If you’re active in any business field, you may have heard the term “Holding Company” at some point and are wondering what exactly that means.
In this article, we’ll go over what holding companies are, what they’re used for, and when you should think about establishing your own.
Let’s start from the beginning:
As the name suggests, holding companies are those used to hold investments, unlike operating companies that are used for making income through active business, such as a computer store or a law firm. Holding companies, on the other hand, are passive and do not do business with clients.
Holding companies can also carry many different types of investments, such as:
There are many benefits that holding companies present, but the top three are asset protection, tax deferral, and tax savings.
Holding companies help to protect your assets by keeping them separate from an operating company. If something were to happen and you were indebted to a creditor or being sued, the creditor would only be able to ask for assets in your operating company. They would have no access to your holding company. In other words, the holding company creates a layer of protection between the operating company and its assets.
Holding companies have the ability to create flexibility in income timing, which may allow you to defer certain taxes. Additionally, holding companies make it easier to transfer earnings from the operating company to the holding company as tax-free dividends, allowing you to reinvest that money without being taxed on it at that moment.
Holding companies can help the owner meet specific criteria for the Lifetime Capital Gains Exemption (LCGE), which allows your business to save money in taxes on capital gains.
This exemption allows owners of Canadian Controlled Private Corporations and most other small businesses to claim tax-free capital gains up to a grand total of $866,912! Like anything involving the government, however, there are criteria that must be met before you’re eligible for the LCGE.
Despite how useful they can be, holding companies present some disadvantages as well. For one, they can quickly rack up setup costs, so you should make sure that the money you stand to save by incorporating a holding company outweighs what you would spend.
While the concept of a holding company may be easy to understand, it can be challenging to determine whether incorporating one is the right move for your business. If you have questions regarding how a holding company can benefit you or whether it would present unnecessary loss, or you’d like advice on how to set one up, let one of our expert CPA accountants at AP Accounting Solutions help.
At AP Accounting solutions, our knowledgeable accountants are ready to assist you in all of your holding company needs. Contact us today for a consultation to get started.
