What is a Holding Company?
A holding company owns a controlling interest in other companies’ outstanding stock, often referred to as “subsidiaries” or “holdings”. Owners are usually not involved directly in the day-to-day operations to produce goods or services of their holdings but exercise control through voting rights and the appointment of boards of directors.
Why Create a Holding Company?
Deciding whether to open a holding company depends on various factors related to your business goals, financial situation, and long-term plans. Owners may choose to create a Holding Company for a variety of reasons. Some of the most popular reasons we see here in Grande Prairie include:
- To limit the risk and liability of subsidiaries
- To diversify an investment portfolio
- To attract external investment
- To reduce personal taxation
- To transfer ownership of an operating company to a family member
What are the Potential Benefits of a Holding Company:
Growth & Risk Management
If you have, or plan to have, many businesses, a holding company can provide a structure to help manage multiple businesses or assets more efficiently. They can also create an additional layer of liability protection by separating the assets and liabilities of each holding within the portfolio by potentially shielding the assets of one subsidiary from the liabilities of another.
Investor Attraction
A Holding company may be more attractive to other investors or allow the owners to secure better financing by demonstrating a more diversified business structure.
Tax Benefits
Sometimes a Holding Company can provide reduced taxes on dividends.
An example:
Michael works full-time as a chef in a local Grande Prairie hotel, making $65,000. He also has a Holding Company that has part ownership in a local bakery, brewery and butcher shop. One of these Operating Companies, Suzy’s Sweet Treats, does exceptionally well this holiday season and issues a dividend to all 4 shareholders of $25,000. Rather than take the dividend personally, putting Michael into a higher tax bracket, they transfer the dividend to the Holding Company. The following year Michael leaves his Chef job, earning $35,000 for the year, and withdraws the dividend, bringing his annual income to $60,000.
Transfer of Assets
A Holding Company can make it easier to transfer assets between subsidiaries and to make the transfer of ownership smoother. Instead of directly transferring ownership of individual businesses or assets, the heir can inherit shares in the holding company, which effectively encompasses all subsidiary businesses.
Costs of a Holding Company:
Establishing and maintaining a Holding Company can be complex and expensive. Legal and administrative costs, compliance requirements, and potential restructuring of businesses can be significant.
Similar to an Operating Company, a Holding Company is registered as a business entity in the eyes of the CRA and is required to complete annual filings, submit reports and maintain accurate business records. These are additional costs for professional services and time on administration.
Different provinces have specific regulations and laws regarding holding companies. Understanding these and complying with them is crucial to avoid penalties and to execute the benefits.
Before opening a Holding Company, we at McNabb Lucuk LLP encourage you to consult a financial advisor, legal expert, and accountant. Call or email us to book an appointment for personalized guidance based on your specific circumstances to access the pros and cons to determine whether a Holding Company aligns with your business objectives.
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