Corporate structure: protect and optimize your entrepreneurial wealth

Why more and more professionals and entrepreneurs adopt a holding company to manage their investments and insurance.

What is a holding company?

A holding company is a corporation that does not carry on an active business day to day. Its role is to hold assets: investments, shares of an operating company, real estate or insurance policies. For an incorporated entrepreneur or professional, it acts as a vault kept separate from the company that runs the business.

In practical terms, surplus cash from the operating company can, in many cases, be moved to the holding company before being invested. That separation puts distance between the capital you have built up over the years and the risks tied to the day-to-day operations of the business.

Advantages that go beyond tax

The first appeal of a corporate structure is often the potential for tax deferral: as long as funds stay inside the corporation, personal taxation can be postponed, leaving more capital at work. The timing and form of withdrawals — salary, dividends or a mix of both — then become genuine planning levers, to be adjusted to your situation.

Asset protection is another frequently sought advantage. Funds held in the holding company are generally better sheltered from the operating company’s creditors, subject to applicable rules and to how the transfers were carried out. A well-designed structure can also make it easier, down the road, to sell the business or pass wealth on to the next generation.

• Potential tax deferral on surplus cash;
• Flexibility in compensation and decumulation;
• Greater protection for accumulated assets;
• Simpler succession and estate planning.

Corporately owned life insurance

Holding a life insurance policy through the corporation can also be worth considering. Premiums are then paid with corporate dollars, which are generally taxed at a lower rate than personal income. At death, part or all of the death benefit may, under the tax rules in force, flow through the capital dividend account and be paid to shareholders as tax-free dividends.

These mechanisms are technical, however: the choice of owner, beneficiary and policy type must be validated against your own situation and the legislation in effect when the structure is put in place.

When to consider it — and why to be well advised

A corporate structure is not for everyone. It comes with incorporation and bookkeeping costs, additional filings and added complexity. Poorly structured, it can also affect access to certain tax benefits, such as the lifetime capital gains exemption on the sale of a qualifying business.

As a general rule, the question is worth asking when your company generates more cash than you need to fund your lifestyle, or when protecting your assets and planning your estate become priorities. Every situation is unique: setting up a holding company should bring together your tax specialist, your lawyer and your wealth management advisor, working in concert so the structure truly serves your goals.

Wondering whether a corporate structure belongs in your plan? The Pérennité Wealth Management team can look at the question with you and your other professionals, for information purposes and without obligation. Contact us to talk it through.