Docstoc

Business Incorporations

Document Sample
Business Incorporations Powered By Docstoc
					     Incorporations & Share
           Structure




Meredith Serota
613-231-8217
meredith.serota@nelligan.ca

June 21, 2007
Risky Business
Different Business
Structures



 Sole Proprietorship

 Partnership

 Corporation
Sole Proprietorship


 Individual is sole owner of business
 All benefits resulting from business belong to
  individual
 No separation in law between individual and
  business, i.e.:
    Assets, income, and losses of business belong
     to individual
    Individual is personally responsible (liable) for
     claims arising out of business
Partnership


 Two or more people, carrying on a business
  together with intent to profit
 No separation in law between partnership and
  its partners
 Two types:
   General Partnership
   Limited Partnership
Partnership
Agreements


  Partnership Agreement

    • Description of business
    • Contribution to capital
    • Division of net profits
    • Authority to sign contract
    • Expulsion and admission of partners
Corporation


 Legal separation between corporation and its owners
  (shareholders)
    Shareholders supply corporation with
     money by buying shares of corporation
     but do not own business or property
     belonging to corporation
 Corporation’s income is subject to tax separately from
  shareholders
 Directors manage corporation and delegate
  management of day-to-day operations to Officers
Shareholder
Agreements



    • Share ownership
    • Disposal of interest
    • Appointment and remuneration of
      officers/directors
    • Restrictions on management
Not Everything is
Possible…


 Choice of business structure depends on type
  of business and risk you want to take
 For example:
   Partnership easier to dissolve than a corporation
   If many proprietors or if public will be offered
    an interest, incorporation is preferable
   Different types of government grants/loans are
    available to different structures
   Most flexible family wealth planning is done with
    corporation and the use of shares
Risk and the Three
Forms


Sole Proprietorship
 High risk because your personal assets and
  your business assets are not separate
Partnership
 Same risk as with a sole proprietorship
Corporation
 Owner or sole shareholder’s risk is Low
  (limited to contract)
Pros and Cons:
Sole Proprietorship


             Pros                      Cons
Simplest way to run     Individual = Business
business                      i.e.: Liable to full
Individual = Business         extent of personal
Direct control                assets for the
Taxed at same                 liabilities of the
proportional rates as          business
individuals              Exists only as long as the
                         individual
Pros and Cons:
Partnership

            Pros                               Cons
Can quickly dissolve            Each partner liable to full
Partnership Act has rules for   extent of personal assets
structure, but can change by     for liabilities of business
Agreement                        Death of partner results in
Fees less than incorp.,         dissolution
(unless unique Agreement)
                                 Partners joint and severally
Spread liability
                                 liable
Income/loss taxed in hands
of partner, not partnership
    Partner can use losses of
     partnership to reduce
     individual income from
     other sources
Pros and Cons:
Incorporation


             Pros                          Cons
Corporation itself incurs    Shareholder liable to creditors
liability                     for up to amount of investment
                              or that guaranteed
Not discontinued by death,
                              Mandatory rules re:
only if required amount of    residency, shareholder
shareholders resolve to       structure
Income/loss taxed at         When corporation’s after-tax
corporate rate; special tax   income paid to shareholders as
“breaks” available for        dividends, dividends taxed at
special situations, ex:       shareholder level (ie: double
CCPC’s                        taxation)
                              Most expensive/complex
Tax Considerations


Two Types:
  1. Federal
  2. Provincial


Definition of Income:
 no definition of “income” in ITA
 Based on sources
 Must be Canadian resident
Tax Considerations
(cont’d)




    Profit / Loss = Revenues- Liabilities
Tax: Sole
Proprietorships


 Profits and losses combined with all other
  sources of taxpayer’s income
 Losses can be used to offset other sources
 Taxed at rate of an individual
 Individuals taxed at progressive rates
 Tax year end = Dec. 31st.
 Must file by June 15th following year
Tax: Partnerships


   Partnership NOT taxable entity
   Partner taxed on share of partnership income
   Partners taxed at individual tax rates
   Loss carry over: forward/back
   Partnership information return
   Tax year = Dec. 31st
   Filing date = June 15th*
Tax: Corporations


 Double taxation:
   Corporation = taxable entity
   Dividends taxable to shareholders
 Taxed at corporate rates
 Small business deduction and lower provincial
  tax rate for CCPCs (Canadian Controlled
  Private Corporations)
 Capital Gains
Tax: Corporations
(cont’d)



 Shareholders:
    Individuals vs. Corporations
    Sale of shares: $500,000 capital gains
     exemption
 Tax year = corporation can choose
 Filing within 6 months of chosen date
Liability




    Individuals v. Corporations
Liability: Individuals


Sole Proprietorships
 Individual fully liable

Partnerships
 General: partners joint and severally liable
 Limited: one general partner liable, limited
  partners liable for amount they put in
Liability: Corporations



 Limited Liability: Corporation separately liable
  from individual owners (shareholders)
    Shareholders’ risk capped at 100% of
     investment
 Personal guarantees
Business Name Rules &
Regulations


 Business Names Act
 Sole Proprietorships: do not need to register
  unless name is different than own
 Partnerships: do not need to register unless
  partnership name is different than those of the
  partners
   Name acquires goodwill
   Can be used by each partner on dissolution
Business Name Rules &
Regulations


          Corporations: Jurisdiction

 Ontario (OBCA)
 Canada (CBCA)
Business Name Rules
& Regulations

    Corporations: Jurisdiction

    Federal vs. Provincial
    • Ability to carry on business in different jurisdictions
    • Federal 25% Directors must be Canadian
    • Ontario less strict on names than federal
    • Federal less expensive:
       • Online: $200
       • Offline: $250
       • Ontario: $360; may be able to do online incorporation
         now
Business Name Rules &
Regulations (cont’d)


     Corporations: Named v. Numbered
Name
 More $$
 More distinct, descriptive
Number
 Less $$
 Determined for you
 Depending on jurisdiction, the words “Ontario”
  or “Canada” will be included in a number
  name.
Changing the Business
Structure


      Sole Proprietorship  Corporation
 How do you go from a sole proprietorship or a
  partnership to a Corporation?
 S. 85 Rollover
     What?
     How?
     Result?
     One Catch
Changing the Business
Structure


           Provincial   Federal
 Continuance
 How?
   Import
   Export
 Why?
Roles and
Responsibilities



   Owners
   Shareholders
   Directors
   Officers
Roles and Responsibilities:
Owners


  Decision-making and management of business
  Employees re: constitutional
   safeguards/human rights code
  Contractual obligations
  Remit GST, EI
  File tax returns
  Please see the liabilities of sole proprietors and
   partners
Roles and
Responsibilities: Shareholders


   Own corporation
   Limited liability to 100% of investment
   May be asked to guarantee the corporation’s
    debts
   Meetings: pass resolutions
   Elect and remove directors
   Appoint auditor
   Receive financial statement
   Approve fundamental changes
   Shareholder Agreements/ USAs
Roles and
Responsibilities:
Directors

 Manage or supervise management of business
 Fiduciary Duty
 Standard of Care
    Attend director’s meetings
    Make further inquiry if a reasonable person
     would
 Disclose conflicts of interest
 Errors that could have adverse impact
 Not responsible for breach duties if acted in good faith
  by relying on financial statements of independent
  experts
Roles and
Responsibilities:
Officers

 Same fiduciary duty, standard of care, and
  duty to disclose as directors but may not have
  benefit of good faith reliance
 Day-to-day management
 Duties can be found in directors’ resolutions,
  articles, by-laws, or in USA
Capital Structure


Common & Preferred Shares

At least one share must have the following
  characteristics
• Voting rights
• Right to receive dividends
• Right to remaining property on dissolution
Income Splitting


• Tax planning strategy

• Income taxed at a lower rate
Shareholder’s
Agreements


1) Why do we need a shareholder’s agreement?

Must deal with the “Probabilities”
• Death
• Disability
• Retirement
• Bankruptcy/insolvency
• Termination of employment
• Disputes
Shareholder’s
Agreements (cont’d)

2) The Unanimous Shareholders Agreement
Some Key Clauses

Directors
• Quorum
• Powers – limited or extensive
• Selection

Conduct of the Affairs of the Corporation
• Key – how much of the activities require the
  approval of the shareholder/which
  shareholder?
Shareholder’s
Agreements (cont’d)


3)   Buy/Sell Provisions
•    How to deal with deadlock in management
•    Shotgun clauses
•    Funding mechanism
•    Mediation/arbitration
•    Non-competition/Non-disclosure
Shareholder’s
Agreements (cont’d)

Insurance Considerations
Types:
• Life insurance
• Disability insurance
Purpose:
• To fund tax liabilities on death
• To fund buy-sell commitment
• Corporation is the beneficiary
• Insurance proceeds added to capital
• Dividend declared
Financing Options


1. Internal Resources

2. Conventional External Sources

3. Equity Financing

4. Investors
GOOD LUCK IN YOUR
FUTURE BUSINESSES!
www.nelligan.ca   Nelligan O’Brien Payne LLP



       [ OTTAWA ] (613) 238 8080

       [ KINGSTON ] (613) 531 7905

    [ VANKLEEK HILL ] (613) 678 2490

     [ ALEXANDRIA ] (613) 525 2396

				
DOCUMENT INFO
Description: Business Incorporations document sample