To illustrate, profits from an active business earned inside an operating company are subject to a low corporate tax rate.These after corporate tax earnings can then be distributed to the shareholders in the form of dividends.If the buyer does want the operating company and the real estate initially, that is easy to facilitate and often takes the form of a share purchase of the operating company and an asset purchase of the real estate.It should be noted that moving excess cash, investments and real estate out of an operating company just prior to the sale of its shares can be done, however when done in contemplation of the sale of the shares of the operating company complicated tax rules will likely result in some or all of this “purification” occurring on a taxable basis.In addition, in most cases the annual investment income earned inside the holding company will be subject to a similar tax rate as you would pay personally so there is no significant disincentive to earning investment income inside a corporation.As illustrated above, holding companies are quite beneficial where you have a number of shareholders owning one or more operating companies.
Holding companies in this case offer the flexibility for each of the individual shareholders of the operating company to independently decide on their draw down/reinvestment strategy.
Since the capital gains exemption is only available to individuals and not holding companies, proper structuring of the shareholdings of the operating company is essential to allow for this ongoing purification on a tax-deferred basis using the holding company, while still providing the individual shareholders potential access to the capital gains exemption on a sale of the operating company shares.
In many cases, family trusts may be utilized in the corporate structure to facilitate this.
On the purchase of a portion of the shares of an operating company (i.e.
key employee buy-in) holding companies are also beneficial as they allow the employee to pay off the original share purchase loan with operating company profits/dividends that have not been subject to personal income tax.
More good news is that holding companies can invest in anything that an individual can, so you are not limited in your investment strategy.