3 min read

Benefits of a holding corporation

Holding corporations provide significant advantages to small business owners who run profitable companies and want to shelter their assets and investments.

 

Holding corporations can be a great way for small business owners to protect their assets, make their businesses more attractive to buyers, and benefit from tax planning opportunities.

 

What is a holding corporation?

 

A holding corporation is a non-active company. This type of corporation doesn’t produce any products and doesn’t provide any services to customers. It’s only purpose is to hold assets like cash, investments, land and buildings, equipment, or the shares of an operating company.

Companies that produce products or provide services are referred to as operating companies.

There are a number of benefits to having a holding corporation, as follows:

 

Asset protection

 

Small business owners can shelter assets of land and buildings, equipment, or investments in a holding corporation to protect them from litigators and creditors.

When small business corporations are sued successfully by litigators the assets of those corporations can be subject to a judgement and the business owner can be forced to use those assets to settle pay a judgement or settlement ordered by the court.

Small business owners can protect their assets by holding them in a separate corporation completely independent from their operating company. The holding corporation doesn’t do business with anyone who can take it to court and therefore those assets are protected from legal disputes.

Similarly, small business owners who do business with vendors suppliers and creditors can shelter assets from claims by lenders if the operating company cannot make payments for outstanding invoices or service the loan payments on current and long-term debt.

A business owner that experiences financial hardship and is forced to close their operating company may keep those assets which are protected within a separate holding corporation.

 

Preparing for the sale of your business

 

Holding assets like the land of buildings in a separate corporation make selling your business easier and allows you to rent those assets to a new owner.

Many potential buyers of small businesses in Canada cannot afford to purchase both an operating company and the land and building from which that operating company operates.

Separating the operating company and the land and building in separate corporations makes the operating company more affordable to potential buyers.

If the corporation that owns the land building is separate from the operating company that small business owner may retain ownership and create a passive of revenue stream by renting the land and building to the new owner of the operating company after purchase.

Similarly, its undesirable to sell the shares of a corporation that holds significant investments. Holding those investments in a separate corporation prevents them from being included in the sale of your business.

 

Tax planning opportunities

 

Holding corporations allow small business owners to move passive investments to a separate legal entity and qualify for the Lifetime Capital Gains Exemption on the sale of shares of their business operating company.

In a previous article we discussed that small business corporations must meet two asset tests when determining whether the sale of shares qualifies for the Lifetime Capital Gains Exemption. Those asset tests are as follows:

  • At the time of the sale 90% or more of the assets of the business need to be used in earning active business income; and
  • For 24 months leading up to the sale 50% or more of the assets of the business need to be used in earning active business income.

Holding passive assets like investments or excess cash in an operating corporation may prevent a small business owner from claiming the Lifetime Capital Gains Exemption on the sale of shares of their business.

To ensure the eligibility of the corporation shares for the Lifetime Capital Gains Exemption small business owners can "purify" their corporations by transferring non-active revenue generating assets to a holding corporation which will not be sold so that shares of the operating company can be sold on tax-preferred basis.

 

Additional things to consider

 

Incorporation and annual maintenance costs – A separate corporation requires its own legal and accounting costs to maintain each year. Small business owners want to be certain that the value received by setting up an additional corporation is greater than the additional cost to maintain it.

A more complicated corporate structure – Multiple corporations create a more complicated corporate structure. Small business owners with multiple corporations will require the help of a Chartered Professional Accountant (CPA) to understand and use multiple corporations effectively.

 

Request a meeting

 

Setting up a holding corporation may or may not make sense for your business depending on a variety of factors. Request a meeting with one of our accountants today to discuss holding corporations and for help making the right decision for you and your business.

 

Request A Meeting

 

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