5 Good Reasons to Start a Holding Company
A holding company may sound like something complicated and unnecessary, but there are several good reasons to start one. A holding company is a company that owns shares or interests in other companies. In most cases, the holding company does not conduct any business of its own but acts as a parent company to the other businesses. Other than that, a holding company is just like any other corporation. Here are 5 good reasons to start a holding company:
1. If you're planning to sell your business
Are you thinking about selling your business? If the shares are owned by a holding company, it’s possible to sell the subsidiary tax-free (under certain conditions). The untaxed profit from the sale then goes to the holding company, and you can, for example, choose to invest the money in a new business. If you, as an individual, own the shares at the time of sale, you—as a private individual—will be taxed on the profit (the tax rate can range from 20 percent up to nearly 60 percent).
If you, as an individual, own the shares at the time of sale, you, as a private individual, will be taxed on the gain (the tax rate can range from 20 percent to nearly 60 percent).
2. To protect retained earnings from previous years
Profits earned by the subsidiary can be distributed to the parent company (holding company). This allows you to secure capital and reduce the risk associated with keeping a large portion of profits within the operating company. However, this requires that the subsidiary have sufficient liquidity.
3. Ability to lend money between group companies
A holding company (parent company) and its subsidiaries together form a corporate group. If the companies in the group have different levels of capital intensity, you may, under certain conditions, lend money between them. This is only possible within a corporate group and not between independent corporations.
4. Equalize earnings among different companies within the same group
Under certain conditions, you can also make intercompany contributions—that is, transfer earnings—between the various companies within a group. In addition to balancing earnings among the companies in the group, this can also have positive tax implications. A profitable company can reduce its tax liability by transferring earnings to a company within the group that is reporting a loss.
5. Increase Your Retirement Savings
You can manage the funds you have saved in your holding company while you conduct business through your subsidiary or subsidiaries. Surplus funds and any profits from the sale of subsidiaries are accumulated in the holding company and can serve as a good supplement to savings, pension plans, and other assets when it’s time to retire. Under current tax rules, there are various options for withdrawing the capital over time.
But how do you actually start a holding company, and are there any drawbacks?
Get in touch with us at OWL, and we'll tell you more!