Ok, we’ve already established that all of us female business owners and entrepreneurs are out to change the world. But to do that, we need to protect ourselves and our professional interests.
Most of you who have crossed the 6-figure mark know this already but here’s a quick refresher on corporations.
There are two main ways to own your own business: Sole proprietorship, and as a corporation.
Let’s break down the differences between the two:
You are the business and the business is YOU. There’s no legal separation.
Receive all profits AND claim all losses.
Difficult to raise investment dollars.
High risk – your personal property and assets are at risk if there’s a claim against the business
No tax flexibility
- Business is a separate legal entity
- There is protection of your personal assets
- Flexible tax planning
- Ease of investment – ability to sell shares.
- Easier and more tax efficient when it’s time to sell.
Ok. I think we can agree that, if you’re ready to level up to the 7 Figures Club, it would be wise to incorporate 😉 And a lot of you have already done so now what?
When a corporation becomes risky
Generally, when entrepreneurs start their businesses, the business itself has fewer assets than you do, as an individual. But, if you feel you’re teetering on the brink of levelling up, you’ve probably grown to the point where your business has retained earnings, extremely valuable intellectual property, even real estate. This is when it starts to become risky to leave all your assets in the same corporation because in the event of a claim filed against you – all those assets are at risk.
So. Do you need a holding company? Or a trust. Let’s take a look at how each can help protect your valuable assets.
Do You Need a Holding Company?
By virtue of its name, a holding company is an entity that “holds” controlling interests in other companies. That would be 50 or more percent of company shares – thus becoming known as the “parent” company, to the “subsidiaries.”
These are all terms you’ve probably heard tossed around before. Take, for example, Johnson & Johnson. Johnson & Johnson is the holding (or parent) company (the hub of the wheel, if you will) to the many, many, MANY, subsidiary companies that “spoke out” from that hub. In fact, as of 2018, J&J had 260 operating subsidiaries with a worldwide presence.
Now don’t be modest. You might not be a behemoth like Johnson & Johnson (YET!!), but no company on an upward trajectory is too small to consider a holding company, which can help protect YOU in multiple ways as you enter the 7 Figure Club.
Reasons for needing a holding company:
Asset protection – Keep assets safe from creditors by keeping them in a holding company, rather than an operating company
Tax savings – Holding investments in a corporation can help reduce taxes.
Tax deferral – Holding companies can provide flexibility in the timing of income, allowing for tax deferral.
Estate planning – Holding companies can help with transferring assets/ownership to the next generation
Speaking of Estate Planning…Do You Need a Trust?
Trusts are those magical places where your corporate assets take on super-powers allowing them to remain conflict-free and virtually untouchable.
Ok, I’m exaggerating a bit re: the super-powers. But seriously! Keeping your assets in a trust allows you to keep your valuable real estate, intellectual property and the like out of *your* ownership – which is a huge plus in case you are ever sued, or face a partnership or marriage breakdown, or if your kids face this.
A trust helps you:
- Protect your current and future beneficiaries.
- Reduce estate tax liability.
- Protect the property in your estate.
- Avoid a lot of the downsides of having a will.
I know. This can all start to sound uber-complicated and FULL of legalese and jargon. That’s why I always advise (and not just because I AM ONE 😁 😁 😁) that you make sure you’re working with a business lawyer who really understands corporate structuring, what it is you want your business to do and where you want it to go, ESPECIALLY if you expect to become a big business and attract significant funding someday.
Speaking of investors…is your corporate structure attractive to investors? How will you know? And what do you have to do to make sure it is? Watch this space to find out.