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You may have heard it from your brother or your neighbor or your friend and you may be wondering, “What the heck are they talking about?”, and “Are they right?” We will just deal with the basics here. This article is not comprehensive or meant to replace advice from your accountant, but more of a way to get your brain thinking in a new way! The structures we commonly use are with an “Operating Company” (Opco), and a “Holding Company”(Holdco). By paying dividends out and passing the earnings to your Holdco, you are deferring tax until you take it out of the company one day through a variety of ways. Here are a few points to consider:
You can sprinkle dividends to the shareholders of the Holdco, such as a spouse or other family member so that the tax burden on those dividends can be shared.
Profits of your Opco can be paid to your holding company as dividends, thereby removing the cash from the assets of the company and protecting it from creditors or from litigation.
Setting up a personal Holdco for each shareholder can provide great flexibility. Dividends can be paid out to each of the Holdcos on a tax free basis and each shareholder can control the flow of dividends out to the shareholders of their own personal Holdcos as their needs and plans require.
The shares of your Holdco and Opco can be held by a family trust. The beneficiaries of the trust might be your family members or your holding company. Dividends paid to the Trust by your Opco can be tax free much like the income splitting scenario above. You can also sprinkle dividends to other beneficiaries at their lower tax rate as you see fit.
The accumulation of assets such as a corporate participating life insurance policy inside your Holdco can become a part of your retirement planning.
By using an Opco for your franchise which is owned by your Holdco, you have a number of advantages over owning it the franchise personally. There are many factors, but the most prevalent would be the ability to regulate your income. By doing this, you give yourself maximum flexibility in tax planning.
There are many ways to set things up to offer maximum tax advantage for the taxpayer. Each situation needs to be very carefully weighed and thought out before moving forward. There are costs to consider and as with anything in life, the benefits will need to outweigh the costs if it is to be considered. This can open up doors for some exciting planning and possibly keep more in your pocket at the end of the day. At Leskun & Son Accounting, we are experts in the field and will walk through it from beginning to end with you, the way it is best for YOUR situation.