Business Consulting

The Pros and Cons of a Holding Company for your Business

November 4, 2022

An image of two business partners discussing a holding company they have set up for their small business.

If you’re a business owner looking to protect and grow your assets in Canada, you might have considered a holding company for your business.

A holding company can offer a way for you to separate your operating assets from your investment assets.

If you’re wondering whether a holding company is right for your business, it is essential to consider many factors, including business structure, tax planning and future business goals.

We’ll go over the basics of a holding company and some advantages and disadvantages of holding companies so that you can make an informed decision for your business. 

What is a holding company?

A holding company is different from your average company. It is a company that exists solely to hold other companies, investments or assets. It does not conduct any active business operations.

Typically holding companies will own:

  • Real estate
  • Shares in Private Companies
  • Other investments including mutual funds, GICs, bonds, and stocks.

For many of our clients, a holding company can be a way to separate their active business operations from the rest of the corporate structure of their business.

Small businesses may choose to hold companies that hold either the real estate holdings (such as the building or a factory) of their business or even shares of the operating company of their business.

While this can be a complex financial structure, a holding company can offer many benefits for business owners, especially if done correctly with the help of advisors who understand your business and finances.

Advantages of a Holding Company

Tax planning

One of the primary advantages of holding companies is tax planning. By owning a holding company, you can structure your income to minimize the taxes you pay today and defer them into the future.

For example, a holding company can allow you options to plan for tax deferrals by reinvesting profits from the holding company, splitting income with family members, or taking advantage of tax strategies such as utilizing the Lifetime Capital Gains Exemption (LCGE).

Estate and Succession Planning

Another advantage of holding companies is the ability to do estate freezes and succession planning. As a business owner, you can choose to structure your share ownership in a way that freezes the value of your investment and provides future growth to your children or other family members. In addition, these estate planning strategies can help defer taxes to the future to optimize your and your family’s tax situation.

Holding companies can also provide opportunities to pass assets to your next of kin. Holding companies can facilitate business succession planning by allowing you to sell shares of the holding company rather than the operating company. In some situations, this can offer significant income tax advantages when done correctly.

Risk management

A holding company can also offer risk management advantages. This type of corporate structure can help you optimize the cash and assets in the operating company at a given time.

For example, if the operating company experiences financial difficulties, you can still protect your investment in the holding company in the event of default or other liability issues.

Holding companies allow you to separate the operations of your business from your assets. Then, with strategic risk management planning, you can protect your assets from creditors, and other forms of liability, in the event of unexpected business downturns.

Planning for your business’s future

As your business evolves, you may be considering several opportunities for your business, whether they be growth strategies like raising capital or exit strategies such as selling your business.

Without a holding company, your business’s value includes the assets it owns (such as the building) and the business’s operations. If you want to sell your business or raise capital, the buyer or investor may be interested in the actual value of only your business operations.

However, if the two parts of the business were separate, it could be easier to determine the value of the operating business on a standalone basis. In many cases, the holding company owns the building, and the operating company leases the space for its active business. This can help separate the value of the business’s operations from the passive real estate holdings.

Disadvantages of Holding Company

Upfront incorporation costs

One of the disadvantages of setting up a holding company is the cost associated with incorporating a new company. The process can be expensive and will likely involve professional costs.

It is essential to consider the goals of setting up a holding company for your affairs before diving into creating a holding company. But, again, a good tax advisor can help you make the right decisions.

Administrative burden

Besides the initial costs of incorporating a new company, holding companies will have ongoing fees and compliance requirements. For example, you will need to file annual financial statements, corporate tax returns, and other filings with government agencies to maintain the company.

There may be additional bookkeeping and accounting requirements, which can add up.

Complexity can come at a cost.

If not done correctly, holding companies can become expensive!

Sometimes, you might end up paying more taxes if it is not the proper structure for your business.

If you’re not careful, the costs of managing a holding company can outweigh its benefits.

Is a Holding company right for you?

A holding company can be a great way to protect your business and its assets. Holding companies can offer a variety of advantages for businesses, from tax benefits to risk management or raising new capital for your business. However, setting one up can be expensive and complex with added administrative tasks, so weighing the pros and cons before making a decision for your business is crucial.

Contact KSSP Partners LLP in Markham for all your Business Planning Needs

Talk to an experienced Canadian tax advisor to get advice on your business planning. At KSSP Partners LLP, our business and tax advisors can provide personalized tax planning advice for your personal and business taxes. To learn more about how KSSP Partners LLP in Markham can provide you with the best tax planning expertise, contact us online or by telephone at 289-554-5997.