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Multi Company Structures

More than one company?

There's a certain strand of thinking that says if one is good, two (or more) must be better. In the world of corporations, we can't say that's always true, but the structures discussed in this section are certainly two good examples where that kind of thinking is fully justified.

OpCos and HoldCos

One basic multi company structure involves using two companies: one to carry on, or operate, the main business (called the "operating company" or "OpCo" for short), and one to own the OpCo (called the "holding company" or "HoldCo" for short). OpCo is thus the wholly owned subsidiary of HoldCo. HoldCo is then owned by the individuals (or even their personal holding companies) who are involved in the main business.

This particular structure creates both tax and liability efficiencies. On the liability side, all of the risk is contained within OpCo, because that is where the business is run from. If anyone sues, they will sue OpCo. And whatever assets must exist in OpCo in order to run the business will be at risk. That's unavoidable. But, and here the tax side comes in, in Canada, dividends between parent and child corporations are tax free. So as OpCo becomes profitable, it will pay dividends to HoldCo. In this way, OpCo is kept lean and mean, while HoldCo goes on to accumulate and protect the wealth being generated by the business.

Another benefit on the tax side comes into play when there are two or more owners of the underlying business. There are a few different ways in which to set up the structure, depending on how many layers of HoldCos (or even trusts), you wish or need to employ. But the point of setting up this kind of structure is the same: This kind of structure helps the individual owners plan separately for their own tax circumstances.

As we mentioned, dividends are paid out of OpCo into its HoldCo (or HoldCos). That's all well and good, but of course your next question will be how do you get money out of HoldCo. Money taken out of HoldCo will be taxed in some fashion. So there can be a tax deferral advantage to be gained if the money can stay in HoldCo for a period of time. But if there are two partners in HoldCo, it may be that one partner really needs the money and wants it now, while the other partner is having a great year from other sources of income and doesn't want the money paid out. That partner wants to draw the money next year, when things won't be so good.

One solution of course is to structure one HoldCo with different classes of shares having dividend sprinkling provisions. Each partner could hold a different class of shares, and dividends can be paid or not paid as the directors of HoldCo determine. But if a lot of money is at stake, it can be risky even to leave money in HoldCo. So the two (or more) owners could each set up personal holding corporations, either to hold shares in OpCo or to hold shares at one remove in HoldCo. All monies can then be paid out equally (or as the partners decide) at the same time, but each individual partner can control the timing for when he or she ultimately draws this money out of his or her personal holding corporation.

Some of the costs of this structure include setting up more than one company and the work involved in keeping the companies going for tax filing and accounting. But if your business is profitable, these costs will be outweighed by the benefits gained from keeping assets from piling up in OpCo.

Corporate Management

The OpCo / HoldCo structure has been around for a while. The Corporate Management structure is a new possibility that exists now in British Columbia because of the new Business Corporations Act (BC). The OpCo / HoldCo structure focuses on ownership risks of a business. The Corporate Management structure focuses on the management risks of a business.

In brief, here's how it works: Normally, a company is managed by its directors. And under the old corporate legislation in BC (and throughout Canada, still), it was required that directors be what we lawyers call "individuals" (as opposed to persons, a word which can include corporations); that is, flesh and blood living people. And as every one knows, directors can be held liable for a wide range of corporate offences (unpaid taxes or unpaid wages or bad decisions relating to environmental issues or securities law issues, being typical examples).

But under the new corporate legislation, while flesh and blood directors are still required as part of a corporation, a BC company's directors are now allowed to delegate some or even all of their management responsibility to any "person" they choose. And in this context, a "person" can mean a corporation. So the directors can offload all of their managerial responsibility, and thus liability, to a corporation. The corporation can be another BC company or it can be a foreign corporation, perhaps in a jurisdiction with strong non-disclosure laws.

People interested in this structure will again be faced with the cost of creating and maintaining at least two corporations. But if your circumstances require the utmost in caution or discretion, this may be a structure to consider.

Tax Consequences - Accessing Canadian Capital Gains Exemption Can be Tougher

One drawback of the multi company structure comes when considering exit strategies; specifically, in thinking about selling your business. The lifetime capital gains exemption (sometimes called the capital gains deduction) is worth $750,000 per shareholder. The exemption is not automatic; you have to meet several different rules. One of those rules is that only individual shareholders (meaning, not trusts and not corporations) can qualify for the exemption. There is an exception where a holding company is involved, but only where the ultimate shareholder sells the shares in the HoldCo, as opposed to the HoldCo selling its shares in OpCo. And that scenario isn't always the way to go.

Workarounds exist. For example, the structure can be set up so that individual shareholders hold the growth shares in OpCo, while HoldCo holds shares that carry only a right to dividends. That way, the business in OpCo can be sold by the individual shareholder to reap the capital gains and the capital gains exemption, while before that one-time event, the ongoing income stream from the business is sent up, tax free, to HoldCo.

All to say that there are ways and ways of structuring your business. Each owner will want to decide which structure best suits their needs at the time the structuring decision is made, with a view to expected futures.

 

Always remember that your corporation is a separate legal entity from anyone else - even yourself.