associate with big businesses and offshore accounts. However, holding companies are quite common, and not just reserved for large businesses. However, before you proceed, ask yourself – is it worth it?
BACKGROUND.
A company that produces goods or services is referred to as an operating company. However, operating companies are what are most understood to be your core business.
A holding company is a company that is not active. This means that the company does not produce any goods or services, but it can hold shares of other companies and investments. This can include your own operating company, shares in public companies, real estate, market securities and so on.
ARE YOU A SHAREHOLDER?
If you are a shareholder of both companies, then you can manage your profits from your operating company to your holding company.
You may also choose to keep all your company assets in your holding company, which could include any land, buildings, vehicles and so on. Then you would simply have your operating company pay your holding company monthly rent for the Intellectual property, equipment, vehicles, land or building.
THE BENEFITS OF A HOLDING COMPANY?
1. ASSET PROTECTION AND CREDITOR PROTECTION.
What this means, is that if something goes wrong in the economy or with a service that your company has provided, creditors cannot go after the assets held by the holding company, they can only access assets held by the operating company.
If the operating company does not have any assets, then you will be in a much better position.
It is important to note that you need to ensure that your holding company is set up well in advance of any potential problems. This is because you may not be allowed to transfer your assets from your operating company to your holding company while you are being sued or as your assets are being seized.
One exception to this, is if the corporate veil is pierced. This means that something has been done outside of normal business activities, like fraud, negligence and so on. At that point, your assets would not be protected, even in a holding company.
2. TAX PLANNING.
Another reason to transfer retained earnings from the operating company to the holding company is for tax planning. You may be able to transfer the retained earnings as tax free dividends, which can then be re-invested.
It is always important to discuss this with a professional though, as anti-avoidance rules may treat this transfer as a capital gain. Anti-avoidance rules are those set up by the government to prevent reducing, deferring, or avoiding paying tax.
3. TAX SAVING.
Tax savings are another reason for you to have a holding company. When you have transferred the earnings from your operating company to your holding company, it allows the individual shareholders in the holding company to withdraw their income, or dividends when needed. If your family members are also shareholders and their personal income is less, it may make more sense for them to be paid dividends.
This is also known as income splitting. There are some restrictions when it comes to income splitting. These include that the family members not only need to be part of the company but that they need to be the age of majority as well.
With corporate tax rates lower than personal tax rates, it is beneficial to keep the money in the holding company where it can continue to earn money through investments if you do not need it as personal income.
4. LIFETIME CAPITAL GAIN EXEMPTIONS.
Another benefit of a holding company is the lifetime capital gains exemption or LCGE. This means that if you decide to sell your company you can subtract the LCGE from your profit on your business sale to determine what you pay tax on.
In other words, you would only be paying tax on 50% of the value of any capital gains after the LCGE, so this is a significant amount of money.
5. ESTATE PLANNING.
Another benefit of a holding company is when it comes to estate planning or freezing your estate. What this means is that the shareholder’s interest in the company is frozen and new shareholders (typically children) come into ownership. At this point any earnings going forward will go to the ‘new’ shareholders.
WHAT ARE THE DRAWBACKS OF OWNING A HOLDING COMPANY?
Despite these great benefits of owning a holding company, it is important to understand the potential drawbacks before purchasing an owning a holding company.
1. INCORPORATION COSTS.
These are the costs that you would incur to have a holding company incorporated by a professional.
2. MAINTENANCE COSTS.
Ongoing costs include your fees for annual filings, financial statements, and corporate tax returns. As well, there will be administration costs to ensure that the corporations legal documents and taxes are up to date.
3. POTENTIAL TAXES.
It is always important to remember to consult a professional so that your investments or other earnings do not have you paying more tax, by causing you to be taxed on your investment income as well as your dividends.
4. COMPLEXITY.
If your holding company has assets and income coming in from various sources, this may get complex.
NEXT STEPS?
GET ADVICE FROM EXPERTS
If you need clarification on holding companies’ vs operating companies, their benefits and if it makes sense for you and your business, discuss our article content with your existing personal and corporate Lawyers, Accountants, Tax and Wealth Management professionals or contact us for a referral to our network of Lawyers, Accountants, Tax and Wealth Management professionals. This article is for informational purposes only to encourage you to get advice from a relevant competent professional.
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