If you’re a business owner, you may wonder if setting up a holding company — also known as a holdco — makes sense for you. It can offer asset protection and potential tax savings. It may also be useful if you’re preparing to sell your business. Pierre Létourneau, Business Succession Advisor, TD Wealth, joins Kim Parlee to discuss these benefits and some of the complexities to consider as well.
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* If you are a business owner, setting up a holding company, also known as a holdco, could lead to potential tax savings and tax deferral opportunities, help protect your assets, and even help you prepare your business for sale. But is it right for you? Pierre Létourneau is a Business Succession Advisor at TD Wealth and joins me to discuss some of the benefits and some of the potential drawbacks that people need to consider. Nice to see you.
* Nice to see you, too.
* So just let's start with the basics-- what is a holdco? And why might a business owner benefit from it?
* Sure. So a holding company, as you mentioned, is a-- or a holdco is a holding company, which is a corporate entity that exists to hold passive assets, as opposed to an operating company, or an opco, which is, again, a corporate entity that conducts an operating business or an active business. So that would be a business that produces or sells goods or services.
* Right.
* In terms of passive assets that a holdco would have includes cash, an investment portfolio, real estate, and shares of an opco is typically what we see in a holdco. Now, in terms of business owners, most business owners can benefit from the holdco, especially if they have excess cash that they don't need personally.
- Now, for certain business owners, like professionals-- doctors, dentists-- it's a bit more complicated. They can't have a simple structure with a holdco because they have restrictions in terms of who can own shares of their professional corporation. So they could still benefit from it, but it's a bit more complex.
* Right.
* The main benefit of using a holding company for business owners is for creditor protection-- so protecting assets, shielding assets against potential liabilities or claims that arise within the operating business. So that's usually why they use it.
- It could also be used-- if you're preparing to sell a business and looking at accessing the Lifetime Capital Gains Exemption, a holdco could be an entity that's used to hold those passive assets so that the corporation remains pure for the purpose of the exemption, because the exemption is only available on sale of shares that are true operating businesses.
* Got it.
* So it can't have too much passive assets.
* OK. Good. OK, let's talk a bit about an example. I know you've got a chart here. So you can bring that up and maybe tell us just how it might work--
* Sure.
* --and what we should think about.
* Sure. But before the example, I just want to clarify one point that I think is important to understand is that a corporation is a separate legal entity, meaning that it can be contracted with. It has its own legal rights and its own liability profile that's separate from a liability profile of its shareholders and its managers. And that's important. That's a key concept to understand how a holdco could be beneficial.
* So you've got the creditor protection and the legal protection at the same time.
* Well, the legal protection leads to the creditor protection, right? So the separate entities is what allows us to protect assets. So the simple structure that I wanted to go through is just a structure where the business owner owns shares of a holding company that, in turn, own shares of the operating business. So it's really simple structure.
- And so if the operating business generates retained earnings that don't need to be reinvested in the business, those retained earnings can be paid to the holding company, its shareholder, as a inter-corporate dividend. Generally, that dividend would be tax free. So now, we've taken those assets and we've transferred them to a separate legal entity, and so protecting those assets against the claims that could arise in the operating business.
- The other advantage that this provides is that it still benefits from deferral of taxes. These assets have remained within the corporation. As I mentioned, that dividend is tax free, generally. So there's no personal taxes that have been paid on these funds. And there won't be any personal taxes until the business owner decides to take that money out.
- So if the business owner does need some of that money, it could then receive a dividend from the holding company. But if the business owner doesn't require that money, it could stay within the holding company and still benefit from tax deferral. And the holding company will then be the location where the investments will be made for the business owner.
* OK. Clear. What are the drawbacks? Why wouldn't somebody do this?
* So some of the drawbacks are costs, right? There are costs to set this up. And depending on the current structure, adding a holding company and transferring the assets to that holding company could be complex and could lead to costs-- will definitely lead to costs.
- And then there's ongoing costs because you're now creating a new entity that needs to file its own tax return, that has its own documentation that needs to be updated regularly. So there's going to be ongoing costs. And then, of course, this adds complexity to your structure. So it's a bit more complex.
- And then if you're using a holding company for other, more advanced planning, like I mentioned off the top, talking about accessing the Lifetime Capital Gains Exemption, the simple structure we're looking at may not be sufficient there. You may need a more complex structure. And so, again, complexity and additional costs that are associated to that.
* What is the difference between a holdco and a trust?
* Right. So they're quite different. They're different entities. A holdco, as I said, is a corporation that's a separate legal entity. A trust isn't a legal entity. It's an arrangement between different parties. So they have different purposes and different-- they're useful but in different ways.
- Usually, business owners-- the holdco makes more sense for business owners. If they're for advance planning, a trust could be very beneficial. And oftentimes, business owners will use both, depending on what their goals are and what they're trying to achieve.
* Got it.
* There is quite a bit of difference, but they're both potentially useful for business owners.
* Yeah, different outcomes, different things you're engineering for.
* Yeah, it depends on what you're trying to achieve.
* Yeah. And I guess the final thing is just it's always advisable to speak to somebody to help you navigate the complexity and also understand the cost benefit of this.
* Yeah, absolutely. So if you have an operating business or operating corporation and you have an investment portfolio, you should speak with an advisor to help you with determining if those funds should stay within the operating business and if you should set up a holdco to hold those funds.
- And, certainly, speak with your accountant, or lawyer, or seek that advice if you don't work with a professional like that. They can help you make that assessment to determine if it's worth the cost-- if the long-term benefits of setting up this structure will outweigh the costs associated with setting it up.
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* Nice to see you, too.
* So just let's start with the basics-- what is a holdco? And why might a business owner benefit from it?
* Sure. So a holding company, as you mentioned, is a-- or a holdco is a holding company, which is a corporate entity that exists to hold passive assets, as opposed to an operating company, or an opco, which is, again, a corporate entity that conducts an operating business or an active business. So that would be a business that produces or sells goods or services.
* Right.
* In terms of passive assets that a holdco would have includes cash, an investment portfolio, real estate, and shares of an opco is typically what we see in a holdco. Now, in terms of business owners, most business owners can benefit from the holdco, especially if they have excess cash that they don't need personally.
- Now, for certain business owners, like professionals-- doctors, dentists-- it's a bit more complicated. They can't have a simple structure with a holdco because they have restrictions in terms of who can own shares of their professional corporation. So they could still benefit from it, but it's a bit more complex.
* Right.
* The main benefit of using a holding company for business owners is for creditor protection-- so protecting assets, shielding assets against potential liabilities or claims that arise within the operating business. So that's usually why they use it.
- It could also be used-- if you're preparing to sell a business and looking at accessing the Lifetime Capital Gains Exemption, a holdco could be an entity that's used to hold those passive assets so that the corporation remains pure for the purpose of the exemption, because the exemption is only available on sale of shares that are true operating businesses.
* Got it.
* So it can't have too much passive assets.
* OK. Good. OK, let's talk a bit about an example. I know you've got a chart here. So you can bring that up and maybe tell us just how it might work--
* Sure.
* --and what we should think about.
* Sure. But before the example, I just want to clarify one point that I think is important to understand is that a corporation is a separate legal entity, meaning that it can be contracted with. It has its own legal rights and its own liability profile that's separate from a liability profile of its shareholders and its managers. And that's important. That's a key concept to understand how a holdco could be beneficial.
* So you've got the creditor protection and the legal protection at the same time.
* Well, the legal protection leads to the creditor protection, right? So the separate entities is what allows us to protect assets. So the simple structure that I wanted to go through is just a structure where the business owner owns shares of a holding company that, in turn, own shares of the operating business. So it's really simple structure.
- And so if the operating business generates retained earnings that don't need to be reinvested in the business, those retained earnings can be paid to the holding company, its shareholder, as a inter-corporate dividend. Generally, that dividend would be tax free. So now, we've taken those assets and we've transferred them to a separate legal entity, and so protecting those assets against the claims that could arise in the operating business.
- The other advantage that this provides is that it still benefits from deferral of taxes. These assets have remained within the corporation. As I mentioned, that dividend is tax free, generally. So there's no personal taxes that have been paid on these funds. And there won't be any personal taxes until the business owner decides to take that money out.
- So if the business owner does need some of that money, it could then receive a dividend from the holding company. But if the business owner doesn't require that money, it could stay within the holding company and still benefit from tax deferral. And the holding company will then be the location where the investments will be made for the business owner.
* OK. Clear. What are the drawbacks? Why wouldn't somebody do this?
* So some of the drawbacks are costs, right? There are costs to set this up. And depending on the current structure, adding a holding company and transferring the assets to that holding company could be complex and could lead to costs-- will definitely lead to costs.
- And then there's ongoing costs because you're now creating a new entity that needs to file its own tax return, that has its own documentation that needs to be updated regularly. So there's going to be ongoing costs. And then, of course, this adds complexity to your structure. So it's a bit more complex.
- And then if you're using a holding company for other, more advanced planning, like I mentioned off the top, talking about accessing the Lifetime Capital Gains Exemption, the simple structure we're looking at may not be sufficient there. You may need a more complex structure. And so, again, complexity and additional costs that are associated to that.
* What is the difference between a holdco and a trust?
* Right. So they're quite different. They're different entities. A holdco, as I said, is a corporation that's a separate legal entity. A trust isn't a legal entity. It's an arrangement between different parties. So they have different purposes and different-- they're useful but in different ways.
- Usually, business owners-- the holdco makes more sense for business owners. If they're for advance planning, a trust could be very beneficial. And oftentimes, business owners will use both, depending on what their goals are and what they're trying to achieve.
* Got it.
* There is quite a bit of difference, but they're both potentially useful for business owners.
* Yeah, different outcomes, different things you're engineering for.
* Yeah, it depends on what you're trying to achieve.
* Yeah. And I guess the final thing is just it's always advisable to speak to somebody to help you navigate the complexity and also understand the cost benefit of this.
* Yeah, absolutely. So if you have an operating business or operating corporation and you have an investment portfolio, you should speak with an advisor to help you with determining if those funds should stay within the operating business and if you should set up a holdco to hold those funds.
- And, certainly, speak with your accountant, or lawyer, or seek that advice if you don't work with a professional like that. They can help you make that assessment to determine if it's worth the cost-- if the long-term benefits of setting up this structure will outweigh the costs associated with setting it up.
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