4 BENEFITS OF A HOLDING COMPANY
What are the benefits of a holding company?
A holding company can provide you with more protection over your business. When you transfer non-essential or redundant assets out of your Operating Company into your Holding Company, then if your Operating Company was ever sued or if creditors were seeking to obtain assets from the OpCo, the assets would be protected because they would be in your HoldCo.
Qualified Small Business Shares
One day you’ll be selling your business, and hopefully taking advantage of the lifetime capital gains exemption. Your shares must qualify in order to utilize the lifetime capital gains exemption. There is a very of criteria that the business must meet in order to make use of the exemption and, one of them is that 90% of the assets in the Operating Company must be actually used – that is, you can’t have too much excess cash lying around. Holding companies allow you to transfer that cash out of Operating Company through a tax-free dividend to keep your shares qualified.
Holding companies can invest in real estate, ownership of other companies and developing an investment portfolio. Since this cash has only been taxed corporately, you are working with much more cash than you would if you had removed the money personally from your Operating Company.
Timing your Dividend Payments
If your Operating Company is owned by multiple shareholders, things can get tricky. When dividends are declared, every shareholder gets their proportionate share. If you don’t have a holding company, each shareholder has to declare that dividend as personal income, even if they don’t need the money.
Unnecessary personal income can create animosity between the shareholders and uncertainty over when to declare dividends and for how much. Shareholder 1 might need the cash right away, while #2 and #3 would prefer to defer.
HoldCos are very helpful here. Typically each individual is a shareholder in their own HoldCo, and then their HoldCos become shareholders of the OpCo. When the Operating Company issues a dividend, it goes to the HoldCo. At that point the ultimate shareholder can choose to leave it in the HoldCo (tax free), or pull it out personally if they need the cash.
This way, everyone is in control of when they get their dividend payment and can handle the tax implications.
Holding companies have their uses, and if your business has grown to the point where you think you might benefit, speak with your accountant and book a call with a lawyer to explore your options.