Holding Company Taxes

Mark Pierce
Mark Pierce is the founding partner of Wyoming Trust and LLC Attorney. He is an estate planning and small business structuring expert with over 40 years of experience.

Holding Company Taxes

If you choose to form a holding company or hold shares of one, you should be familiar with the tax implications of these companies. Tax consequences exist even if you are only receiving dividend payments from a single stock share. If your holding company owns shares of another business, the dividends the holding company receives are typically tax-free. For those in the highest tax bracket, deferred taxes in these situations can amount to around 30 percent of taxable income.

Tax Implications for Holding Companies

There are numerous reasons a successful business owner may choose to create or purchase another business. Parent companies often form subsidiaries to purchase risky businesses as the parent company itself will not be liable for any losses of the subsidiary if the subsidiary fails. The parent company is not liable because it is considered a separate legal entity from the subsidiary as the subsidiary is responsible for making decisions without the parent company’s approval. However, the parent company usually retains control of the subsidiary via bylaws that ensure the parent company remains the sole shareholder.

The parent company and its subsidiary will also maintain separate tax accountabilities as long as both companies operate independently in an obvious manner. If the IRS determines that the two companies were not operating separately, e.g., there was a comingling of funds, the IRS will require the companies to pay back taxes.

Ways to Defer Taxes for Holding Companies

In addition to the semi-complicated nature of holding company taxes, there are also multiple methods that allow for deferring taxes. One method is to have many shareholders. You can then create a separate holding company corresponding to every shareholder within the corporation. This allows for flexibility among shareholders as the holding company controls each person’s dividend payments.

Another option is to split the income by having multiple people own your holding companies. This method essentially divides any dividend payments as well as the taxes owed on them. You can also defer taxes by utilizing retirement funds. Essentially, you would use holding company assets similar to a pension, allowing you to use the assets upon your retirement.

You could also have a family trust hold company shares. In this event, the holding company would receive dividends as the beneficiary with those dividends being tax-free.

Furthermore, it’s possible to send company profits to your holding company via dividends. When the business needs cash, you can send those funds back. This allows you to keep any profits away from creditors without having to remove it from the business.

An experienced business lawyer can provide further advice about whether a holding company is right for you.