Now that we've explored the advantages of using a holding company for leasing heavy equipment, a crucial question arises: When is the right time to launch a holding company for your business?
Incorporating as Multiple Entities
Starting your business on the right foot means playing to your strengths, especially when the team is small. But, even if you know your product and industry well, there is no guarantee that you can navigate the legal and administrative hurdles.
It's essential to be aware that managing a holding company structure adds an administrative layer to your operations. Maintaining financial records, legal compliance, and tax obligations for two entities demands meticulous attention to detail. This tango takes two or more—often in the form of professional help from qualified accountants and lawyers. With that comes a heaping side of extra costs.
In short, starting a holding company early is probably not necessary (or wise) unless you or someone you know really knows what they’re doing.
The Overhead Costs of a Holding Company
The administrative burden extends beyond just professional fees. Remember those pesky business tasks like annual renewals, tax filings, and financial statement preparation? When managing multiple entities, they become double the work (if not triple). It’s like rescue dogs. One is fun. Two, and they start teaching each other how to steal chicken off the kitchen counter.
Lastly, insurance becomes a surprisingly difficult factor in determining cash flow between two businesses. In a costly insurance market like Alberta, maintaining separate policies for both companies might outweigh the benefits of a holding company structure.
Pro tip: Our cash flow masterclass covers considerations like insurance in more depth. Click here for that!
The Creditor Conundrum
In the benefits article, you may have thought the upsides of a holding company sounded too good to be true. Well…
While a holding company can shield assets from certain operational risks, it doesn't necessarily protect your business from all creditor risks. Most creditors require the holding company to be part of the loan guarantee package. So, unless your operating company can stand financially or you operate debt-free (congratulations!), the creditor risk separation might be a trickier plane to land than some initially think.
Strategic Planning for a Holding Company
The grass isn’t always greener, hey? As we’ve seen with these considerations, seeking professional guidance is crucial before embarking on the holding company path.
Perhaps you’re starting to think your startup stage doesn't necessitate a holding company yet. That’s okay! Leasing through your operating company is still on the table, and you can always consider a holding company later as your business acquires more valuable assets.
Remember, changing strategies later can be significantly more expensive than starting with the proper structure. So, if it’s a big future you’re looking at, we’re ready to start helping you plan today.
Making Informed Decisions for a Strong Future
The key takeaway? A holding company structure requires careful consideration and a head for long-term planning. Feel free to seek guidance from trusted advisors like accountants and lawyers to determine if it fits your business goals. For everything else regarding leases and your growth, we’re here to empower you. Give us a call today and see just how far the right lease (at the right time) can take you.
