When thinking about incorporating a business, or evaluating your ownership structure, you may have heard of a “holding company.” They are said to be used in the corporate structure of a lot of businesses, however, you aren’t sure what a holding company is or why you should want one. Here we will be going over what a holding company is and why it may be beneficial to set one up.
What is a Holding Company?
For starters, a holding company is an incorporated company that is usually used for holding investments, generally shares of another company. A holding company is not primarily used for selling goods or services; its main purpose is to have a beneficial ownership of another business or being a partner in a partnership. This differs from an operating company as they are used primarily for generating active businesses income.
What are the advantages of a holding company?
Holding companies are used for a variety of reasons that can help build or maintain a business. Here we will list some reasons as to why you might want a holding company.
- Asset Protection
One advantage that comes with having a holding company is asset protection. Holding companies can be used as an additional level of protection by transferring some of the assets of your operating business to the holding company. Since these assets are separate from your main operating business, they may be protected from creditors in the event something were to happen.
- Layer of separation
A holding company provides a layer of separation between the ultimate shareholders and the operating business. In some instances, this may help protect personally owned assets, such as your family home, in the event of litigation against your operating company. Even if you’re in a low-risk industry, many operating companies are inherently exposed to various risks through activities and having a holding company in Canada may be a useful part in an overall protection plan for your assets.
- Tax Benefits
Another advantage of having a holding company is related to multiple tax benefits that come alongside having one. Assuming the holding company owns a certain percentage of outstanding shares of the operating company, the operating company can pay tax-free intercorporate dividends to the holding company. It’s possible to gain tax savings by investing these excess profits corporately rather than personally. Without a holding company, the shareholder would receive any excess profits paid in the form of dividends, pay personal income tax, and have less left over to invest. The amount of tax savings can differ due to several possible factors that can include personal income, the type of income earned, and the province. Due to some recent changes in rules related to how much investment (or passive) income a corporation can earn, the complexity in achieving these savings has increased but it is still valuable to take any opportunities that arise.