Should I Incorporate?
Sole proprietorship – Partnerships – Incorporation under Companies Act (Nova Scotia) - Income Tax Act (Canada)
Prepared for a presentation at Hub South Shore, May 9, 2013
Christian Weisenburger Law, Inc.
OUTLINE
CostsTransferring existing business to a CompanyLiability ImplicationsIncome Tax CreditsInvestment and Transferability
COSTS
Christian Weisenburger Law, Inc.
start-up costsSole proprietor Partnership Company
Name Search and Reservation $62 Contact myself or Deb McLellan at [email protected] to make process easier
Fees to Registry $61.66 $422Corporate Minute Book $80Corporate Seal $55Legal Fees to Incorporate $550Start-up Costs (plus tax) $58 $120 ~$1050 (without seal)
Shareholder/Partnership Agreement
$500 - $3000 (often ~$750 - $1,000)
Christian Weisenburger Law, Inc.
ongoing and wind-up costsSole proprietor Partnership Company
Ongoing costs
Registry Annual Fees $66.55 $66.55 $114.90 + legal fees
Accounting fees Depends (ask John)
Bookkeeping Depends (ask John)
Wind-up costs
Registry $133.05
Advertisement Costs $200
Legal and Accounting Low Medium Greatest e.g. $1500+(although, often companies are abandoned without cost)
COSTS AND COMPLEXITY TO CONVERT TO A COMPANY FROM A PARTNERSHIP OR SOLE PROPRIETORSHIP
Christian Weisenburger Law, Inc.
transfer of existing business to Newco
Newco
Business AssetsTangible assetsAccounts ReceivableWork-in-progressIntellectual PropertyGoodwill
Tax ConsequencesWithout tax-planning, capital gains tax, recapture, HST and other negative tax consequences can be triggered on the transfer as transferor is generally deemed to have disposed of such assets at their fair market value (i.e. and not their original cost amount)
Tax saved due to losses claimed in relation to the business in the past may be now payable
Sole proprietor orPartner
Transferred
Christian Weisenburger Law, Inc.
assignment of contractual rights to Newco
Newco
RightsReal Property LeaseEquipment Leases - e.g. photocopierSupply ContractsPurchase ContractsWarranty RightsBusiness licensesFranchise or IP rights
Assigned(often requires consent of other party to be assigned)
Sole proprietor or Partner
» agreements often cannot be transferred without the other party’s consent» watch out for clause in some leases that allow lessors to walk away from
agreement in the event of transfer (and rent to someone else for more if they elect to do so)
» Newco may not be entitled to warranty rights (i.e. if transferred equipment later breaks)
» insurance policy, business licenses, tax accounts (e.g. HST) (often) cannot be assigned and have to be applied for by Newco
Christian Weisenburger Law, Inc.
assumption of obligations by Newco
Newco
ObligationsDebtsObligations under contacts (e.g. pay amounts required under lease)
Assumed(requires consent of creditor for assumption to be binding)
Sole proprietor or Partner
» obligation to pay interest on debt must be assumed by Newco for the payment to be tax deductible to Newco
» failing to get consent for the loan assumption may put the loan in default, making it immediately payable in full
» likely creditor will not consent to assumption unless transferor agrees to personally liable as well (i.e. personal guarantee)
» tax considerations may come into play if amount of liability assumed by Newco is greater than the value of the business assets transferred to it
Christian Weisenburger Law, Inc.
conversion costsSole proprietor Partnership Company
Accounting and legal fees to to review tax consequences and transfer business to Newco
depends
Transfer fees payable by terms of contracts to party to give consent to transfer
depends (e.g. some lessors require lessee to pay any legal costs they incur in the course of consenting to the assignment)
LIABILITIES
Christian Weisenburger Law, Inc.
examples of business liabilities• Breach of contract, e.g:
– failure to perform as required or on time– failure to repay loan as required
• Breach of Intellectual Property rights, e.g.:– using copyright without permission (e.g. source code)– using similar trademark to one registered by others
• Tort, e.g.:– slip and fall (occupier’s liability)– negligence– libel
• Environmental and Regulatory• Tax• Vicarious, e.g.:
– liability for acts of employees
Christian Weisenburger Law, Inc.
liabilities – sole proprietor
AccountsReceivable
Sole Proprietor
BUSINESS LIABILITIES
personal assets business assets
Christian Weisenburger Law, Inc.
liabilities – partnership
AccountsReceivable
Partnership
BUSINESS LIABILITIES
personal assets
business assets» partners are each personally liable for all of the obligations of the
partnership, even if the obligations were entered into by another partner without their approval
» merely investing in a friend’s business (other than as a loan) likely makes you their partner
» you can be deemed to be a partner even if the partnership is not registered at the RJSC
» for these reasons, most investors require incorporation
Christian Weisenburger Law, Inc.
liabilities - company
AccountsReceivable
BUSINESS LIABILITIES
personal assets
business assets
Newco
Shareholder
» However, corporate shield does not protect against:
Fraud Director liability (e.g. HST, unpaid
source deductions, environmental, workplace)
Certain torts like inducing breach of contract
» Lenders and lessors often require personal guarantees, which circumvent the protection of the corporate model
personal assets are shielded from corporate liabilities
Christian Weisenburger Law, Inc.
tax incentives to use a company
The following tax incentives are only available if the business is incorporated:
• $750,000 capital gains exemption– growing the business in a company can save each owner tax they would have paid
on up to $750,000 of capital gains as the business grows and is subsequently sold – also would apply to save capital gains taxes that might otherwise be applicable on
the death of shareholder • 3 year tax holiday – NS small business tax credit
– requires 2 employees, 1 being full time and at arms length• NS equity tax credit
– tax credit equal to 35% of equity investment into qualifying companies, deductible against NS personal tax of shareholder
INVESTMENT AND TRANSFERABILITY
Christian Weisenburger Law, Inc.
investment and use a company• Usually companies are financed by a nominal payment from shareholders
(e.g. $10) as equity, and the remainder is debt financing, however– certain banks and institutions (e.g. BDC) require a minimum equity investment– NS Equity Tax credit is available only for equity investments
• Investors often require incorporation:– so that they are not at risk of being deemed to be a partner (i.e. making all of
their assets available to creditors of and claimants against the business)– corporate legislation and constating documents are long and relatively worked
out (i.e. allowing for proper corporate governance)• in contrast, the Partnership Act (Nova Scotia) is short and not as many protections to
investors apply by default
– rules applying to the transferability of ownership interests in companies is more settled than those of other business structures
– partnerships technically terminate with each change in partnership; whereas companies are stable and shareholders death or change in ownership has no effect on existence of entity
Christian Weisenburger Law, Inc.
investment and use a company
• Securities law restrictions:– you cannot sell or issue shares in a private company to persons who are
not:• Employees• Close personal friends• Accredited Investors (e.g. $200,000+ income per year or $1 million+ in net assets)• Buying enough shares to take over control• Other prescribed persons
– i.e. once you buy shares of a private company, you are generally stuck with them if you can’t find someone in these categories to sell to
– (Same prohibitions apply with respect to purchasing partnership interests)
Christian Weisenburger Law, Inc.
summary
incorporate do not incorporate
Losses can immediately be offset against other income
of the owner
Winding-up costs
Annual fees and corporate tax returns
Set-up costs
Ease of investment and transferability of ownership
Tax Credits and Exemptions
Tax Savings by Income Splitting
Personal Asset protection (to extent guarantees aren’t
required)