When forming your Florida holding company, keep in mind that some of your formation choices might have tax implications for you and your company. A main concern will be the structure of your company, whether it is a personal holding company (i.e. C-corporation) or an LLC. The IRS has two tests to determine if your corporation is a personal holding company: the Income Test and the Stock Ownership Test. The Income Test states that if at least 60% of a corporation’s adjusted ordinary gross income for the tax year is from dividends, interest, rent, royalties, and annuities. The Stock Ownership Test states that if at any time during the last half tax year five or fewer individuals directly or indirectly own more than 50% of the corporation’s outstanding stock.
Holding Company Tax Implications
Whether you currently hold shares in a company or you are considering forming a holding company, it is important to be familiar with the possible tax implications. For example, if you receive any dividend payments from a company, then there will be taxes tied to those dividends. However, if you form a holding company that then owns your shares in a corporation, dividends paid to your holding company can often times be tax-free.
With an LLC, each individual subsidiary files a tax return, then all of the subsidiaries are added together. So, each LLC would file a schedule C, then the losses and gains of each is added up and filed on his personal tax return. In this way, a profit made by one entity can be used to offset a loss recorded by another.
Additionally, it is becoming increasing popular for families to utilize holding companies, turning LLCs into holdings to offer personal liability protection for members in the event of a legal judgment or creditor claim. This structure also has the added benefit of pass-through taxation, which allows profits and losses to pass-through to individual members. Pass-through taxation allows members to file income on their personal taxes and not be subject to the double-taxation of corporations.
For a C-corporation holding company, owners must file tax returns for both the parent company and the subsidiaries. There is a holding tax levied on C-corporations when at least half of its stock is owned by five for less investors. If you are interested in trying to avoid this personal holding company tax, consider increasing the number of your business owners. If the top five owners of your corporation own less than 50% of its value then this tax would not apply. Gifting stock to relatives or friends may be one way to avoid this.
Determining tax implications for your holding company can be a complex matter. Before you form your Florida holding company you will want to consult an attorney or CPA with expertise in this area. Lay out your intentions for the company so that you are certain all state and federal regulations are followed.
Holding Company Tax Strategies
Multiple Owners: If you have multiple owners, creating a holding company for each provides greater flexibility. Each of the holding companies then controls dividend payments to each person.
Split Income: Since a holding company can be owned by more than one person, dividend payments and any taxes can be divided among owners.
Create a Family Trust: Shares of your company can be placed in a family trust, which will benefit both your family and business. You can often distribute dividends tax free to your holding company as a beneficiary.
Protect from Creditors: Company profits can be sent to your holding company in the form of dividends, which can then be used by the business in the event that it needs cash. With this method, profits will stay within the business and not go to creditors.
Retirement Fund: Assets in your holding company can be classified to represent a form of pension, which can be used once you retire.