The “Holding Company” has become like a legendary creature amongst Toronto entrepreneurs. It is poorly understood, and often used improperly. As our earlier articles have shown, the Shocking Myth believed by Toronto entrepreneurs has helped perpetuate the rarity of the Holding Company.
Here’s how it works:
As an entrepreneur, you go out to hunt for profits so you can put food on the table. As your business grows you do 2 things:
First, you begin to acquire assets. These are the “things” that you get while building your business. Assets include equipment, inventory, intellectual property (such as your brand and customer lists) and other spoils that every successful businessperson dreams of regularly.
Second, as your operations expand, you begin to rack up more liabilities. As you grow you need more space, more employees and more sophisticated technology and equipment.
Both factors do something we in the legal world refer to as “draw a huge target on your back.” As you sell more, do more and acquire more, the target just keeps growing. At some point the question shifts from “if” you are going to get sued, to “when and by whom” are you going to get sued.
These questions transcend your location and business. So regardless of whether you are a roofer in Toronto or running a micro-brewery in Barrie, success will eventually force you to bite the bullet and do some corporate planning.
The Mystical Holding Company
A holding company is simply a corporation that holds assets in isolation from your operating business. Doing this essentially relieves one big drawback of your emerging success: the risk of losing your wealth and hard work to a law suit.
By shifting assets such as retained earnings, equipment, accounts receivable, and other assets into a separate entity you are creating a safe in which your valuable assets are stored. As with any hero, the holding company has a less celebrated partner: The Operating Company.
The Unsung Hero: The Operating Company
The “Operating Company” is the corporation that deals with the outside world. All of your potential sources of law suits are jammed into your operating company, these include:
- contracts with employees;
- agreements with suppliers and clients;
- real property leases; and
Since the day-to-day operation of your business is done through the operating company, it has the most potential to become exposed to a dispute.
The Key is to Get Started Early
As discussed in the Shocking Myth Believed by Toronto Businesses, Entrepreneurs and Startup Companies, it is quite simple to set up a proper structure at the beginning of the journey as compared to later in the adventure.
However, there are several tax neutral steps that your mature business can take in order to shuffle the deck, establish a holding company, and minimize your exposure to liability and taxes.
Now there may be a thousand questions swirling around your head regarding having a holding company and an operating company:
- Which company goes on my business card?
- How do I pay my employees if all of the money is in my holding company?
- How do I charge/remit taxes if everything is split up?
- What have I gotten myself into?!
Those are great questions to ask BEFORE you are in trouble with a disgruntled employee or the taxman.
Call or email our team at Grinhaus Law and setup your company the right way. As a boutique law firm located in midtown Toronto, we have the capacity to do both large corporate reorganizations and the flexibility to work with bootstrap startups.
We will set up your business properly from the get-go, and give you a roadmap to success. All you have to do is gas up and drive. Contact the team at Grinhaus Law for a consultation to discuss your business.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.