Holding Companies Explained- Protect assets and enable tax strategies.

[Music] hey guys it's uh david david barnett from davidcbarnett.com the blog site youtube channel itunes soundcloud google play amazon podcast where i talk about buying selling financing and managing small medium-sized businesses this week we're talking about holding companies i got a bunch of questions from people asking about holding companies what they're for how they work if there are any like serious you know tax advantages or other real perks to why someone would want to have a holding company whatever the heck that is so i decided to put together a little powerpoint presentation because it can be easier to understand when you can see it and i'll do as good a job as i can describing what i've got on the screen for those of you that listen in the audio stream let me share my screen we'll head right over here so [Music] as you can see the very first thing i'd like you to do if you haven't already is head over to davidcbarnett.com which is my blog site sign up for my email list because if you never want to miss a new video like this one talking about all the topics i talk about buying and selling businesses then the surest way not to miss anything is to be on my email list because you'll get an email every wednesday with the new video that comes out and you get to pick which topics you're interested in so you literally check off the boxes of what you want you'll only get videos that apply to those topics it's easy to unsubscribe i'm recording this in december 2020 the other big advantage to being on my email list is that the email list recipients are the only people that get the holiday chat recordings which are one hour actual consulting calls with people who've paid to uh talk with me about buying selling financing and managing a business and so if you want to see those videos or hear the recordings you need to be on the email list otherwise you're going to have to wait until i release them in july and august of 2021. so if you want to get those you got to be on the email list so let's take a look very first beginning someone gets into business so on the screen here it just says person in business and there's a sole proprietorship and that's simply me doing business in my own name and any attorney out there would tell you that this is risky because if i do something wrong and someone sues me all my personal assets are exposed to anyone who sues me because there's no legal difference between the business i'm conducting and my own personal affairs and so at the very start what most people will do when they're getting into business is they will create some sort of limited liability business entity and i'm leaving it as a broad term like that because depending on where you live in the world uh these could have different names so common names would be a corporation or an llc or some kind of limited partnership etc it's a a legal entity so under the law it's a person unto itself it can sign its own contracts and there's a division between what goes on in that business and you personally as the owner so if something were to happen in the business somebody enters your premises they slip and fall there's a lawsuit for example that business could be found culpable and the assets et cetera in that business could be at risk of being lost in that lawsuit for example but if it's set up properly that's where the liability ends if you owned your own house for example or a cottage or a sailboat or something then the the person who has a problem with your business won't be able to come up and take your personal assets now a little disclaimer there are issues and things that happen within business that do become affairs that are the responsibility of the owner what we call directors directors liabilities and and things like this um often to do with taxes and if if a limited liability entity is not set up properly then they the good attorney for someone prosecuting you could uh or someone suing you could with what they call pierce the corporate veil which is a way to get around someone's company so it's important to get proper advice from you know qualified people when you're going to be setting these things up so this is this is the level that most people get to and they never go beyond this within this operating company this limited liability entity they've got assets and liabilities the equity that they own in the business there's business activity going on in here employees customers payables receivables inventory this is where we do business okay think about any business basically describes it and we refer to this as an operating company because it does stuff now in the beginning if you owned a bunch of expensive equipment for example in your business and you borrowed money from the bank there's really no risk that your assets could be lost because the bank will have a lien on those assets that to hold them as collateral so if someone sued the company that person suing the company couldn't necessarily take the equipment because the bank is ahead of them in line they've got a legal um you know entitlement to those assets because of the debt that you owe to the bank as time moves on and you pay off that bank loan for example now you've got assets in the business which are worth something which may not necessarily be encumbered with any kind of direct debt that's when we start to have a greater degree of risk again in something like a lawsuit for example so this is when we're going to start seeing the first instance of what what we're going to refer to as a holding company so here i've got the owners in the blue box and below them in the purple box is the limited liability entity and then there's a separate box here which is a business entity notice i removed the term limited liability because we may or may not want to use a limited liability entity to be a holding company it depends on what the strategy is what the purpose is here's why sometimes we might have a holding company that has losses in it and we may want to move those losses upstream to the entity above it whether that's the individual owner or some other entity as we're going to see shortly and so it takes planning and strategy to figure out what are the ultimate goals in creating these different corporate setups what i'm going to show you here today is something that someone would do for example to protect assets in the case of being sued so we've got our operating company and we have a business entity which has important assets only as it says there and so i'll give you an example i've got a friend of mine here locally he's in the construction industry the construction business only owns a few pickup trucks and some other minor pieces of equipment all of the other major items of equipment that they own the biggest pieces of equipment are held in a holding company and are leased to the construction company why in case something were to ever happen heaven forbid you know an accident involving someone getting hurt or something like that the the ability of somebody to sue that operating company is there but they wouldn't be able to get hold of those assets because those assets the equipment they belong to another company that operating company is simply leasing them so it would be like if i was renting a car and somebody tried to sue me they couldn't take the car because it's not my property belongs to the car rental company right and so this is what happens as entities get bigger if it's a successful business we want to take these important assets and move them into separate legal entities to separate them so that they're not available to someone who might come after the operating business now how do you get the assets from an operating company into a holding company without for example triggering a capital gain or some kind of tax bill those questions are going to be answered by your cpa and so you have to figure out number one what is my goal in this so there's legal stuff there can also be financial stuff that you want to achieve through reorganizing into you know using holding companies and stuff and this is why you need to have advisors that are expert on this on this kind of thing who can give you advice i would just i would love to remind everyone if you're enjoying the video or any of my videos hit the thumbs up or like button it really really really helps me um in the youtube algorithm and everything to to get more people to watch my videos and this is an incredibly authentic thumbs up it's actually a photo i took in my own hand all right so what then is the next iteration or evolution beyond the owners owning an operating company and a holding company well you might want to add another layer between the two and so in this example we have the owners who own the shares of a sharehold co which is simply a holding company which owns the shares or ownership interest in other companies in this case the operating company and the holding company now why would you have this kind of setup this kind of setup adds another layer of protection or separation between the operations of the business and the ultimate owners you know at the very top who are ultimately going to benefit from the the corporate and the business enterprise um but if you get into a situation where you have multiple uh holding companies and multiple operating companies a structure like this can make it more efficient from a tax strategy perspective to move resources between these different entities and really the sky's the limit as you can see from this next slide we've got the owners only owning a shareco and then we have the shareco owning you know one two three different operating companies then we have one of the operating companies owning another operating company over in jamaica and we've got four different asset company asset uh holdcodes and you can see here one of the asset hold codes actually has some other shareholders involved in it and so really you can you can get involved in a very very complex corporate structure through having all these different kinds of things big companies will do this for things like joint ventures they might open a new entity a new opco and own part of it with another company then they're both contributing something for a mutual gain what is the downside to creating a very complex corporate structure like this well every one of these entities is is an entity that probably has to file a tax return every one of them has to have a minute book every one of them has to have regular maintenance and it's not free and so this is why people often only get into this once they've gotten their enterprise up to a level where they feel that there's there's really something to protect there you can also use different structures like this to make it easier for you to exit for example so oftentimes i'll have a business seller that i'm talking to who wants to sell their business and the business owns the business operations affairs but it also owns the piece of real estate well they might find a buyer who can't afford to buy them both and so they might end up agreeing to a deal where they sell the operations of the business maybe in an asset sale and they keep the legal entity which owns the building and they become the landlord of the buyer if they had structured it such that there was an a holding company owning the building which was leasing to an operating company then they would have a much easier time selling either the assets or the shares of the operating company without having to worry about how to move the building into another entity it would already be in another entity and so in that scenario those people would be set up already in order to easily sell the operations while continuing to be the landlord and then enjoy some income from collecting rent maybe for a few years down the road until they sell the building to somebody else so so these are just some of the ideas that you can get involved in with a holding company and there are also some tax strategies that i mentioned before so for example if you can imagine a an asset holding company which has a big piece of equipment there might be a depreciation schedule that is a declining balance depreciation maybe 30 a year if that holdco is leasing the piece of equipment to an operating company for a set amount per month over many years for example whatever the the contract agreement is that holdco may have financial losses in the beginning because of the depreciation and if those losses can be moved up to a parent for example then there could be some tax strategies at play eventually it's it's not tax avoidance it's tax deferral because eventually that's going to play in the opposite direction once the depreciation expenses go lower every year soon that lease income is going to exceed the the expenses of the depreciation and then the the hold co is going to start to have profitability and so again this is complex stuff you need a proper team of advisors cpas and attorneys who have been involved in this kind of thing before and can give you some advice it's not cheap which is why again we only see this kind of thing as companies really grow and become successful if you are interested in learning how to buy an existing business that already has customers profits and cash flow in a risk-reduced way under realistic scenarios that happen all the time out there in the real world then you should be heading over to businessbuyeradvantage.com that's where you will find an illustration of how i help people buy businesses i've been in this business now for over a decade helping people buy and sell businesses the online course is over 12 hours of content and i recently added new modules about buying a business during a recession how covid will impact the marketplace and on buying distressed businesses so you can learn more over at businessbuyeradvantage.com and if you want even more of my help beyond the online course i do a group coaching program and i'm available for 101 consulting consulting to help you buy the business of your dreams and with that i'll say see you later it's been a pleasure and don't forget hit like really helps [Music] cheers

Channel: David C Barnett Small Business and Deal Making SME

Views: 108,883

Keywords: entrepreneurship, small business, small biz, holding company, operating company, business, business broker, Business brokerage, entrepreneur, entrepreneur advice, holdco

Id: ORWaTm7qYRw

Length: 14min 33sec (873 seconds)

Published: Wed Dec 16 2020