Ask the Experts: Establishing your Business
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Transcript of Ask the Experts: Establishing your Business
Ask the Experts – An Advice Series for Entrepreneurs
Establishing Your Business – Laying Your Foundation for
Success
AGENDARBC Royal Bank:• How you can finance your business using
traditional and/or non-traditional funding
Welch LLP – Speaker: Zoran Vranjkovic, CPA, CA
• The basis of ownership structures and the fiscal benefits and pitfalls of sole ownership, partnership, and incorporation
AGENDA
Perley-Robertson, Hill & McDougall LLP/s.r.l.
Speakers: Lorraine Mastersmith & Owen Bourns
• Entering into a shareholders agreement: Considerations for co-owners
Traditional Means of Financing
• Personal Funds From Savings
• Love Money (Friends and Family)
• Part time job/steady source of income while the business gets going
• Outside shareholders/investors
• Suppliers
Traditional Means of Financing
• Banks: Term loans or Canada Small Business Financing Loan to finance capital/fixed assets.
• Operating loans/Overdrafts to finance cash flow
• Corporate Visa Cards to bridge purchases
• Letters of Credit/Guarantees
• Equipment Leasing
Non-Traditional Means of Financing
• Equity: Angels, Venture Capital, Public Market
• Subordinated Debt
• Mezzanine Financing
• Asset Based Lending
• Factoring
Non-Traditional Means of Financing
Government Programs:
• IRAP
• SR&ED
• Community Loan Funds, CYBF
• Ontario Centres of Excellence (OCE)
• Fresh Founders.com
Welch LLPChartered Professional Accountants
Establishing Your BusinessOwnership Structures
Zoran Vranjkovic, CPA, CA, CFP, TEP
Overview
Tax rate comparison
Sole proprietorship
Partnership
Corporation
Tax Rate Comparison
Corporation Individual
Active business income < $500,000 > $500,000
15.5%26.5%
46.41%46.41% / 49.53%
Tax integration of low-rate business incomeOwner's Income Owner's Income
>$509,000 <$509,000
Small Business Small Business
Income <$500,000 Income <$500,000
Income in corporation $1,000 $1,000
Corporation tax ($155) ($155)
Dividend refund n/a n/a
Available for dividend $845 $845
Personal tax (maximum rate) ($326) ($295)
Net after tax cash $519 $550
Income earned directly $1,000 $1,000
Personal tax (maximum rate) ($495) ($464)
Net after tax cash $505 $536
Deferral of tax $340 $309
Savings (cost) $14 $14
Tax integration of high-rate business incomeOwner's Income Owner's Income
>$509,000 <$509,000
Business Business
Income >$500,000 Income >$500,000
Income in corporation $1,000 $1,000
Corporation tax ($265) ($265)
Dividend refund n/a n/a
Available for dividend $735 $735
Personal tax (maximum rate) ($249) ($217)
Net after tax cash $486 $518
Income earned directly $1,000 $1,000
Personal tax (maximum rate) ($495) ($464)
Net after tax cash $505 $536
Deferral of tax $230 $199
Savings (cost) ($19) ($18)
Sole proprietorship - Benefits
Simple
Losses offset other sources of personal income
Can transfer business to a corporation
Sole proprietorship - Disadvantages
Potentially unlimited liability
Limited income splitting opportunities
Cost of transferring business to a corporation
Partnership - Benefits
Limited liability for limited partners
Losses flow to partners
Tax-deferred dissolution available
Proportionate small business deduction available to corporate partners
Can transfer to a corporation
Partnership - Disadvantages
Potentially unlimited liability (except for limited partners)
Set-up costs
Increased administration
Limited income splitting opportunities
Questionable whether estate freeze is acceptable
Corporation - Benefits
Deferral of tax (“small business deduction”)
Income splitting opportunities
Optimizing remuneration
Capital gains deduction
Estate planning opportunities
Limited liability
Corporation - Disadvantages
Set-up costs
Increased administration
Losses trapped in corporation
Sample corporate structure
Opco
Family Trust Holdco
PrincipalFamily
Common shares
Common shares
Thank You
Shareholders’ AgreementsConsiderations for Co-Owners
October 22 and 24, 2013
Lorraine Mastersmith & Owen Bourns
Overview
• Unique nature and purpose of a shareholders’ agreement
• Governance considerations
• Share issuances and transfers
• Funding considerations
• Key provisions
• Dispute resolution
Without a Shareholders’ Agreement• Governed by Statute:
- Ontario registered company - Business Corporations Act (Ontario) , R.S.O. 1990, c. B.16; or
- Federally registered company - Canada Business Corporations Act (R.S.C., 1985, c. C-44)
Nature of Shareholders’ Agreement
• Agreements generally deal with present events
• In contrast, Shareholders’ Agreements focus on anticipating future circumstances and events
• No "standard form" of agreement
• Start with a term sheet – set out your concerns or key terms in point form
Purpose of a Shareholders’ Agreement• Particularly useful in closely-held corporations• Material topics to address in agreement include:
– Dispute resolution & deadlocks– Special minority rights– Obligations in respect of equity and debt financing needs
of the corporation– Describe specific obligations of shareholders– Otherwise anticipate likely future events
Governance Considerations• Dual roles of shareholders and directors common in small to
medium sized companies
• Shareholders’ agreement provides a mechanism for the appointment of directors and officers
• Set out quorum and other requirements in respect of meetings
• Other governance clauses relating to:- annual budgets- financial plans- financial statements- reporting obligations- dividend and distribution policy
Share Issuances and Transfers• Primary rule - no shares may be transferred without prior approval• Permitted transferees (ie. immediate family / holding companies)• Address:
- Pre-emptive rights- Rights of first refusal- Shotgun (buy/sell) or auction provision- Piggyback/tag-along and/or drag along provisions- Bankruptcy or Death of a shareholder- Divestiture or Dissolution- Share valuation mechanism- Public offering
Funding Considerations
• Share subscriptions from existing shareholders or from new shareholders
• Shareholder loans
• Third party debt financing
• Provide for circumstances where a particular shareholder defaults in respect of its funding obligations
Other Key Provisions• Non-competition and other restrictive covenants
(consider employment contract terms also)
• Requirements for shareholders to devote their full time and attention to the business
• Consequences for breach– Forced sale of shares– Reduced pricing– Redemption mechanism
Dispute Resolution• Dealing with disputes between shareholders - especially
deadlock between shareholders where no majority
– Court vs mediation vs arbitration – Exercise of a liquidity right (ie. shotgun or auction clause)– Mediation or arbitration– Dissolution
Pooling and Voting Agreements
• Two or more shareholders may enter into a limited agreement to vote their shares in a certain way (“pooling agreement”)
• A voting trust agreement involves a trustee being appointed to vote specific shares owned by particular shareholders
Lorraine Mastersmith1400-340 rue Albert StreetOttawa, ON, KIR 0A5T: 613.566.2810F: 613.238.8775email: [email protected]
Owen Bourns1400-340 rue Albert StreetOttawa, ON, KIR 0A5T: 613.566.2823 F: 613.238.8775email: [email protected]