When is the right time to implement a Holding Company?
August 25, 2023
When to Implement a Holding Company
Successful organizations consider risk management and asset protection as part of their strategic planning, and one way to best cover both of these is through the implementation of a holding company.
A holding company (or a holdco), also known as a parent company or an investment company, is a type of business entity that exists primarily to own and control other companies or assets. Instead of engaging in active business operations itself, a holding company's main purpose is to hold and manage the ownership interests in its subsidiaries or investments – in a nutshell, a holdco is an instrument to separate organizational risk and wealth.
When is the Right Time to Implement a Holding Company?
For astute business owners, understanding the optimal moment to establish a holding company can be a game-changer in terms of growth, efficiency, and risk management. A holdco, with its potential for improved asset protection, streamlined operations, and strategic expansion, offers a compelling opportunity for businesses to maximize their potential. However, navigating the decision to implement a holding company requires careful consideration of various factors, such as organizational structure, tax implications, and long-term goals.
The optimal time to begin discussing the value of a holding company with your accountant would be when your organization is starting to see excess cash. Excess cash provides the occasion for various investment opportunities, whether that is investing in real estate, considering expansion, or stepping up on research and development.
What do Business Owners Need to Keep in Mind When Implementing a Holding Company?
Implementing a holding company can be a complex strategic decision for business owners, and it requires careful planning and consideration. There are several important things that business owners need to keep in mind when setting up and operating a holding company.
Legal Structure and Incorporation
It’s important to discuss the legal requirements and implications of establishing a holding company with your accountant. Choose an appropriate legal structure (e.g., limited liability company, corporation) that aligns with the business's objectives and offers the desired level of liability protection. Work with your accounting team to clearly define the purpose of the holding company and its role within the overall corporate structure.
When implementing a holding company, business owners must carefully consider several tax implications to ensure compliance with tax laws and optimize the overall tax efficiency of the corporate structure. The tax considerations can vary depending on the jurisdiction, the legal structure of the holding company, the types of businesses held, and the specific activities undertaken.
Implementing a holding company can offer asset protection benefits for business owners, as it creates a legal separation between the holding company and its subsidiaries. However, there are several asset protection implications that business owners should consider to ensure the effectiveness of the holding company structure, including proper capitalization and asset transfers and liabilities.
Particularly with riskier businesses, perhaps those where there is a high likelihood of injury or controversy, you’ll want to make sure that you are separating risk and wealth as much as possible. Taking the time to identify and assess potential risks associated with the holding company's operations and its subsidiaries and implementing strategies to mitigate exposure to risks is prudent planning.
A well-structured holding company can provide significant advantages in terms of risk management, tax efficiency, and business diversification. However, improper implementation can lead to legal and financial complications.
As with all major organizational financial decisions, the best course of action is to discuss whether to holdco or not with your trusted accountant. Given their deep understanding of your business operations and growth goals, they are best suited to provide direction on when the time is right.
A member of the Integrated Advisory Network, Graham Thiessen is a Partner and Co-Founder with SummitPath LLP. Graham is passionate about educating his clients, enjoys being a sounding board for them, and is deliberate about asking the right questions to show them a different way to look at their business. Graham’s driving purpose is to leverage his client relationships to make a positive difference in the lives of others.
The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.
Preserving Wealth: Strategies for Minimizing Inheritance Taxes
One trillion dollars. That is the staggering amount that is forecasted to change hands from one generation to the next in Canada in the ten years leading up to 2026.
Unleashing the Power of Accountants: Your Trusted Partners in Small Business Growth
Small businesses serve as the backbone of Canada’s economy, driving innovation, fostering local growth, and creating job opportunities. They are also challenging to launch and keep going.