By: Jayson Schwarz LLM
As businessmen and women we are often troubled as to the proper structure to use, in the operation and management of our active businesses. This applies to every kind of active business, from manufacturers, to sales organisations. As a result we need to seek the advice of solid and knowledgeable accountants and lawyers to guide us. Today’s article will focus on the advantages of using a holding company behind the operational structure of your business.
Before we begin I need you to imaging a scenario where the business is run through an operating company (opco) and the shares opco are owned by a holding company (holdco). For this discussion holdco is owned by you, the entrepreneur, the business owner. Each year opco earns a profit, pays its taxes and has cash sitting in the bank. Opco then issues a dividend to holdco. What does this do?
- Inter-corporate dividends are tax free. This means that the money sitting in opco can be transferred by dividend to holdco generally without tax consequence;
- We have taken the cash from opco and put it in a place of safety. It has been virtually creditor proofed from creditors of Opco.
- The money in opco is available to invest in other areas separate from opco such as other assets to diversify holdings. If excess earnings were paid directly from opco to the owner personally, to make those investments, the owner would either pay the personal marginal tax rate or the dividend tax rate after the funds being taxed corporately and this would leave less to reinvest: by using holdco reinvestment is more tax efficient.
- Tax savings may be had by income splitting through holdco. In other words if the owner’s wife and children over 18 are shareholder’s of holdco or through their family trust are shareholders, if not working or having low income, each may receive dividends of close to $50,000 with minimal tax consequence.
- The money may be loaned back to opco and security taken creating additional creditor proofing and maintaining cash in opco.
- The other benefit relates to timing. Money can be drawn from Holdco as required and the owner, as an example, may choose to pay dividends every second year rather than every year allowing the owner to avoid paying quarterly personal tax instalments. It is possible to base instalments on either the previous year’s tax liability, or the current year’s expected liability. If the owner has little or no tax liability every second year, instalments can be based on the year of low income expectation.
As you can see there are many benefits to using a holding company. Please meet with your professional advisor, either lawyer or accountant to assist you in achieving the proper structure for your business.