The advantages of a management company

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September 14, 2021
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October 4, 2021

Often entrepreneurs will hold the shares of their operating company through a management company, instead of holding the shares directly. We give you an overview of the advantages of such a structure.

Asset protection

An operating company may be at risk of legal action, particularly if it is active in a high-risk area in terms of civil and contractual liability. It may also, if business does not go as planned, find itself in a situation of insolvency and bankruptcy.

Thus, it may be interesting, from an asset protection point of view, to declare and pay dividends from the company's surplus to a management company that would be a shareholder, as and when these profits are earned. In this way, these surpluses cease to be part of the patrimony of the operating company, and will not be subject, in principle, to seizure and would thus be safe from creditors.

It is important to note that it is illegal to pay dividends when the company is unable to pay its liabilities as they fall due. Tax laws and the Bankruptcy Act also contain provisions to prevent transfers to avoid liabilities. It is therefore important that dividends be paid as they are earned, when "all is well".

Tax free

Why not just pay dividends to himself personally, to take his surplus out of the company? Because in this way the dividends would be taxable immediately, and subject to the entrepreneur's personal tax rate (which can, at the marginal rate, be as high as 53%). In contrast, a dividend paid to a company is in principle not taxable, if the two companies are connected, within the meaning of the tax laws. The dividend will be taxable when this management company pays a dividend to its shareholder who is an individual or a trust.

Several shareholders

Where an operating company has several shareholders, it may be appropriate for each shareholder to hold their shares through a management company. The shareholders of a company do not necessarily all have the same lifestyle, and some may prefer to pay themselves smaller amounts in order not to be taxed at the marginal rate.

By paying dividends to management companies, each entrepreneur will have the opportunity to control the rate at which surpluses are paid at a personal level, and thus be able to defer or accelerate tax liability if they so wish.

How to implement such a structure?

A corporate structure with a management company can be implemented at the start of the business. In this case, there would be two incorporations to be made, and the management company would subscribe to shares in the operating company from the outset. This may not be ideal if one hopes to use the capital gains deduction when selling one's shares.

Alternatively, it is possible to make the change subsequently. The shares may be rolled over to the management company, or a freeze of the shares may take place in order to change them into preference shares, and the management company may subscribe to shares for a minimum amount.

More sophisticated corporate structures involving a management company and participating discretionary dividends, or involving a family trust, are also possible but are more costly to plan and implement.

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