Should Your Client Choose A Holding Company?

If you have a client with many investments or who owns a business, they might have approached you about opening a holding company. As Investopedia informs us, holding companies are usually LLCs or corporations that hold on to the controlling stock in other companies. Holding companies operate as entities that collect and retain income in place of the owner of a company. Alternatively, a holding company may have the rights to securities or rental property instead of those liabilities being tied to its owner directly. Several holding company taxes may apply to the business, depending on the type of structure that the owner intends to use it for.

The Holding Company – Operating Company (Holdco-Opco) Structure

Just like LLCs can serve to isolate an owner’s assets from lawsuits involving the LLC, so too, a holdco can be used to separate assets from legal problems that an opco may encounter. However, the more important consideration for running a holdco-opco arrangement is tax planning. In individual states, the opco can pay tax-free dividends to the holdco, as proceeds from its business operations. Instead of the money going to the owner and being taxed, that money will enter the holdco. It will stay there until the owner needs it.

If each member of an operating company owns or forwards their proceeds to a holding company, they can easily keep that money sequestered until they need it. When they extract those funds will be the first and only time that income will be taxed. Unfortunately, new regulations may treat these deferred dividends as capital gains. Consulting an expert tax advisor is the best way to approach this problem. They will understand better what taxes apply in your locale.

Investment Portfolio Holding Companies

Some individuals prefer to put their investments into holding companies because of tax purposes. However, on further investigation, it seems that this has little to no impact on the amount of taxes you are liable to pay. Depending on your location, there may be a tax cost associated with earning investment income from within a private organization instead of holding the shares in a company directly. Investment income that enters a holdco is taxed in a manner, making it unwise to keep that investment portfolio sequestered there.

Are Holding Companies Beneficial?

From an investment perspective, they aren’t really that good. As companies, the income they generate from the investment is still taxable income, meaning your returns are far less than if you held the investment portfolio personally. However, when we look at the tax benefits of a holding company parented to an operating company, we can notice some definite advantages. Taxes are only charged on income that you get from the holding company, but that income can be deferred until you need it. It’s like an extra-secure holding account in a bank. If your client is a business owner, then a holding company may be worth looking into for tax purposes. If they’re more into investments, holding shares themselves stands to net them a far greater profit overall.

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