Establishing a Holding Company
REALIZE TAX BENEFITS AND SAFEGUARD AGAINST RISK
A holding company is a unique legal entity that doesn’t operate an active business. Instead, it’s a company created to hold passive assets, such as shares of other businesses, real estate, or an investment portfolio. Entrepreneurs may decide to establish a holding company for various reasons, such as asset protection or for use as an investment vehicle.
The Benefits Of A Holding Company
A holding company offers unique benefits, including providing an additional layer of liability protection, enabling the owner to invest corporate dollars rather than personally taxed dollars, and providing access to the lifetime capital gains exemption. Holding companies allow you to dividend out excess cash from your operating company on a tax-free basis, reducing exposure in your operating company while managing your tax liability. However, the benefits of holding companies are complex, and whether they’ll be advantageous for your business will largely depend on your individual circumstances, so seeking expert tax and legal advice is essential.
FAQs
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Holding companies are generally not set up until an operating company is sufficiently profitable to generate income beyond what is immediately required by the entrepreneur to fund business or personal expenses. However, this is only a rule of thumb, and everyone’s specific circumstances are unique. For instance, in some cases, it can be more efficient to set up a holding company and an operating company simultaneously, particularly when it is clear that the operating company will be quickly generating substantial revenue - for example, when setting up a Personal Real Estate Corporation or other professional services entity with predictable revenue.
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The first step is identifying who will serve as director(s) of the holding company. Consulting a tax advisor is also strongly advised to ensure you fully understand the tax implications of establishing a holding company. The final step before establishing a holding company in Canada is registering a corporate name and drafting the articles of incorporation or corporation bylaws that will govern the holding company. Note that since holding companies are typically not “public-facing,” a numbered company will suffice and the choice is cosmetic rather than substantive.
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Once all the required information is gathered, holding company formation can be processed as quickly as 3 to 5 business days.
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Before starting the process of establishing a holding company, you’ll need to gather contact information for all directors and shareholders including legal name, date of birth, occupation, citizenship status, tax residency, mailing address, email address, phone number, and copies of government-issued photo ID.
Need Advice on Setting Up a Holding Company?
Considering a holding company? We recommend discussing your business goals with a trusted team of legal professionals before attempting a corporate restructuring. Schedule a consultation call with Parr Business Law today and let’s discuss how to structure your business in a way that sets you up for success.