Holding Company vs. Operating Company: What You Need to Know

The Difference Between the Two

An operating company, or Opco, runs the business. It earns revenue, employs staff, signs customer and supplier contracts, and carries the risks of day-to-day operations.

A holding company, or Holdco, owns other assets. Usually, it holds shares of the Opco, along with surplus cash, investments, or sometimes real estate. It does not normally deal with customers or run operations.

Alberta does not have a separate legal category called a holding company. Both are ordinary corporations. The label describes what each one does.

How Incorporation Differs

Both corporations are incorporated under Alberta law in the same way, and they file the same kinds of corporate records. What differs is the role each one plays and how the two relate to each other.

Operating company.The Opco is usually incorporated first and set up around the business. Its share structure should reflect who will work in the business and who will own it.

Holding company.The Holdco is set up to own shares of the Opco. For a new business, the founder can subscribe for Holdco shares, and Holdco can subscribe for Opco shares from the start. For an existing business, the shares must be transferred to Holdco, which is a separate step.

Important Considerations When Setting Up a Holding Company

Creating a holding company does not move anything into it.Ownership changes only when shares are subscribed or transferred, and the transaction is recorded.

Each corporation needs its own records.Keep separate bank accounts and corporate records, and document every transfer, loan and dividend between the two.

Dividends have tax consequences.Dividends from the Opco to the Holdco are generally deductible to the Holdco under section 112 of the Income Tax Act, but the rules have limits. Your accountant should review each dividend before it is declared.

Separation has limits. Personal guarantees, security over assets and debts owed by the Holdco itself can change the result. Transfers made while a company is insolvent can be challenged.

Timing matters.Setting up the structure before significant profit or assets build up is usually simpler than reorganizing later. Moving existing shares into a new holding company can be taxable unless a rollover applies.

Some professions have ownership rules.Regulated professional corporations must follow their regulator’s rules on ownership and voting. Verify those rules before placing a holding company above one.

Ongoing filings continue. Each corporation files its own annual return and tax returns.

How CorpDiem Can Help

CorpDiem prepares the corporate structure and records for Alberta incorporations, including the articles, organizational resolutions, share records and registers for a holding company. If your business operates under a name other than its legal name, CorpDiem can also help with trade name registration. You can write a comment that this corporation will be used as a holding company when incorporating. Our lawyers will be able to flag any issues.

CorpDiem does not select, instruct, supervise or coordinate with the client’s accountant. The completed corporate package gives the client’s accountant the ownership information, share terms and corporate records needed to provide tax advice and complete the applicable tax filings. Incorporation does not automatically produce tax savings, and tax results depend on your circumstances.