Should I set up a holding company for my startup shares?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
Sometimes. A holding company lets a founder own operating-company shares through their own corporation, which can help with moving profits out of the operating company, creditor protection and later tax planning. It adds cost and filings, and the tax benefits depend on your facts, so decide with an accountant. It's simplest to set up before founder shares are issued.
What is a holding company in a startup?
It’s a corporation a founder owns that, in turn, owns the founder’s shares in the operating company. Instead of “Founder owns 40% of Startup Inc.”, the cap table shows “Founder Holdco Inc. owns 40% of Startup Inc.” and the founder owns Holdco. Holding companies are often numbered companies, because they don’t deal with the public.
Why do founders use one?
The reasons are mostly tax and protection, and they depend on the company’s stage:
- Moving profits up. Dividends paid from one Canadian corporation to another are generally deductible under section 112 of the Income Tax Act, so a profitable operating company can move cash to Holdco without the founder being taxed personally until Holdco pays them. Anti-avoidance rules, including section 55, can change that result.
- Protection. Cash properly moved to Holdco is generally no longer exposed to the operating company’s creditors, though transfers made when the operating company is in financial trouble can be challenged.
- Later planning. Holdco can be part of estate or family planning. The capital gains exemption under section 110.6 has its own conditions, and holding through a corporation can affect how it applies.
For a pre-revenue startup that won’t pay dividends for years, the near-term benefit can be small.
What are the downsides?
| Consideration | Without a holdco | With a holdco |
|---|---|---|
| Setup cost | None | Incorporation and annual filings for a second company |
| Annual work | One tax return for you | Plus a T2 and annual return for Holdco |
| Investor view | Simple | Usually fine, but vesting and transfer terms must bind Holdco and you |
| Associated corporations | n/a | Holdco and the operating company may share one small business limit (section 256) |
Investors are generally used to founder holding companies. The shareholder agreement should bind both Holdco and the founder personally, so vesting, transfer restrictions and IP commitments still work if the founder leaves.
When should I set it up?
Before your founder shares are issued, if you can. Holdco can subscribe for the shares directly at incorporation, at a nominal price. Moving shares into a holding company later usually means a tax-deferred transfer under section 85 of the Income Tax Act, which needs an election filed with the CRA and an accountant’s involvement. It’s doable, but it’s more paperwork, and it’s harder once investors are involved.
Does a holding company affect CCPC status?
Not by itself, if a Canadian resident controls Holdco. But it does go into the analysis of who controls the operating company. See what is a CCPC and why does it matter?
Do I need one?
Not necessarily. Ask your accountant about your expected income, exit plans and family situation, then decide before shares are issued.
We incorporate holding companies and issue shares to them as part of setting up the operating company. Our incorporation fee starts at $600 per corporation. See fees.
This guide is general information about Ontario and Canadian law, not legal or tax advice for your situation. To talk through your structure, book a free 15-minute consult.