Some people think that a holding company is only used in the corporate structure of big businesses. But if you are unsure what it means or why setting one up would benefit your business, right? Take an in-depth look at this term and see if we can figure out whether setting one up could work with yours!
All About a Holding Company?
It is a business entity that owns other companies’ outstanding stock. It usually does not operate these companies; rather, its purpose is to hold stakes in them as part of a larger investment portfolio. For example, Berkshire Hathaway is a well-known example that owns shares in many businesses, including GEICO, Duracell, and Dairy Queen.
One common reason is to minimize tax liability. By owning shares in multiple companies, a company like that can spread its income and take advantage of different tax rates in different jurisdictions. It can be especially beneficial if the company is based in a country with lower corporate tax rates than the countries where its subsidiary companies are located.
Aside from the potential tax advantages, several other benefits can come with setting up a holding company. For example, it can help to:
- Protect your assets: If your business is ever sued, it can act as a shield to protect your assets from being seized.
- Simplify the sale of your business: If you ever decide to sell your business, setting up a holding company can simplify the process. It is because potential buyers will only need to purchase shares in that company rather than negotiate the sale of each subsidiary company.
- Raise capital more easily: A holding company structure can make it easier to raise capital. It is because investors will only need to purchase shares in the holding company rather than invest in each subsidiary company separately.
- Access new markets: If your subsidiary companies are located in different countries, a holding company can help you access new markets more easily. It is because the holding company can act as a central hub for all of your business activities.
Of course, setting it up is not without its drawbacks. For example, it can:
- Complicate your business structure: A holding company adds an extra layer to your business structure, making it more complicated to manage.
- Increase your administrative costs: A holding company structure can also increase your administrative costs. You must maintain separate files and records for the holding company and its subsidiary companies.
- Make it more difficult to get loans: If your subsidiary companies are not doing well, it can be more difficult to get loans from banks or other financial institutions.
- Limit your flexibility: That company structure can also limit your flexibility, as you will need approval from the board of directors before making any major decisions.
As you can see, setting it up has both advantages and disadvantages. You must weigh these factors carefully to decide if your idea is right for your business.
What Are the Requirements for Setting Up a Holding Company?
If you decide that a holding company is right for your business, there are some specific requirements that you will need to meet. For example, to set it up, you will need to:
- Incorporate your business: You will need to incorporate that company in the country where it will be based.
- Obtain a business license: You will also need to obtain a business license from the government. In the country where that company will be.
- Appoint a board of directors: You will need to appoint a board of directors for your that company. The directors will be responsible for making decisions on behalf of that company.
- Draft shareholders’ agreements: You will also need to draft shareholders’ agreements for that company. These agreements will define the rights and responsibilities of the shareholders.
- Bank account: You will need to open a bank account in the name of that company.
As you can see, there are some specific requirements. That you will need to meet to set up a holding company. However, if you are willing to put in the time and effort. Setting up a holding company can be a great way to protect your assets and simplify the sale of your business. Don’t forget to get help from advisory services from any professional accounting or tax firm in Canada before you think about it. You can take a look at this tax guide if it’s helpful for you.
You can contact us to get uniquely crafted advice that can help you.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.