Many entrepreneurs are being told by their accountant that they need to set up their corporation as a holding company and an operating company says Edmonton bookkeeping. However, this is often confusing to a lot of business owners, especially because they struggle to understand basic business finances. Intuitís, who are the makers of QuickBooks did a survey of entrepreneurs and small business owners in order to quiz them on the basic business financial understanding. Out of all the respondents who did the test, 82% of them scored less than 70% on this knowledge quiz. Therefore, since many entrepreneurs struggle to understand some of the basics, understanding why they should have two corporations is often confusing.
There are many benefits that business owners can get from this structure, but before they can discuss the benefits, Edmonton bookkeeping says that it is very important for entrepreneurs to understand what a holding company actually is. This is a corporation that is set up for the sole purpose of owning another corporation. While the business owner owns the holding company, the holding company and not the business owner owns the operating company, the holding company owns all of the shares in the corporation. This is also known as a parent corporation or a limited liability corporation.
There are many reasons why a business owner might choose to utilize a holding company says Edmonton bookkeeping, but ultimately that decision is up to the business owner and their accountant to discuss. There may be many things including tax benefits, reducing the risk, being able to concentrate assets, to succession planning, have flexibility, just to name a few. Therefore it is very important that the entrepreneur understands what a holding company is, and what benefits their accountant thinks they can benefit before they decide on this corporate structure for their business.
The reason why it needs to be a decision, is because since they are two corporations, they are their own legal and separate entities. This means that not only do they need to have separate bookkeeping done but also they need to have separate year-end filing, their own GST and payroll accounts as well. This adds cost, as well as the time required to manage. Therefore, a business owner must way the pros and cons against each other, and discuss even with their Edmonton bookkeeping company as well as their accountant to make the decision on if this structure is beneficial to them or not.
By understanding all of the benefits of using a holding company, can help a business owner make the decision on this is a corporate structure they need for their business or not. Even though it can be beneficial in a lot of ways, there is also a related cost and additional work that goes along with that that may cause many business owners to not want to take on this structure especially when they struggle understanding basic business finances. By getting educated, can help them make the decision that will allow them to grow their business and be successful.
Edmonton Bookkeeping | What Is A Holding Company
There may be many reasons why an entrepreneur would make the decision with their Edmonton bookkeeping company an accountant to set up a holding company for their corporation. Regardless of what this decision is, once a business owner has this as their corporate structure, they need to know how to manage it in order to avoid errors and use the information to their benefit.
One of the very first things that they need to understand is when they have two corporations, the ability to transfer money from one corporation to the other is called an intercompany transaction. The reason why this is important is that quite often a business owner will need to transfer money from one corporation to the other, and may be instructed by their Edmonton bookkeeping company or accountant to do so in order to see tax benefits. However, if a business owner is not transferring money correctly, or not keeping track of it accurately, this can create problems.
If an entrepreneur is not keeping track of all of the transactions that they transfer between corporations when their Edmonton bookkeeping company goes to do their monthly bookkeeping, they may make classification errors, or errors on which corporation gets the transaction if an entrepreneur has not been clear enough. This will end up not only with inaccurate financial statements, but these inaccurate financial statements will also negatively impact the entrepreneurís ability to make financial decisions in their business. Or they will make a decision that they think is good, and create problems in their business.
Also, by having these errors on their financial statements mean that when it comes time to do both of the corporate year-endís for both corporations, it will take even longer and cost even more money if they have not been right from the start. Therefore, in addition to being extremely careful with keeping track of all the transactions that they give to their Edmonton bookkeeping company, they should also ask for their transactions and bookkeeping to be done on a monthly basis. By ensuring that all transactions match for both corporations every single month, all the time can help ensure that when it comes time for their corporate year ends, they will have a better chance of being accurate.
This is especially important if an accountant has set up the corporate year ends to be at a different time of year as each other. Edmonton bookkeeping says that an accountant may do this in order to give a mechanism to minimize tax payments, but this means that in order to ensure that both corporations balanced with each other even when they have different year ends means that having or accurate bookkeeping done on a month-to-month basis is vital.
By understanding the importance of keeping accurate records been utilizing a parent company’s corporate structure in their business can help ensure that entrepreneurs are not only keeping accurate track but then using that structure to benefit their business so that they can grow.