Benefits of Using a Holding Company | 4 Reasons To Consider A Holding Company For Your Business

hi my name is Steve Parr and I'm a Vancouver business lawyer and today we're gonna talk about holding companies what they are and why you might benefit from having one of them in your small business structure so holding company is a little bit different than your typical operating company so in a holding company it's not selling anything they're not is not taking in revenue doesn't have expenses or payroll it's not really a business in that sense of the word instead what a holding company does is that it holds assets so it holds assets for tax reasons and for liability reasons and we're gonna get into all of that in just a minute so typical assets of a holding company are other companies so a holding company may hold one or multiple different operating companies or it may hold real estate assets or it might even hold an investment portfolio there are four main reasons why you might want to consider using a holding company in your small business structure let's go over each of those right now so number one asset protection number two maintaining your eligibility for the lifetime capital gains exemption number three for use as an investment vehicle and number four the timing of dividend payments out of your company so that's a lot so we're gonna break it down one by one so at the top let's go to asset protection so number one a holding company is a very effective strategy for protecting the earnings from your operating company so typically this is how a structure would look like if you just have one shareholder and they're operating companies so let's take tim-tim the small business owner tim owns a t-shirt company and he is the sole shareholder of his operating company tim's t-shirts tim's t-shirt had t-shirts had a great year they made a million dollars and Tim is trying to figure out what to do with that cash he could leave it in the corporate bank account or he could pull it all out into his personal account and do whatever he likes with it whether it's personal expenses or if it's making his own investments so the drawback of pulling it all out is of course taxes he's going to blue about half of that income straight is going to go straight to taxes so whereas if he leaves it in the corporate bank account he's going to be subject to the corporate tax rate and it's gonna be a lot lower a lot better for Tim but the problem with leaving all that cash in the operating account is that Tim's t-shirts has relationships with customers with suppliers with the Landlord where they're renting their facility to produce the t-shirts so there's all to cut all kinds of relationships that center around that operating company and if something goes wrong with one of those relationships his cash which is kept in the corporate bank account could be exposed to a lawsuit so far better off for Tim to set up a holding company at this point where Tim would be the owner the sole owner of the of the holding company the holding company in turn is going to be the owner of the operating company and the operating company will dividend out tax-free all of the cash that it doesn't need for its ongoing day-to-day operations - the holding company and that cash will sit there until Tim decides it needs to pull it out for himself or if he wants to use it for investments or other purposes so let's turn now to the second reason for maintaining a holding company and that's making use of the lifetime capital gains exemption so every Canadian is entitled to eight hundred and eighty thousand dollars of a lifetime capital gains exemption on the sale of qualifying small business shares so the important part is making sure that your shares in your company maintain those qualifications - so they can be called qualified small business shares and there are a number of important steps that need to be taken in order to make that happen and you can discuss those with your accountant but one of them is to make sure that there's not any excess cash in your operating company so your operating company needs to meet a certain threshold of how much cash can be actively used in the business ninety percent of the of the assets of your operating company need to be actively employed in the business otherwise the shares in that company will not be well not qualify for the lifetime capital gains exemption so this is a very important thing to keep in mind and if your is throwing off a lot of cash is generating a lot of cash and it's essential that you set up a holding company now it's turn to the third reason for using a holding company is it can be used as an investment vehicle so rather than keeping all that cash in the operating company or pulling it out onto the personal side and then making investments from the personal side and being subject to those heavy personal taxes a holding company allows you to get the best of both worlds so the cash comes out of the operating company into the holding company and then from there it's taxed on the corporate rate and can be used for investment portfolios for purchasing real estate and for purchasing shares and other companies now let's turn to the fourth reason why a holding company could be beneficial for you so if your operating company Timms t-shirts in this case has three shareholders say so Bob Tim Julia so Bob Tim and Julia each have a share in the company they all have different financial needs and they're gonna want to take payments or dividends out of the company at different times but if they all own the same set of shares the same class of shares then when a dividend is issued by the company everybody has to receive a dividend at the same time and this might not be tax beneficial because if there's a hundred thousand dollars of dividends to go out and so a thirty-three thousand approx goes out to each of those shareholders then that might not produce a favorable tax result on the personal side so if each of those shareholders sets up a holding company in place then timing is not really an issue because the cash will get taxed on the corporate side in the operating company or it will get taxed on the holding company side it doesn't 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 the cash through dividends at different times so there are four reasons why a holding company can be beneficial for your small business structure this is complex stuff and if you have any questions I strongly encourage you to talk to your accountant or reach out to me directly I'm happy to respond to your questions thanks for watching [Music]

Channel: Steve Parr

Views: 78,507

Keywords: what is a holding company, benefits of using a holding company, holding company definition, using a holding company for small businesses, holding company explained, holding company structure, asset protection, asset protection strategies, lifetime capital gain exemptions, dividend payments, holding company vs operating company, holding company business plan, holding company problems and solutions, steve parr, parr business law, business law, holding company for real estate

Id: HidtdNJ1xkg

Length: 6min 40sec (400 seconds)

Published: Tue May 19 2020