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: lmastersmith@perlaw.ca

Owen Bourns1400-340 rue Albert StreetOttawa, ON, KIR 0A5T: 613.566.2823 F: 613.238.8775email: obourns@perlaw.ca