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Why you should open up a holding company?

Holding is different from the operating company as it does not sell anything or have any expenses but only hold assets:

The operating company has a relationship with suppliers, customers and landlords and if something goes wrong with one of those relationships the cash kept in the operating co. bank account could go into the lawsuit so it would be far better to keep the assets in a separate company.

4 reasons why you should open up a holding company:

1. Assets Protection: Due to the limited liability feature the creditors cannot come after your assets if they are in the holding company so it is important to keep your assets in the holding company especially if your operating company is dealing with the public directly.

2. Maintain eligibility for lifetime capital gain exemption: Every Canadian is entitled to get an LCGE on sale of qualifying small business shares for almost $892,218. It is very important that the shares in the company qualify as qualifying business shares. There are different criteria for this; make sure you talk to your accountant to check the qualifying criteria but 2 of the conditions are that the company should not have excess cash, and 90% of the assets should be actively employed in your business so the holding co. can help you to meet these conditions by transferring the excess cash from the operating company.

3. Investment vehicle: Being a businessman you have two options either keep all the excess cash in the operating company or take it out personally and make the investments from the personal side which will be subject to heavy personal taxes. A holding company allows you to get the best of both so the cash taken out in the holding company will be taxed at a lower corporate tax rate and can be used for investment portfolios or real estate purchases.

4. Timing of dividends: If there are few shareholders in the company and they decide to take dividends at different times. The best idea would be for each shareholder to set up a holding company which can be useful to take out the dividend then timing is not an issue, also the cash will get taxed on the corporate side in the operating company or in the holding company. It does not really matter where the cash sits so a holding company can be really useful if you have an operating company that has multiple shareholders and each of those shareholders needs to get cash at a different time.

Conclusion: As there is a cost involved like incorporation and ongoing costs you should talk to a professional before making the decision about opening up a holding company.

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