You, (or you & others), own the shares of the company that operates your business (aka OpCo).
Do you need a holding company (aka HoldCo) that would own the shares of OpCo? This is an important question. Some advantages of a HoldCo are discussed below.
Setting up and maintaining a HoldCo involves administrative and regulatory compliance requirements, (similar to the OpCo), but the potential benefits can outweigh the costs, making it a valuable tool to protect and grow your wealth. Consult with your accountant and lawyer to determine if a HoldCo is right for you and when it’s the right time to set up a HoldCo. They can also advise if you should have a separate HoldCo for each of your OpCos.
What is a HoldCo? It’s a company that owns enough voting shares of your OpCo to control its policies and management. You, (or you & others, e.g. family members, investors), can be HoldCo’s shareholders.
Why use a HoldCo? The HoldCo can manage the assets and investments of your OpCo, while the OpCo can deal directly with the operating activities of your business.
ADVANTAGES
1. Reduce Tax
(i) Dividend payments by OpCo to HoldCo are typically tax-free due to the dividend refund mechanism under the Income Tax Act. A tax-efficient transfer of profits.
(ii) Dividend payments by HoldCo to its shareholders splits HoldCo’s income among the shareholders. Dividends paid to shareholders who are family members in lower tax brackets can reduce the total taxes payable.
(iii) HoldCo can retain its earnings and: (a) defer taxes by strategic reinvestment; or (b) delay dividends payments until the tax implications are more favorable.
2. Protect Assets
HoldCo can help to protect valuable assets, such as intellectual property, real estate and financial investments.
OpCo will deal with your business’s operating activities; HoldCo will own the business’s assets. These assets are generally shielded from potential liabilities resulting from OpCo’s day-to-day activities, e.g. if OpCo is sued or faces financial difficulties, the assets owned by Hold Co are generally shielded from claims against OpCo.
3. Succession Planning
HoldCo can simplify succession planning. HoldCo’s shares can be:
(i) transferred to your beneficiaries without disrupting OpCo’s business operations; and
(ii) transferred, in part, over time, while still allowing you to retain control of HoldCo.
This flexibility in timing and transfer of shares potentially can minimize tax liabilities.
4. Simplified Structure
(i) HoldCo can streamline the structuring of its business arrangements.Consolidating business interests under a Hold Co can simplify management and financial reporting, making it easier to oversee your diverse business operations and investments.
(ii) HoldCo can enhance your ability to raise capital. Presenting a consolidated financial position improves your business’s creditworthiness, which can make it easier to get financing.
5. Flexibility
A HoldCo structure:
(i) provides flexibility,-allowing for quick and efficient reorganization of your assets and operations in the future which can be useful for mergers, acquisitions or divestitures.
(ii) facilitates transferring shares, assets, and/or business units, so you can more easily respond to sale opportunities. – MARY RUIJS (ASE)