^Blog Is Your Business Structure Costing You?

When starting a business, or even as it grows, many entrepreneurs underestimate how much their ownership structure matters. While it may seem like a minor detail, the way you own shares can significantly affect your taxes, cash flow, succession planning, and overall financial flexibility.

Too often, business owners’ default to a simple structure without considering the many options and advantages available. Whether you hold shares personally, through a holding company (Holdco), or within a family trust, each approach has unique tax consequences and long-term implications. The right choice depends on both your business’s current position and your goals.

Real-World Example: How Structure Affects Your Business

Let’s look at James and Quinn, two partners who started a business together. In the beginning, cash flow was tight, and the company’s future was uncertain. They opted for a 50/50 personal ownership structure because it was simple, cost-effective, and allowed for easy profit distribution. Fast forward three years, and their business is thriving. Profits are rising, and so is the company’s value. Under their existing structure, James and Quinn must take all profits as personal income, meaning they’re immediately taxed at their individual rates leaving them with less after-tax dollars to invest.

After consulting with their advisor, they decided to set up holding companies (Holdco’s) to own their shares in the operating company (Opco), allowing business profits to be moved tax-free as intercorporate dividends. This allowed them to defer personal taxes and accumulate wealth within the Holdco’s. Problem solved, right? Not quite.

By transferring the Opco ownership to their Holdcos, James and Quinn lost access to the Lifetime Capital Gains Exemption (LCGE). This is a critical tax benefit that allows individual shareholders to sell qualifying business shares with significant tax savings. Since their shares are now owned by corporations, they no longer qualify for this exemption. If they ever wanted to sell the business tax-efficiently, they would need a different structure than described. This is where a family trust could come into play, still allowing for a tax-free transfer of after-tax profits to each of their Holdco’s, while not impairing their ability to utilize the Capital Gains Exemption.

This example is simplified, but it highlights an essential point: Business structuring requires careful planning to avoid unintended consequences.

Key Factors To Consider When Structuring Your Business

Every business is unique, and the right structure depends on both short-term needs and long-term goals. A change that helps you today may limit your options in the future. Here are some key considerations when evaluating your ownership structure:

• Balancing simplicity vs. complexity – Is a basic structure enough, or do you need more advanced planning?
• Profit distributions – How do you want to receive income, and what are the tax consequences?
• Selling to a third party – Will your structure allow for a tax-efficient exit?
• Passing the business to family – Are you structuring ownership for a smooth transition?
• Lifetime Capital Gains Exemption (LCGE) – Will your setup allow you to take advantage of this major tax benefit?
• Income splitting – Can you legally reduce taxes by distributing income to a spouse or family in the future?
• Estate planning & taxes – What happens to your business when you pass away?
• Investment strategies – Will your structure allow for tax-efficient reinvestment of profits?
• Creditor protection – How well does your structure shield your assets from risk?

Make the Right Choice

Choosing the right corporate structure is more than just taxes, it’s about aligning your business with your financial, personal, and legacy goals. Whether you stick with a simple personal ownership model, use a holding company to manage profits, or implement a family trust for long-term planning, each option has trade-offs that need to be carefully considered.

Making an informed decision today can help you maximize tax efficiency, protect your assets, and create a clear path for the future. However, the right approach depends on your unique circumstances, which is why working with a financial planning team is essential.

If you’re unsure whether your business is structured optimally, now is the time to review your options. A strategic conversation today could save you thousands in taxes and ensure your business thrives for years to come.

Authored by: Braeden Osske, at Three60 Wealth