Reliable protection of personal assets is an opportunity sought after by rich people, and they use holding companies as a tool that can ensure safety of their wealth. Effective protection is just as important as capital accumulation, and holding companies serve as barriers that hold off detractors.
But that is not all: you can use these business entities to reduce tax expenses, make investments in startups, and for many other purposes. Holding companies allow reducing the tax burden and thus increasing the profit while keeping within the law. However, all this is true if the structure was formed correctly with the help of competent professionals, otherwise you can cause serious damage to your assets and fail to keep your business operating.
How do the Rich People Use Holding Companies?
The holding company is a tool for rich people that enables them to take advantage of the following benefits:
- Reduce the amount of taxes paid
- Simplify asset transfer
- Limit their liability to the desired level while keeping within the law
These are perhaps the main reasons why rich people resort to the establishment of holding companies. However, it does not exclude standard business goals, like protecting their wealth and getting more profit.
Let’s take a more detailed look at the most popular options of using holding companies. You will see why rich people prefer creating holding companies rather than using personal accounts.
If you want to find out the main peculiarities of a holding company in a nutshell, read our beginner’s guide to holding companies.
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Holding companies are usually taxed at lower rates than individuals: in one US state, for example, the corporate profit tax is 21%. At the same time, the income of individuals is subject to a differentiated scale — the higher the income, the more federal and local taxes must be paid (all together about 48.9%, and the size depends on the state or country). As a result, if the annual income is $1,000,000, the tax liabilities of the holding company will be $205,000, while the individual will pay $489,000. We can clearly see that the first option saves $284,000.
Also, the holding company’s income from activities may be distributed to individual shareholders in the form of dividends. However, this is not necessary if shareholders do not need to finance personal expenses. Thus, retained earnings can be reinvested in the business, and it will help not only save on taxes but also invest in profitable projects.
Reduced Tax Expenses on a Group Scale
A holding company that owns several subsidiaries can redirect profits from some organizations to repay the losses of others. Thus, rich people can not only improve the performance of the group but also reduce the overall tax burden.
Optimization of Expenses
Rich persons bear the costs of renting and maintaining cars, yachts, real estate, and other movable and immovable property. These assets can be transferred to the holding company to improve the efficiency of property management – along with the expenses on them. This is a simple way to reduce the amount of profit and, accordingly, the taxable base of the holding company.
For example, you can transfer car maintenance or real estate rent to the holding company – after all, rich people bear the expenses of their maintenance in any case. However, if you pay using your personal account, it does not affect the level of taxation.
This is one of the frequent options taken by rich people who use holding companies to improve business performance.
Read our article to see the popular strategies for using holding companies.
Protection of Family Members
This is another frequent reason given by rich people who decide to set up a holding company. When you have great wealth, you need to ensure that it will be divided between family members and others on a fair basis. However, family relationships may sometimes be complicated.
Holding companies help to divide the property between all those involved as desired by the owner. At the same time, it is possible to ensure complete confidentiality so that some family members would never find out anything about the assets of others.
Investment in Start-Ups
Rich people constantly invest money in interesting and promising projects. However, startups may fail, and the funds will be lost. Therefore, it is recommended to create a holding company in order not to lose all capital: in case of failure, the liability to creditors will be limited. In simple words, the use of a holding company allows to minimize the risks of capital loss to the part that was actually invested in this company.
Effective Money Management
Why do rich people have holding companies? Well, they simply do not have the time to dispose of their property and their money as they are busy controlling really important and large processes. Therefore, they create holding companies and hire professional managers for the effective organization of cash flow management.
Exemption From US Property Tax
Individuals residing in Canada who own property in the United States (such as securities or real estate) may be subject to a post-death tax based on the fair market value of those assets.
However, if the total value of Canadian property is less than $12.06 million (2022), it is exempted from inheritance tax in the United States, but the obligation to file an inheritance tax return in the US may still exist.
This applies to citizens of the United States of America who are residents of Canada.
If you are a resident of Canada and not a U.S. citizen, you may also be exempted from U.S. inheritance tax. To do this, you will need to establish a Canadian holding company and transfer assets to it as Canadian corporations are not subject to inheritance tax.
However, such a structure should be organized only with the help of professionals since corporate and tax legislation has many nuances. In particular, care should be taken when personal property is transferred to a Canadian holding company. This may result in a shareholder benefit problem: an individual shareholder’s benefit is subject to taxes unless he pays fair market value for the use of the asset to the corporation.
If you are thinking about your business management improvement or looking for opportunities to increase its efficiency, please contact our experts at email@example.com. Experts at Offshore Pro Group have extensive practical experience and numerous successful cases of creating various holding company structures.