Holding Corporations--- Are they for us or not??

Holding corporations, or Holdco for short, works for some people and not so well for others.  

What is a Holdco then?

A holdco, as the name implies, is a corporation which is incorporated for the sole purpose of holding something.  Usually, that “something” is shares in an active corporation (typically referred to as an operating corporation or optco).

For example, Rose and Marie are sisters who own a winery. They incorporate a corporation,optco, to retain the employees, sell wine and own the land. The optco, in turn, is owned by the holdco. Rose and Marie own holdco. Thus, the relationship is that the individual owners own holdco who own (or hold) all the shares in optco. In other words, a corporation owns a corporation.

Why a holdco?

Holdco’s are ideal structures when the business is cash rich but may also attract a lot of liability. To go back to the above winery example, the business may be cash-rich but think about the liability any winery incurs: bad wine, broken glass, employee lawsuits over allegedly unsafe work conditions etc etc.If you currently own an optco only, a holdco can be set up on a tax-defer basis under what is known as a section 85 rollover. 

Why not a holdco?

A person is only eligible for the lifetime $750,000 capital gains exemption if the sale of shares in an eligible small business is owned by an individual and not holdco. Therefore, if optco is sold, holdco is not subject to the capital gains exemption. One possible solution is to collapse the optco and holdco structure before the sale of optco but this is expensive to accomplish.Holdco’s are also expensive structures to administer.