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									CREATING ENTREPRENEURSHIP
               Silvana Alzetta-Reali, Esq. - Moderator
                           Coca-Cola Ltd.
                            Toronto, ON

                            Gail Lilley
                  Blake, Cassels & Graydon LLP
                           Toronto, ON

                       Michael Wager, Esq.
                 Squire Sanders & Dempsey L.L.P.
                          Cleveland, OH
                          New York, NY




         Canada-United States Law Institute Annual Conference
Comparative Aspects of Entrepreneurship in Canada and the United States
                               April 13, 2006
CREATING ENTREPRENEURSHIP

    U.S. and Canadian Perspectives on
              Policy and Law

         Gail Lilley
         Blake, Cassels & Graydon LLP
         Toronto, ON

         Michael Wager, Esq.
         Squire, Sanders & Dempsey L.L.P.
         Cleveland, Ohio
         New York, New York



2
I. U.S. Public Policy and Entrepreneurships:
   “Chickens, Eggs & Causality”1

•   American business and popular culture embraces and
    celebrates the “entrepreneur”
•   In history and geopolitical calculus, American capitalism is
    the counterpoint to centralized economies
•   Widely accepted wisdom –
         entrepreneurial activity = economic growth
•   Causality – Does U.S. public policy and law drive (or even
    support) entrepreneurship?




    1   Quote from Walter N. Thurman and Mark E. Fisher, “Chicken, Eggs, and Causality, or
        Which Came First”, Amer. J. Agr. Econ, May 1988, pp. 237-238


3
II. U.S. Public Policy and Legislative Initiatives (and
   Detriments)

•   Definitions – What is an “entrepreneur”?
        1.   Develop/commercialize innovate products and services
        2.   Inspire/initiate new industries or industry clusters
        3.   Create new catalysts for capital formation
        4.   Create new employment
        5.   Create new wealth
    –   Differentiation from “small business”
    –   Are there cross-border differences in characteristics of
        entrepreneurs?

•   Factors Driving Entrepreneurial Activity
    –   Cultural/Demographic Aspects
    –   Policy – Cause and Effect


4
II. U.S. Public Policy and Legislative Initiatives (and
   Detriments) [cont’d]

•   Policy Overview
    –   Political Statements v. Policy
        1.   Tech transfer program
        2.   New capital program
        3.   R&D programs
        4.   Workforce development program
    –   Broad-based Policy/Law v. Directed Action




5
Canadian Public Policy and Entrepreneurships

•   One of the keys to prosperity for all Canadians is
    entrepreneurship
•   That is why governments at all levels need to nurture
    entrepreneurs, not punish them with job killing taxes and
    burdensome red tape




    September 2006 – The Honourable Maxine Bernier, Minister of Industry Canada



6
Canadian Public Policy on Legislative Initiatives (and
 Detriments)

•   Definitions – What is an “entrepreneur”?
        – “Entrepreneurship is an outlook on life. It is the ability to see
          new opportunities in your environment and exploit them to
          create something new or make something better”1
        – “The root of the word can be traced as far back as 800 years to
          the French verb entreprendre or “to do something” 2




    1   September 2006 – The Honourable Maxine Bernier, Ministry of Industry Canada
    2   The Notion of Entrepreneurship: Historical and Emerging Issues – Charles Outcalt
7
Canadian Public Policy and Legislative Initiatives
 (and Detriments) [cont’d]

•   How does our Government help entrepreneurs
    “to do something”?
     – Competition Policy
     – Tax Policy
     – Red Tape Reduction
     – Financial Support




8
III. U.S. Public Policy – Capital Formation

    •   New Business – limited access to capital
    •   Role of angels and smaller capital providers (local seed
        capital)
    •   Increasing intervention of “public” venture capital – does
        this ease constraint?
             1.   Venture capital pools (direct equity; indirect equity)
             2.   Micro-enterprise loans
             3.   Loan guarantees
    •   Existing capital markets – more capital, but is this more
        access?
        –   Private equity
        –   Hedge funds




9
IV. U.S. Public Policy – Tax

 •   Tax incentives/disincentives
          1.   Tax credits (R&D, capital investment, targeted industry,
               targeted areas)
          2.   Sales tax exemption
          3.   Income tax (ordinary rates; capital gains rates)

 •   Death/Inheritance Taxes – tax on capital accumulation
     –   U.S. federal estate tax
     –   State estate taxes




10
V. U.S. Public Policy – Regulatory

•    Economic “freedom” drives economic activity
•    Entrepreneurs – market disruptive forces or free market risk-
     takers?
•    Labor law policy – effects of minimum wages; workers’
     compensation; unemployment insurance
•    Immigration policy – attracting and retaining entrepreneurs
     and skilled personnel for entrepreneurial businesses
•    Regulatory reform – unified reporting; paperwork reduction
•    Utilities deregulation
•    Securities regulation




11
How Does Canada Compare?

•    On October 18, 2005 the Conference Board described
     Canada as an underperforming but potentially gifted
     child…productivity achievements were declared to be our
     most significant weakness with 2004 increases less than
     one-third of those in the US (1.1% versus 3.6%)1
•    Canada is the most cost effective location in the G-7 to
     conduct such sophisticated ICT (Information & Computer
     Technologies) R&D2
•    tax incentives
•    investments in R&D infrastructure
•    the lowest labour costs in the G-7

     1   April 5, 2006 – Sheridan Scott, Commissioner of Competition, Competition Bureau
     2Industry Canada website – Information & Communications Technologies, updated
     2006-12-05
12
Canadian Competition Policy

•    My mission is to maintain and encourage competition in
     Canada – to ensure that small and medium sized enterprises
     have an equitable opportunity to participate in the Canadian
     economy
•    Innovation is the crucial ingredient for economic success




     April 5, 2006 – Sheridan Scott, Commissioner of Competition, Competition Bureau



13
Canadian Tax Policy

•    Reduce tax burden on small businesses
•    Create incentives for research and development
•    Create incentives for investment in small business




14
Canada – Reducing the Tax Burden

•    Entrepreneurs and small businesses are a key source of
     jobs and economic growth in Canada. The Government is
     strengthening support for this sector by reducing taxes on
     small business income and capital gains1
•    Examples from March 19, 2007 Federal Budget:
         – Triple the taxable supplies threshold to CAD$1,500,000 from
           CAD$500,000 for annual goods and services tax filers
         – Permit Eligible Canadian Controlled Private Corporations
           (CCPs) that meet certain criteria to make quarterly tax
           instalments instead of monthly tax instalments




     1   August 2003 – Department of Finance Canada

15
Canada – An Opposing View on Reducing the Tax
 Burden

•    The combined federal and provincial preferential small
     business income – tax rates, while designed with good
     intentions, have resulted in steep increases in statutory
     business income tax rates for successful businesses that
     grow and expand
•    …such steep increases…create a powerful barrier or
     disincentive for entrepreneurs to expand their businesses




     Growing Small Businesses in Canada: Removing the Tax Barrier – Jason Clemens &
     Niels Vedhuis, Studies in Entrepreneurship Markets, A Publication of The Fraser
     Institute
16
Canada – Tax Incentives for Investment in Small
 Business

•    Labour-sponsored investment funds proliferated in the late
     1990s
•    Sponsored by a trade union or similar worker organization
•    Tax credits to investors federally and provincially
•    Some estimate that these funds account for up to 40% of all
     venture capital raised in Canada
•    Generally, returns have been poor
•    LSIF success story is Research in Motion
•    Being phased out


     June 13, 2005 – CBC News Online



17
Canada - R&D Tax Incentives and Innovation

•    “It has been Canada’s innovation policy for the past 30 years
     to rely extensively on tax incentives to promote R&D”
•    Combination of federal and provincial programs
•    Tax deductions and tax credits
•    Net after-tax cost of R&D expenditures can be less than 0.44
     cents for each dollar spent
•    Small Canadian businesses receive the greatest benefit




     Industry Canada – Information and Communications Technologies, updated 2006-12-05



18
Canada – Financial Support

•    Numerous programs at various levels of government
•    Canada Small Business Financing Program
•    Qualifying small business has to apply for a loan at a
     financial institution
•    If loan is granted, the federal government will reimburse 85%
     of lender’s losses in the event of a default




     Industry Canada – Canada Small Business Financing Program, updated 2007-03-09



19
VI. U.S. - Creating Entrepreneurial Businesses:
    Choice of Entity

•    Determinants
     (i)   Capital Structure
     (ii) Risk Management (Liability)
     (iii) Management and Control Issues
     (iv) Taxation
•    U.S. Forms of Organization
     (i)   Sole Proprietorship
     (ii) Joint Ventures
     (iii) General Partnership
     (iv) Limited Partnership
     (v) Corporation – C Corp
     (vi) Corporation – S Corp
     (vii) LLC


20
Canada – Creating Entrepreneurial Businesses:
 Choice of Entity

•    Determinants are the same in Canada
•    Forms of Organization are substantially the same in Canada
•    No S Corp or LLC equivalent
•    Unlimited liability company in Nova Scotia and now Alberta
•    Franchising




21
VII. U.S. - Creating Entrepreneurial Businesses:
     Allocation of Rights and Obligations of
     Founders and Funders

•    Organizational and Capital Formation Issues
         1.   Capital Needs/Capital Structure
         2.   Governance Issues
         3.   Board

•    Operational Issues
         1.   Management structure
         2.   Limitations on Authority
         3.   Reporting; Accountability

•    Strategic Issues – Business combinations




22
Canada – Creating Entrepreneurial Businesses:
 Allocation of Rights and Obligations of Founders
 and Funders

•    Canadian considerations are the same
      – Founder = Idea
      – Funder = Capital

•    Common Goals
      – Protect the idea
      – Create a tax efficient structure for both the business and the
        funder
      – Create a simple operating model




23
Canada – Creating Entrepreneurial Businesses:
 Allocation of Rights and Obligations of Founders
 and Funders

                         Key Tensions

     Founders                          Funders
     Keep the idea even if the         Keep the idea or prevent the
     business fails                    founder from using it if the
                                       business fails
     Have no liability to funders if   Have no liability to founder or
     the business fails                any third party beyond capital
                                       invested
     Retain as much upside             Retain as much upside
     potential as possible if          potential as possible if business
     business is a success             is a success




24
VIII. Creating Entrepreneurial Businesses: Allocating
      Risks and Resolving Disputes

•    Terms and Conditions of Contracts
•    Indemnity Issues
     (i)   Scope of Indemnification
     (ii) Conditions and Limits on Indemnification

•    Dispute Resolution
     (i)   Contractual
     (ii) Arbitration
     (iii) Litigation

•    Termination Issues




25
IX. Entrepreneurial Enigma: The Effects of Policy
    and Law

•    Does policy and law encourage entrepreneurial activity?
•    The Enigma:
     –   Does capital attract entrepreneurs?
                    or
     –   Do entrepreneurs attract capital?
                    or
     –   Is this a multi-directional process of resource allocation,
         opportunity and governmental intervention?

•    Does entrepreneurship change across borders? If so,
     why?




26
CREATING ENTREPRENEURSHIP
               Silvana Alzetta-Reali, Esq. - Moderator
                           Coca-Cola Ltd.
                            Toronto, ON

                            Gail Lilley
                  Blake, Cassels & Graydon LLP
                           Toronto, ON

                       Michael Wager, Esq.
                 Squire Sanders & Dempsey L.L.P.
                          Cleveland, OH
                          New York, NY




         Canada-United States Law Institute Annual Conference
Comparative Aspects of Entrepreneurship in Canada and the United States
                               April 13, 2006

								
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