Many entrepreneurs struggle with understanding the finances of their business, according to Edmonton bookkeeping. In fact, into it, who are the makers of QuickBooks did a survey of entrepreneurs and small business owners in order to quiz them on their basic financial knowledge. They were asked questions about what the role of a balance sheet is, what our accruals and how to improve cash flow in their business. 82% of the respondents scored less than 70% on the test. While many business owners struggle with understanding some of the basics, they may not understand what their accountant recommends when they say that they should open a holding company to own their corporation.
There are many reasons why an accountant might recommend a business owner should open a holding company that would then own all of the shares in the operating company. This gives business owners a layer of protection and reduces their risk because instead of them owning their corporation, it is being owned by another corporation. Not only does it help a business owner limit their liability, but there are also several other benefits.
One of these benefits that entrepreneurs may find very beneficial once they have owned their business for a few years, is being able to concentrate all of the assets that they own in the holding company, while the business that they operate does not own those assets. The reason why this is beneficial is that if something happens to the business and it has to close, or if the business owner sells the business, those assets are not owned by the company, giving a business owner far more control over the assets. Edmonton bookkeeping says that if they are not nor is business fails, by having the assets in a different corporation means that they can still own those assets, and whether they want to use them or sell them, is up to them.
Another reason why business owners might find it beneficial to have a holding company that holds their corporation is if they are going to be buying stocks. If not nor is going to buy stocks, they should buy them in the holding company so that they also keep that completely separate from their business. They can start making money from those stocks, and keep it in their holding company and keep that financial information separate from their business that they are running.
By understanding why an accountant would recommend an entrepreneur utilize a holding company can help them ensure that they set up their corporations properly from the beginning and that they are communicating with their Edmonton bookkeeping company to ensure their doing the year ends accurately. Since their year ends need be done separately because they are different entities, business owners need to ensure that they are communicating clearly with their Edmonton bookkeeping company to ensure they are putting the correct transactions with the correct corporation at all times. Not only will this help ensure they have the most accurate financial statements, but so that the corporation’s finances balance at the end of their fiscal year.
Edmonton Bookkeeping | Why Utilize A Holding Company
If business owners have a holding company set up by their accountant, but they were not explained how that will affect their finances, may cause an entrepreneur to not be clear enough when sending information to their Edmonton bookkeeping company. If they do not communicate what transactions need to go onto which corporation, this can end up with transactions being misclassified, creating larger problems. Therefore, a business owner needs to be very aware that if they have a holding company and an operating company they need to keep their finances separate all times.
The first thing that an entrepreneur needs to understand is a holding company is a corporation that owns another corporation for the sole purpose to control the business. Therefore, all of the operating company transactions and finances need to be accounted for accurately, and any financial transactions that happen on the holding company side need to be kept to that corporation’s finances says Edmonton bookkeeping in order to ensure that the financial statements of both corporations end up being as accurate as possible.
Common mistakes that happen if business owners are not communicating with their Edmonton bookkeeping company about what transactions should go onto what company is a bookkeeper thinking that a deposit should go onto the profit of the operating company. If this is not the intent, not only could end up financial statements of the holding company and accurate, it could also make the operating company look like it made more money than it actually did, and can result in a business owner having to pay more taxes then they actually owe.
Not only is it possible for transactions to be put into the wrong company, but business owners also need to be aware that their Edmonton bookkeeping company needs to clearly understand wherein those companies those transactions should go. This will help avoid the miss classifications that can not only because the financial statements to be incorrect but can also end up with unbalanced operating companies and holding companies. Because not only is it important that the books balance at the end of the year, corporations need to balance with each other as well.
One of the things that an entrepreneur should ensure that their Edmonton bookkeeping company is doing is matching all transactions for all companies on a monthly basis. Not only can this help ensure that the financial statements are as accurate as possible, but by doing this monthly can make it much easier to do the year ends. If the transactions are matching month-to-month, there is a greater chance that the year ends will be easier to do, and be more accurate as well.
There are several benefits to business owners utilizing a holding company and an operating company. Regardless of why their accountant made that decision with them, once they have a corporate structure this way, an entrepreneur needs to ensure that they are keeping their finances very organized to ensure their ending up with the most accurate information.