Holding companies, partnerships and trusts

Why plan your structure in advance

If you have more than one business, or your business puts your personal assets at risk, you will especially benefit from legal counsel on a solid business structure. Proper planning now helps prevent costly problems later.

Sometimes your personal or business needs call for more than one corporation, or for non-corporate entities such as partnerships or trusts. You may need a higher level of limited liability than one corporation can provide, want to provide for your children in case of death, separation or divorce, or want to preserve your family’s wealth from business risk.

Multi-company structures

OpCos and HoldCos

One basic structure uses two companies: one to carry on the main business (the operating company or “OpCo”) and one to own the OpCo (the holding company or “HoldCo”). HoldCo is owned by the individuals involved in the business, or by their own personal holding companies.

This structure creates both liability and tax efficiencies. The business risk is contained within OpCo, because that is where the business is run; if anyone sues, they sue OpCo. In Canada, dividends between connected parent and subsidiary corporations can generally be paid tax-free, so as OpCo becomes profitable it can pay dividends up to HoldCo. OpCo stays lean, while HoldCo accumulates and protects the wealth the business generates.

Where there are two or more owners, the structure can also help each owner plan for their own tax circumstances. One owner may want money paid out now, another may prefer to wait until a lower-income year. Options include share classes with discretionary dividend provisions in a single HoldCo, or a personal holding corporation for each owner, so each controls when they ultimately draw funds.

The costs include setting up and maintaining more than one company, with the tax filing and accounting that involves. For a profitable business, those costs are often outweighed by the benefit of keeping assets from piling up in OpCo.

Corporate management structure

While the OpCo/HoldCo structure addresses the ownership risks of a business, a corporate management structure addresses its management risks. Directors can be held liable for a wide range of corporate obligations, such as unpaid taxes or wages, environmental issues or securities law matters.

Under British Columbia’s Business Corporations Act, a BC company still needs individual directors, but the directors may delegate some or all of their management responsibilities to another person, which can include a corporation. This can reduce the exposure of the individual directors. It requires creating and maintaining at least two corporations, but where your circumstances call for the utmost caution or discretion, it is worth considering.

Capital gains considerations

One drawback of multi-company structures appears when you plan your exit. The lifetime capital gains exemption on qualifying small business shares, raised to $1.25 million in 2024, is available only to individuals, not to trusts or corporations directly, and several conditions must be met. [TO CONFIRM current LCGE amount before launch]

Workarounds exist. For example, individuals can hold the growth shares of OpCo while HoldCo holds shares carrying only a right to dividends. Ongoing income flows up to HoldCo, while the individuals can still sell their OpCo shares and claim the exemption. Each owner should decide which structure best suits their needs, with a view to the future.

Partnership structures

Canada has three kinds of partnerships: general partnerships, limited partnerships and limited liability partnerships. A key reason to use any of them is tax planning: partnership profits and losses are reported by the partners rather than the partnership. That is why partnerships are often used for investment vehicles, restaurants and film development, where losses can flow through and be set against other income in the right circumstances.

General partnerships

Setting up a partnership usually takes more work than incorporating, because there is no “one size fits all” partnership agreement. Because general partners face unlimited liability, general partnerships are typically used only where another structure is not practical or where particular tax results are needed. Using corporations as the partners reduces, but does not eliminate, that risk.

Limited partnerships

A limited partnership has a general partner, usually a corporation, with unlimited liability, and one or more limited partners whose liability is limited to their investment. A limited partner who takes part in management loses that protection. Because of this feature, limited partnerships are often used to raise money for certain business ventures.

Limited liability partnerships

Don’t confuse a limited partnership with a limited liability partnership (LLP). An LLP is a general partnership in which the liability of all partners is limited. If something goes wrong, the partnership can be sued and the responsible partner’s assets are at risk, but the other partners’ assets are protected. British Columbia introduced LLPs in 2004, and unlike most provinces, BC makes them available to any kind of business. That makes a BC LLP a suitable vehicle for international businesses, particularly those operating entirely outside Canada. Read about our standard BC LLP package.

Structures using trusts

A trust is a very old legal structure that still serves useful purposes. Strictly, it is a relationship among the people involved:

• The settlor gives the initial property to the trust and then usually steps away, because of Canadian tax rules.
• The trustee holds and manages the trust property.
• The beneficiary is the person for whom the trust property is ultimately held.
• A protector (optional) is appointed by the trust deed to carry out specific functions, such as appointing or removing trustees.

The trustee holds legal ownership and controls the property; the beneficiary holds beneficial ownership and is entitled to its financial rewards. Trusts are useful where control over an asset matters more than who ultimately benefits. Structured properly and well ahead of time, a trust can help protect assets in a separation or against other creditors, or at least improve your negotiating position. In business, a trust can be a partner in a partnership or a shareholder in a corporation.

Trusts are less tax-efficient than they once were, and there are plenty of tax rules to watch for, so you will want full tax advice from a qualified adviser before setting one up. INC Business Lawyers will be pleased to help create the trust structure that fits your situation.

Weighing the costs of complexity

As your structure becomes more complex, there are unavoidable costs: legal fees, accounting fees, compliance and paperwork. It is up to you to weigh those against the hoped-for benefits. We are familiar with the strengths and weaknesses of many special structures and, with your tax adviser where tax advice is needed, can help you create a structure that suits your exact needs.