Business Structures Presented by Brian Rudy, lawyer Small Business - PDF document

Cathedral l Place Suite 2300, 92 925 West Georgi gia Stre reet t Vanco couv uver, B.C. V6C 3L2 Tel: 604.685.8186 Fax: 604.685.8187 www.synergyl ylaw.ca We provide business and strategic insight to our clients, having the expertise to understand and find creative solutions to solve our client’s challenges. Business Structures Presented by Brian Rudy, lawyer Small Business BC Education Centre S Y N E R G Y B U S I N E S S L A W Y E R S Business Vehicles Most common:  Proprietorship  Partnership / Limited Partnership / Limited Liability Partnership  Corporation (limited and unlimited) S Y N E R G Y B U S I N E S S L A W Y E R S 1

Long Term Objectives (beyond turning a profit)  Consolidation of business assets  Benefit from capital gains exemption on sale of business (ensure you qualify)  Benefit from small business tax rates  Segregate ventures to ease reorganization, sale  Create liability buffer between businesses S Y N E R G Y B U S I N E S S L A W Y E R S Factors to Consider  Arrangement among principals, if more than one person  How will business expand and grow  How can business be sold  How will business raise capital  How will business structure provide for flexibility to ensure ongoing tax and business efficiency  How will key assets be owned S Y N E R G Y B U S I N E S S L A W Y E R S Reality Check!  What is your budget  How much money do you expect to earn in business  What is your lifestyle and personal cash requirements S Y N E R G Y B U S I N E S S L A W Y E R S 2

Proprietorship  Most basic business vehicle  Happens by default if the entrepreneur does not take active steps to structure  Corporation can run a proprietorship  “Doing business as”….can register name of Proprietorship S Y N E R G Y B U S I N E S S L A W Y E R S Proprietorship: Advantage  Little or no set-up cost  Ability to deduct business losses from other personal income  Reduced accounting fees  Greatest freedom from regulation S Y N E R G Y B U S I N E S S L A W Y E R S Proprietorship: Disadvantage  No liability protection  No “image” projection  Not always tax efficient  Business entity disappears without owner  Difficult to raise capital S Y N E R G Y B U S I N E S S L A W Y E R S 3

Partnership “Persons carrying on business with a view to profit”  No active structuring required  Not a separate entity from the partners  Share one small business tax rate  Good structure when all principals are actively involved in the business and where partners desire single coordinated business  Profits are allocated to each partner and this allows some flexibility in the organization of each partner’s financial affairs S Y N E R G Y B U S I N E S S L A W Y E R S Partnership: Advantage  Little or no set-up cost (but partnership agreement recommended)  Profits and losses allocated to partners’ income  Allows each partner to separately plan their finances  There is flexibility as to the manner in which profits are allocated  Broad management base  No public record of partnership agreement S Y N E R G Y B U S I N E S S L A W Y E R S Partnership: Disadvantage  Joint liability of all partners  No liability protection (unless a corporate partnership or limited liability partnership is used)  Can arise unintentionally and without any paperwork or with poorly drafted paperwork  Divided authority  Partners can bind other partners without approval S Y N E R G Y B U S I N E S S L A W Y E R S 4

Limited Partnerships and LLP’s  LLP’s allow flexibility of partnerships with reduced liability to each partner  Excellent for large partnerships where not all partners are incorporated  Limited partnerships split management and investment and are more suited to larger entities that sell limited partnership units to investors and are not common among active entrepreneur’s who are all involved in the business S Y N E R G Y B U S I N E S S L A W Y E R S Corporation  Most common business vehicle  Used in different phases of entrepreneur’s business  Limited liability  Easy to raise capital  Good set of default rules – both in Statute and Common law  Tax free inter-corporate dividends allow money to be moved throughout corporate structure  Various classes and kinds of shares allow re-structuring to occur on a rollover/tax deferred basis which allow the entrepreneur to re-structure to meet ongoing business needs without incurring tax liability  New ULCs used in certain cross-border situations S Y N E R G Y B U S I N E S S L A W Y E R S Corporation: Advantage  Separate entity with existence separate from shareholders  Settled body of rules that allow parties to quickly set up a manageable structure without significant effort  Limited liability  Easier to raise capital  Ownership is transferable  Provision for specialized management allows for larger organization  Small business tax rates  Greater flexibility for income splitting with certain family members S Y N E R G Y B U S I N E S S L A W Y E R S 5

Corporation: Disadvantage  Requires additional legal and accounting work  Requires extensive record keeping  More difficult to manage overall facility than when operated by one entity  Heavily regulated  Personal guarantees often undermine liability protection  High tax rates and possibility of double taxation, or incomplete integration of corporate and personal tax, for certain types of income, as business grows S Y N E R G Y B U S I N E S S L A W Y E R S Basic Elements of Company  Shareholders  Directors  Officers  Assets, bank counts, and corporate property owned by Company, and managed by directors  The shareholders own shares, whose value is based upon the assets of the company, less its liabilities S Y N E R G Y B U S I N E S S L A W Y E R S Provincial or Federal Company?  Federal Canada Business Corporations Act  British Columbia Business Corporations Act  Companies from other jurisdictions can register to do business in British Columbia S Y N E R G Y B U S I N E S S L A W Y E R S 6

Sample Phase of Small Entrepreneur Initial Visit Accrual of Entrepreneur Save money Idea Investment Capital lawyer/ profits pays off mortgage and invest accountant Proprietor Phase Incorporated Business Holding Company S Y N E R G Y B U S I N E S S L A W Y E R S Tax Free Inter-corporate Dividends Tax paid on dividends No tax HoldCo $100 Tax paid on profit OpCo S Y N E R G Y B U S I N E S S L A W Y E R S Sample Structure – Senior Entrepreneur Beneficiary Beneficiary Trust Trust Trademarks, Real Estate Software HoldCo Savings and Security Passive Assets Loan Salary OpCo 1 OpCo 2 OpCo 3 Business 1 Business 2 Business 3 S Y N E R G Y B U S I N E S S L A W Y E R S 7

Corporat ate Planning g & Wealth th Preservat ation Merger & Acquisi sitions Shareholder Agreements Debt Financi cing Corporat ate Structuring Trust sts Employee Matters Leasing Matters Estat ate planning / Wills Real Estate 8