According to the Internal Revenue Service, a personal holding company is a corporation in which five or fewer persons own at least half of its stock and it makes at least 60 percent of its income from investing. Those with large amounts of assets sometimes set up personal holding companies as a way to hold investments and other securities. There are many benefits of a holding company as a vehicle for holding your wealth, mostly related to estate planning, but watch out for the additional tax that's imposed on undistributed income alongside the regular corporate income tax.
Advantage: Avoid Estate Taxes
One of the primary advantages of setting up a personal holding company is that it can provide people with an opportunity to avoid estate taxes. Estate taxes are on the total value of an estate when an individual passes away. Some people set up a personal holding company offshore so that they can hold investments. Estate taxes are not due on assets owned outside of the United States by foreign investors. By putting assets into the care of a brokerage or investor outside the United States, people can minimize estate taxes.
Advantage: Sidestep Probate
Another reason that some people choose to invest in a personal holding company is that it can help their heirs avoid probate. When a person dies, traditionally the assets will have to go through probate before they distribute to the heirs. When a person sets up a personal holding company, an investor who holds possession of the person's assets at the time of death can transfer the assets to the heirs. This helps a family avoid the probate process.
Disadvantage: Extra Personal Holding Company Tax Liability
When considering the holding company pros and cons, understand that setting up a personal holding company could lead to extra tax liability if you leave money in the company. The Internal Revenue Service has set up a personal holding company tax that it imposes on personal holding companies in the U.S. If the IRS determines that more than 60 percent of a company's income derives from personal holding company income, then it will charge the tax. This is an additional tax on top of the corporate income tax.
PHC tax is assessed on undistributed income. Therefore, one solution is to pay out a year-end dividend each year so there's nothing to levy the tax one. This should eliminate the tax. Ideally, the company should make a reasonable projection of its taxable income for the year and take steps to dividends by the year end.
Disadvantage: Expensive to Set Up and Complex
Another drawback of setting up a personal holding company is that it is a complex process. Setting up this type of investment scheme is not something that the average person can do without legal help and professional financial advice, and it will cost you a few thousand dollars to set up in terms of professional fees. If people want to accomplish the goals for creating a personal holding company, they will most likely need to hire an estate planning or corporate lawyer who specializes in these types of entities.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.