If you carry on a business as a corporation you may want to consider using a holding company to own your operating company. The holding company structure offers tax deferral opportunities and can help insulate your accumulated wealth from creditors or be used to avoid the U.S. estate tax.
The Basics of A HoldCo
In its basic format, a holding company owns the shares of your operating company. The operating company pays dividends tax-free to the holding company. If the operating company needs cash, the holding company can loan funds back (the loan should be secured provided by a General Security Arrangement – GSA).
Holding Company Benefits
Creditor Protection – You may be concerned that your operating company’s assets may be at risk from a real or frivolous law suit or that they may be subject to seizure from creditors.
By transferring the shares of the operating company to the holding company, the operating company can pay tax-free dividends to the holding company and eliminate access to these funds. Be sure to communicate with your bank beforehand!
Deferral & Investment – If the operating company has several shareholders, it may pay dividends at times or in amounts that are not convenient for you.
Have the operating company pay dividends to the holding company, where you can decide when and how much will be paid.
This also allows you to leave funds in the holding company for investment and defer the tax on the dividends paid.
Income Splitting – When the operating company has several shareholders you can transfer your shares to your holding company and have your holding company issues shares to your family members. The dividends or salaries paid from the holding company can be an effective way to split income  and reduce your overall tax bill.
Estate Freeze –An estate freeze is a transaction that fixed the value of your estate and transfers the future growth to your heirs. By using a holding company, you may want to consider placing investments in the corporation and undergo a freeze transaction.
U.S. Estate Tax – If you own U.S. property (shares, real estate etc.), you may be subject to the U.S. estate tax if your holdings are significant enough. By placing U.S. “situs” property in a holding company, you can avoid the U.S. estate tax on death.
The Downside To Holding Companies
There are some things you may want to think about when considering the use of a holding company.
If you have access to the capital gains deduction, using a holding company may limit your ability to claim that generous tax break.
There may be no tax benefit of moving investments into your corporation because corporate investment income does not receive any reduced rates like an operating company does.
Finally, if you move personal property to a corporation (i.e. vacation property), you may incur taxable benefits for using the property.
Considering A Holding Company?
Whether a holding company is right for your situation is based on each person’s individual circumstances and you should discuss your options with a professional accountant .
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