Opening one's own business is a dream for some. People who decide to follow this dream often put a lot on the line to do so. If the business does not perform as expected, financial problems could arise. Depending on the specific situation, those problems could financially decimate those behind the business. This outcome may be eliminated, or at least minimized, through proper planning.
One method that may be employed to protect the assets of a business is to create a holding company. If the assets of the business are owned by a holding company, and leased to an operating company that carries out the business, then the failure of the business does not mean the assets are at risk.
Should a business that has placed assets-including operating assets but also other assets such as investments, real estate and excess earnings-into a holding company, experience financial difficulty, creditors to which the business owes money will not have access to them. This course of action may be particularly prudent where small and medium sized businesses are concerned.
There are other benefits that a business might realize from the use of a holding company, including:
- Minimizing taxes
- Qualifying for capital gains tax exemption
- Deferring and saving taxes
This is of course not the only way in which a business might protect itself and its assets from the claims of creditors. The best course of action will depend upon the specifics surrounding each business.