As a small business owner, you should always be looking at how to take your growing business to the next level. Maybe you’ve already taken the steps to incorporate your company and now you’re wondering about whether you need to do something like create a holding company. Is this the right next step for you?
How to decide if you need a holding company
First off, what exactly is a holding company? A holding company is a company that owns the shares of your operating company. It doesn’t participate in any other business activities, and is primarily used for tax purposes and to protect your assets. Essentially, the holding company keeps you once removed from your operating company. There are two main benefits to creating a holding company:
- Estate planning: One of the key times to consider creating a holding company is when you’re doing estate planning, as holding companies are a great tool for creating flexibility. When we at Smart Foundations speak to clients about creating a holding company for their business, they’re usually at the life stage where they are trying to figure out how to have their company carry on after they retire. One of the key benefits of creating a holding company is that your shares can be transferred to your children through the holding company by way of an estate freeze, which locks in the current value of a share, while attributing any future growth to your child.
- Asset protection: Holding companies act as an extra layer of protection between you and your operating company. By creating a holding company and transferring non-essential or redundant assets (i.e. cash) to it from your operating company, you protect those assets from creditors should something were ever to happen to your business.
One of the biggest potential issues when it comes to creating a holding company is navigating the tax implications. While it’s possible to use a holding corporation to defer the taxes on money taken out of an operating corporation, there can also be negative tax consequences if certain qualifications are not met. If you’re considering starting a holding company, let us help you talk to an expert in estate planning or taxes to make sure you’re reaping the most benefits possible.
You have a business plan, but do you have variations on it? Business plans are not a one-size-fits all solution and variations on your plan serves different purposes. Our next post will tell you all about it.