DISCLAIMER: The information in this article is not (and is not intended to be) legal advice. This is legal information only. Reviewing information about the law may help you understand whether you need legal assistance. Whether and how this information applies to your circumstances requires the assistance of legal counsel who can apply the information to your needs. Do not rely on this article to make decisions. You may contact Wires Law, and we would be pleased to determine whether our firm can assist you. No solicitor-client relationship is established until we confirm we can act for you in a legal services agreement. Read our Terms of Use for more information.

Corporate Structuring & Holding Companies

Today, an entire industry revolves around corporate structuring, asset protection and tax planning to ensure individuals are removed as far as possible from findings of personal liability, while at the same time, lawfully reducing or deferring tax obligations.   Absent the use of a holding company, there are three main reasons startups incorporate:

1. Reduce Exposure to Personal Liability – The main reason most founders incorporate is to protect their personal assets against the claims of creditors and lawsuits. Without incorporating sole proprietors and general partners in a partnership can be personally and jointly responsible for the liabilities of a business including (among other things) loans, accounts payable and legal judgments. In a corporation, however, shareholders are typically not liable for the company’s debts and obligations. With some exceptions, shareholders are usually limited in liability to the amount they invested or loaned to the corporation.

2. Tax Benefits – The second reason founders incorporate is to take advantage of tax savings. Corporations, like individuals, are subject to both federal and provincial income taxes. However, corporations are taxed differently . While individuals are subject to progressive income tax rates, corporations are subject to flat rates of tax. The rates of tax applicable to corporations are lower than most individual tax rates.

3. Raising Money to Finance a Business. The corporation is also the best vehicle for raising money to finance a business. However, given the complexity of securities laws,  its best to hire a lawyer to help you issue shares. Remember that as a startup you cannot head out into the market and issue shares to whomever you desire. Speak with a lawyer for assistance.

Aside from the three main benefits, other benefits of incorporating include:

  • Transferable ownership. Ownership in a corporation is easily transferable to others by selling all or part of your equity (subject to applicable laws).
  • Durability. A corporation is often capable of continuing indefinitely and does not dissolve on the death of shareholders, directors, or officers.

The Holding Company

Holding companies can further reduce risk, minimize tax and be an effective estate planning tool.

From a liability perspective, building large cash reserves inside your operating company makes you a litigation target. There is a saying in the legal community that “litigation is the search for the solvent defendant”. In short, only defendants with money (or a good insurance policy) tend to get sued. By using a holding company, profits can be extracted from your operating business (often as dividends). So if you operate a business that has the risk of being sued one day, holding companies can (with some exceptions) be used to reduce your litigation exposure.

Once funds are paid out of your operating company as dividends, your holding company can sometimes use the money to purchase investments such as real estate, other businesses etc. Often (although not always) assets purchased by the holding company can be leased back to the operating company while still not exposed in a lawsuit against the operating company.

From a tax perspective, business owners can consider a holding corporation as a private pension plan. The shareholders can transfer funds into a holding company during high earning years, and withdraw profits later, often when they are taxed in lower brackets.

It is best to obtain accounting and tax advice early on.  In many cases tax savings need to be considered when you are starting your business, and not years from now when you sell it. Visit the Wires Law online incorporation centre and seek legal advice to structure your own holding company.

How to Incorporate Online with Wires Law

 

The following two tabs change content below.
John Wires is a Toronto business lawyer who comes from a corporate litigation background. John is the founder of Wires Law, a law firm serving corporate, technology and e-commerce clients across Canada. He was called to the Bar of the Law Society of Upper Canada in 2011 and has appeared in the Ontario Superior Court, the Ontario Court of Appeal and private arbitrations. John graduated from law school with first class honours specializing in both International Trade and Corporate Commercial Law. Having litigated shareholder and employee disputes he understands the value of companies protecting their businesses with the proper upfront legal work many Canadian businesses lack.