So you are a seasoned business person and have been making sales ninja style. However what happens if you are sued? How do we eliminate the additional liability from your operations? You made a profit this year and that's awesome but how do we keep this money safe from sticky fingered Lawyers?
The short answer is incorporation of a Holding company. The idea behind such a setup is that you do all your regular operations on your current company that means all your revenues and expenses remain within OpCo however we transfer the "Net Income" or in the accounting world we call "Retained Earnings" directly as a dividend to HoldCo. Tax Free. Yes that's right.
Some associations such as Doctors, Dentists and Engineers are required to have professional corporations where only another Doctor/Dentist/Engineer can be a partner and own shares. The rules are very strict but they do allow a HoldCo to own the building and receive rental income from the OpCo for using the premises. So technically you are paying your own company rent at market price. Yes it gets confusing but it's legit. #LegitAccounting
So once the money is being held in HoldCo you are reasonably protected by any potential law suits. What do you do with the money that's in the HoldCo you ask? Well you can use it for something accountants call "Dividend Sprinkling". If you have a spouse or children the right amount of dividend can be declared to maximize the after tax income you will receive. Setting up your corporate structure is critical to the success of your company. If you plan for the future then this HoldCo can one day evolve into becoming your Estate where you can transfer the entire corporation to your Kin(s) Tax Free upon retirement or death.
The incorporation costs are relatively minor compared to the peace of mind and additional security of your investments. It can get confusing to manage a HoldCo but remember it's in your “Taxvantage” to do so!
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- Written by: Jag Bath