A holding company is a corporation that holds shares in one or several other operating corporations. There are several main reasons for setting up a holding company including the need to protect business assets, to flow funds between operating corporations, to simplify business succession and estate planning and to minimize taxes.
Protecting business assets
A holding company can be used to protect business assets by insulating them from potential creditors. The general idea is for the operating company to have little in the way of assets and cash available to satisfy any creditors. Property and equipment are leased by the holding company to the operating company. The operating is funded through secured loans made by the holding company. Any profits made by the operating company are paid to the holding company by way of dividends.
More flexible flow of funds
A holding company makes it easier to move funds between a group of related companies. For example, take the situation where a holding company owns two operating companies, Opco A and Opco B. If Opco A is in need of funds and Opco B has excess funds, Opco B can pay dividends to the Holding company. The Holding company can either provide a secured loan to or subscribe in shares of Opco A.
Estate and Succession Planning
Business succession planning is necessary to ensure the viability of a business continues long after its original controlling minds no longer play an active role. Where there is more than one shareholder or operating corporation, the use of a holding company will simplify a number of common estate planning structures. For instance, an estate freeze is used to transfer the future appreciation in value of a company to one's family, while maintaining control of the corporation. This is done to minimize exposure to taxes on the later disposition of shares. Using a holding company will enable the structure to be implemented once with the holding company, instead of once with each operating company.
Tax Savings
A holding company creates a number of opportunities for tax savings. The extent to which taxes can be minimized is highly specific to the nature and structure of the particular business. Using a holding company can provide tax deferral opportunities through the use of tax-free inter-corporate dividends (subject to Part IV tax). It can also be used for income splitting, although the ability to do so has been curtailed by income attribution rules. In addition, where there is more than one shareholder, interposing a holding company in between each individual shareholder will allow the shareholders to time their dividends to suit their circumstances.
A holding company can also allow for deductions to be claimed where they are not otherwise available. For example, where a company borrows money to purchase life insurance, the interest expense is generally not tax deductible. If, however, the company borrows money to pay a dividend to its holding company and the holding company uses the dividend to purchase life insurance, the company would be able to deduct the interest expense.
The above examples are for demonstration purposes only and should not be undertaken without consulting your professional advisors. To find out if we can assist you with a holding company, call us for a free consultation.