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Is a holding company worth it?

2K views 9 replies 7 participants last post by  ian 
#1 ·
I recently started a consulting business with 2 partners. When setting it up, I was advised by both the accountants and the lawyers to setup a holding company which I did. The fees for this personally were about 2500$ including tax for the lawyer and accountant.

I am wondering if this was really worth it in the long run? Im going to be looking at a bill of roughly that every year for corporate filings and tax returns.

My salary from this new company is 90k per year and my share of the dividend will be about 30k. My accountant has advised me that I will be saving "lots of money" by paying most of this dividend to my spouse who earns about 65k per year. I fail to see how this setup benefits anyone other than accountants as my calculations show very little apparent benefit once the fees are factored in. I have gotten a second opinion which was basically the same thing, so now I am asking the internet:

Have I been fleeced? The fees and complexity seem to not be worth the minimal savings? Am I overlooking something? I understand that income splitting/timing is a benefit, but is there anything else that I am misssing? Does $2500 for accounting and legal seem high for a holding company that will likely have less than 10 transactions per year? Everyone I have called has given me a number in the same ball park as this? Help!
 
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#3 ·
I know im being a bit silly here, but what im looking for here is a relatable explanation that will put into perspective how this scenario will play out for me.

Both accountants gave me a well rehearsed speech that sounded like a national personal finance article. Lots of statements without necessarily explaining the underlying reasons or directly relating the benefits to me or acknowledging cost benefit of the fees.
 
#4 ·
Why was a holding company suggested? Does the business have large assets you want to protect? Was an operating company also created? And what was the main purpose of incorporating your company?

Although it is true that a dividend will be taxed less than a salary, you will have to determine if the savings are really worth it and/or needed. Do you really need to pull out $90k+$30k or can you live with less income? If you can live with less income, you can leave the money in the business and avoid the taxes. But all depends the income your business is generating. If you cannot offset your sales with enough expenses, you will eventually end up with a large cash position in the company that you will want to take out.

I think if you company will grow into something big, the corporation is a good thing. If it remains relatively small, then you could have stayed with a simple partnership. Also, having partners is not always easy. The corporation can also protect you should you need to make a change in ownership.
 
#6 · (Edited)
The last time we worked with a tax consultant she outlined clearly the dollar advantages of going down a certain path. Each year, as we prepare for taxes, our accountant reviews the strategy, specifically outlining the tax savings.

Circumstances vary. If you do not have confidence in the professionals that advised you then I would consider engaging someone else who is qualified and has the experience to assist.

My son in law punted his so called accountant in favour of some professional tax and business advice. He operates several related businesses.

Two years later his comment is that the fees are higher but the advice and the direction is far better. At the end of the day this advice and direction has saved him far more money and headache than he pays in professional fees.
 
#9 ·
Income splitting does not require a holding company. You could achieve the same income spitting of dividends by having your wife own shares in the operating company.

Is there any chance that you will sell your shares in the operating company in the future? You could lose your small business capital gains deduction by having the shares in a holding company. A friend of mine was given the same advice as you, it cost him about $250k in taxes when the company was sold.
 
#10 · (Edited)
The last invoice over $700. I had from a CPA was a few years ago. It was $3K and worth every penny. Her advice/direction resulted in $10K of tax refunds. Not to mention the fact we were able to write off her fee so the net cost to us was $1800. We also paid $1,000 in fees to her and a tax associate to provide advice going forward on how to structure our income going forward in the most tax advantageous way. We have reaped significant benefit from this advice over the past six years. We had similar success in engaging a lawyer for an issue that we had. The professionals that we have dealt with are simply too busy to find make work projects. And too professional.

I think it comes down to taking the time to shop for professional advice. Ask friends, business associates, colleagues, etc. You need to deal with someone that you feel comfortable with and that you trust. If not you will spend your time second guessing them instead of moving forward. If you are questioning the advice/direction that that you have received then I suspect that you have not engaged the right folks for you. Their advice may be solid, but clearly you are not comfortable with it.
 
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