Strategic Planning & Business Consulting

Do I Need a Holding Company?

November 22, 2022

An image of a small business owner reviews details on her holding company.

Are you a small business owner? Do you own a portfolio of investments? If either of those rings true, you may have at one time or another wondered if a holding company is right for you.

To help guide you in the right direction, in today’s blog we’ll be exploring what a holding company is, how it works, and some of the advantages and disadvantages that come with having one.

What is a Holding Company?

According to The Balance, a holding company is a company that doesn’t have any operations or active businesses but owns assets. These assets may include shares of stock in other corporations, limited liability companies, limited partnerships, private equity funds, public stocks, bonds, real estate, brand names, trademarks–practically anything that holds value.

Holding companies hold enough stock in another company that they are able to exert complete control over its policies and management decisions.

How Does a Holding Company Work?

A holding company is primarily used to hold investments. They may also own real estate, stocks and bonds, and intellectual property like trademarks.

Holding companies choose to invest heavily in subsidiaries to shield themselves from losses and other liabilities that come with direct ownership of a business.

Why should I Have a Holding Company?

There are several reasons you may consider creating a holding company.

Creditor and Asset Protection

As a business owner, your company is exposed to several liabilities. By keeping some of your assets in your holding company, you can reduce the legal risk. For example, if something goes wrong with a service your company provided, creditors can go after assets held by the operating company. They cannot, however, go after the assets held by the holding company.

Tax Savings Benefits

With a holding company, you can transfer your retained earnings from the operating company to the holding company via tax-free dividends. Why would you want to do this? Well, it provides you with the flexibility to control how much income you receive through dividends, and in a way, provides some control over how much tax you pay. For example, if you find yourself in a high tax bracket in 2022, you can have your dividends paid to your holding company to defer your income to the following year and reduce your tax bill for the current year.

A holding company also provides some tax savings as corporate tax rates are often lower than personal tax rates. So, rather than withdrawing funds and being taxed personally, you can keep them in your holding company where they can grow through investments.

Estate Planning

Estate planning is seen by many as an overwhelming process. Having a holding company can make this process more bearable. This is primarily because it can help facilitate succession planning, which is the transferring of assets or ownership of a business from one generation to the next.

For example, you may be able to transfer shares in an operating company to your children through a holding company using an estate freeze. An estate freeze halts a person’s tax liability following their death and transfers any future cash gains within the operating company to their beneficiaries.

Not sure if a holding company is right for you? Consult DDL & CO

Having a holding company can provide several benefits but they are not ideal for everyone. It’s best to consult your accounting or legal professional for advice before making a final decision. As one of the top full-service accountants in St. Catharines, DDL & CO can help you decide whether a holding company is right for you.

At DDL & CO we provide advisory services in the area of accounting, assurance, tax preparation and business advisory services. Our team of professionals prides itself on providing a high level of service at an exceptional value to all our clients. Give us a call today at (905) 680-8669 or request an appointment to get started with one of our trusted advisors.