Your choice can vary depending on your situation and the intended purpose of your business. For instance, as a sole proprietor, you may not be able to afford taking on the company’s debts on your own. As such, it is better to incorporate your company if you can not afford to be liable for your business.
One other type of company that also serves a specific purpose is that of a holdings company. This type of business structure differs in function than your typical small business structure.
What is a Holdings Company?
A holdings company is different from your average company. It does not conduct any operations and mainly serves to hold a controlling interest in other companies. These companies become subsidiaries of the holding company.
By investing in other companies, a holding company makes its money through their subsidiaries by selling assets, providing services and making profits from stock investments.
You may have already seen examples of holding companies, such as Alphabet, Berkshire Hathaway, Johnson & Johnson, and Sony Corporation. Through their subsidiaries, these companies can hold patents on products and property, operate a number of businesses in different industries themselves (electronics, telecommunications, etc), own franchises, and trade stocks.
What Types of Holding Companies are there?
A parent holding company is a corporation that owns a majority of another company. This means they hold 50% or more of a company’s shares. With that amount of ownership, holding companies have the authority to make executive decisions, influence corporate strategy, and participate on the board of directors.
What can a Holding Company Invest in?
Because holding companies can have ownership in a number of different companies, investors can leverage a holding company’s financial strength. By buying only a 50% share interest into a company, holding companies can diversify their investments. However, they can also have wholly-owned subsidiaries where the holding company owns 100% of the stock.
Holding companies can invest in a wide range of financial investments such as those in public companies, GICs, term deposits, real estate, and shares in private companies.
What are the Advantages of a Holding Company?
What makes establishing a holding company advantageous is the financial efficiency it provides. It can protect both personal and business assets and boost your business’ ability to qualify for certain financial breaks. Here are a few ways:
- Risk management
- Taxes (savings and deferral)
- Estate planning (succession planning)
- Protection of assets
- Aid in claiming the capital gains tax exemption
- No share capital requirements
- Federal and provincial incorporation
Despite these advantages, a holding company can put you at a disadvantage. For example, the annual cost to register the company and prepare financial statements can be significant. Also, taxes and legal costs will be more complex. Moreover, it is possible that any losses which the holding company incurs can offset any profits or income being earned.
How do I Start a Holding Company in Canada?
Establishing a holding company in Canada follows the same process as registering any business. The first step is to choose whether to register your company at a federal or provincial level followed by reserving the company name with the Trade Register. Your new Canadian holding company will be issued a unique number and be registered under the Company Act.
If you need help in establishing a holdings company, OMQ Law can help navigate you through the process. Our corporate Toronto lawyers have had experience in establishing a holding company Canada, and can help advise you on how to get started. Contact us with your questions via email, phone, or Skype.