Keeping your Holding Company in good standing

Managing a holding company (“holdco”) successfully includes keeping accurate records and performing administrative tasks. Missing some details might mean your holdco fails to comply with tax laws. But also, failure to administer your holdco properly could mean you waste time in the future cleaning up messes or wasting time searching for information. This post describes how to manage a holding company to ensure it remains in good standing.

What is a Holdco?

A holding company (“holdco”) is simply a corporation that earns passive income or holds other assets. Passive income is income earned from investments such as dividends, interest, rent from real estate, etc. Passive income contrasts with active business income, which is the income earned from revenue received from operating a business selling products & services. The assets a holdco might include real estate, shares in an operating business, or liquid investments like stocks & bonds.

Starting Point

If you’re considering creating a holdco or if you’ve inherited a holdco (either by the death of a family member or after the sale of your business) there are a few basic things you should ask yourself as you’re deciding how to proceed. First, what is your own capacity for keeping accurate records? Do you enjoy doing bookkeeping? Do you enjoy paperwork and filing? Do you enjoy dealing with the government?

If you answered no to any of these questions, then you may want to consider outsourcing the management of your holdco. Your accountant might be the best person to consult. Most accountants who provide services to high net worth individuals will have experience keeping the books & records for holding companies. Many lawyers, such as the lawyer for your operating business or your estates lawyer might also be willing to do certain tasks or store documents for your holdco.

If you use a family office, they should be doing most of the administrative tasks related to the management of your holdcos. Your family office should be co-ordinating with your accountants and lawyers to ensure your holding companies are kept in good standing.

What documents do you need to keep current?

Here is a list of documents that your holdco should have on file:

Minute Book

The Minute Book is the corporate record book where many key documents are stored. The minute book can be consulted to retrieve many corporate records such as the Shareholders Registry, Copies of Share Certificates, Corporate Resolutions, Minutes of Meetings, and Financial Statements. Commonly, the minute book has a hard copy, but you should also keep a soft copy for easier access. More on this later.

Articles of Incorporation

The Articles of Incorporation are the founding documents of your holdco. A corporation’s articles outline the initial share structure and founding director(s). Whenever your holdco opens a bank or investment account, the financial institution will require a copy of the articles of incorporation. Copies of your holdco’s articles will also be required when most new investments are made.

Also, keep copies of shareholder agreements and corporate by-laws, including buy-sell agreements with your articles.

Shareholder Registry

The Shareholder Registry lists the shareholders of your holdco. This document must be updated each time a share transaction is made and should contain the following information:

• Date
• Shareholder name
• Shareholder phone number and/or e-mail address
• Shareholder address
• Buy or Sell
• # of Shares
• Share Class
• Authorization (name and signature/initial)
• Share certificate #

Copies of signed Share Certificates

Each shareholder of your holdco should receive a share certificate. A share certificate should contain the following information:

• Corporation’s name
• Name of shareholder
• Number and class of shares
• Date
• Name and signature of authorized officer

When shares are issued, sign a paper copy or use software such as Acrobat or Docusign to sign the document. If you sign a paper copy, scan this copy and save it to a shared folder. Send the original to the shareholder (or keep in the holdco’s hard files).

Annual Resolutions

Each year, corporations must hold an annual meeting or authorize dispensing with this requirement. Corporations should also ensure that signing officers (such as the president, secretary, etc) are authorized to act. These types of authorizations can be done with corporate resolutions. Depending on the nature of your holdco, you might also want to draft corporate resolutions authorizing significant investments, etc. The directors of your holdco (maybe this is just yourself) should also draft a resolution approving the annual financial statements each year.

Minutes of Annual Meetings (or a resolution dispensing with the annual meeting)

Keep the minutes of the annual meeting of your holdco. If you don’t require a formal meeting, simply acknowledge this with a corporate resolution (which could also authorize or acknowledge things like annual financial statements etc).

Copies of Annual Tax Returns

Keep copies of the annual tax returns, and all other correspondence from CRA in your holdco’s records. In this folder, you may also want to keep tax documents prepared for your corporation by your accountant as well as tax opinions from your accountants and lawyers.

Copies of Financial Statements

You must prepare annual financial statements for your holdco and keep those financial statements on file. This is important, partly because to generate financial statements you must be keeping accurate financial books, but also because if CRA ever audits or requests additional information from your holdco, having annual financial statements will show continuity and consistency. The amounts on your financial statements should match the GIFI map of your tax return.

Notices of Good Standing

Sometimes, a financial institution or investment your holdco is making might require a “Notice of Good Standing” document. This document is proof that your corporation is in good standing with its issuing authority. This document can be obtained by the issuing authority your corporation is registered with (such as the province of Ontario). You can ask your lawyer and sometimes your accountant to obtain this document for you. Keep these notices on file as you receive them.

Bank Account, Credit Card, and Investment Account Statements

An often overlooked but important documents your holdco should keep are the statements for banking, visa, and brokerage accounts. Each month or quarter have your family office download these statements or scan the paper as its received. Save soft copies to a shared folder.

Investment Documents

When your holdco makes investments, its important to save any documents you receive. This includes share certificates, partnership agreements, offering memorandums, etc. But also, keep marketing documents like pitch decks. In case there is fraud or a dispute in the future, any correspondence you exchange with an investment’s representatives can be used to help clarify your position (or provide to regulators in a worst case).

Document Management

Described above are the documents required for your holding company to remain in good standing. Next, we will discuss ways to manage the flow of that documentation.

As you can see from the descriptions above, a lot of documents are required to keep your corporation in good standing. If you don’t keep good records for your holdco, it will cause you big headaches at unexpected times. Without good records, it becomes much harder to open new accounts, and provide timely information when its needed by service providers.

When a holding company is managed properly, it becomes an easy set of administrative tasks for your team to complete.

Share Drives (or “cloud storage”)

Don’t rely on paper copies of your corporate documents. Relying on paper alone will cause headaches for yourself and your service providers. Paper copies are a lot harder to access in a pinch. What happens when you’re traveling, at the cottage, etc? When documents are stored as digital copies on shared drives it makes it much easier for your team to access those documents in a timely manner.

Google Drive, Microsoft OneDrive, and DropBox are the most well-known shared drives. But, there are many competitors for cloud storage services. The solution that works best for you might be integrated with the other business management software you use (such as Microsoft Office, Gmail, etc). Most leading shared drives can be embedded on your local machine and accessed by a mobile app too.

You can also provide custom privileges to your service providers. For example, you can provide your accountant access to a folder for each year’s tax returns. Or provide your estate lawyer access to a folder where all your related records are stored.

Commonly, investors who use a family office will have their family office setup and maintain their shared drive.

Ways to organize your folders

Typically, investors organize the folders for their holdco by creating a folder for each year. Within each of these folders, there might be sub-folders for topics such as “expenses”, “financial statements”, “resolutions”, “quarterly reports”, “taxes”, etc.  Many investors also keep top level folders for things like “investments” and then sub folders for the records for each investment. Top level folders might also be kept for each individual property the holdco owns with sub-folders containing details on that property.

The way that you organize the folders for your holdco will be based its purpose and the activities & investments your holdco has. Your family office should design & maintain your holdcos filing structure and documentation process.

Quickbooks/Xero

Use an accounting software such as Quickbooks & Xero to keep the financial books for your holdco. Get your family office or a bookkeeper to enter transactions on your behalf. Too often, investors with holdcos send their accountant a folder of scanned docs and financial records in a hap-hazard way during tax time. This not only wastes your accountant’s time but will end up increasing your accounting bill. Most good accountants strive to decrease the time they spend on administrative matters and increase the time they can spend providing you with tax advice.

If you make your accountant’s job easier, they will provide you with better service and advice. One of the easiest ways to help your accountant is to maintain good books and records for your holdco. Lean on your family office or a bookkeeper to accomplish this.

Reporting (quarterly reports, annual reports?)

If your holdco has several investments and a size that warrants some dedicated time, then you should have your family office generate a standardized quarterly report for stakeholders. Consider a holdco with $10 of assets. The assets include a cottage, and a portfolio of stocks including promissory notes issued to various family members. Revenue from dividends is $120,000 per year. If it costs your family office 3 hours per quarter to prepare a standardized quarterly report for you, then this is a very small cost to pay for the increased visibility and enhanced transparency quarterly reports will provide.

Preparing Financial Statements

Your accountant can prepare formal financial statements for your holdco each year. Depending on who else requires those financial statements, you can technically get away with generating financial statements using an accounting program like Quickbooks or Xero. Financial statements generated in this manner are good enough for CRA, if the numbers contained within match your holdco’s tax return. To do it properly, pay your accountant a little extra to generate financial statements for you.

Scheduling

Part of managing a holdco means having a schedule of tasks to be performed on regular intervals. Some things need to be done annually, but others need to be updated on a monthly or quarterly basis. Other items are collected ad hoc but need to be captured and filed in a consistent manner. Leverage your family office to relieve the administrative burden for you. Have your family office create a schedule of administrative tasks that your holdco post complete.

Bringing it all together

Keeping your holding company in good standing requires organization and a dedicated process. This is where your family office can provide you with a lot of value. Instead of spending any time keeping track of things yourself. Empower your family office with the administrative responsibilities. Your role should be to supervise the results, provide your input for improvement, and make decisions. Our family office has experience maintaining the books & records for a variety of holding company structures and can suggest the best processes for your unique situation & goals.