While there are many reasons for incorporating, the most common motivators are two- liability and tax.
A corporation is a separate entity from its owners and those running the business and, because of this, in most cases these individuals are not personally liable for the debts and obligations of the corporation. There are exceptions, of course, such as when a law makes individuals personally liable ( such as in the Environmental Protections Act or the Income Tax Act for some of the amounts that the corporation should be remitting, to name just 2 examples) or when personal guarantees are given. Depending on the nature of the business, the protection of the personal assets of the shareholders is a significant benefit of incorporation.
The tax system in Canada can also provide a good reason to incorporate. It is possible to derive major tax benefits through the use of a corporation and its share structure. Incorporation alone does not provide the tax benefit. It is the choice of the proper corporate structure to meet the specific needs of the incorporator that provides the benefit. And, as each person’s circumstances differ, so too the appropriate structure differs for everyone who is contemplating incorporation.
The proper legal advice is crucial in order to obtain the maximum benefits available that incorporation offers. Be sure to choose a lawyer who has the necessary expertise to advise you properly in this important decision.
Planning for what is to happen to a business once the present owner(s) are no longer involved is vital to the continued success and value of a business. Significant resources have been committed to establish a business and these resources can all be wiped away unless proper and timely planning is not undertaken. The legal aspects of such planning are a major part of the transition planning.
If the owners have a proper shareholders or partnership agreement, depending on the format chosen to operate the business, it might be a simple matter of following the agreement. However, if there is only one owner, or if the business if family owned, then a different set of considerations arise. What if there is a desire for the business to remain in the family and there are more than one child, and not all of the children are involved in the business? What if there is no interest on the part of the children to take over the business? And even if they do, how do they do so and provide the income needed by mom and dad for their retirement? What about those employees that have been a part of its growth over the years- are they interested in the business? And what will happen if they leave the business? If the decision is made to sell the business, the sale of a business raises other complex issues to be dealt with. Our web site offers some insight into these issues.
We have over 25 years' experience in advising business owners as to how they can best make the transition in the most effective and efficient manner that is suited to the circumstances which we would be happy to offer.
Shareholders and Partnership Agreements
Two or more people carrying on business together can form a tremendous team, especially when the gifts and talents of the individuals are complementary. However, it is all too common to hear stories of situations where things have not worked out and the disagreements between the individuals have ruined a potentially great business opportunity and, more importantly, a great friendship.
Whether the individuals decide to incorporate or carry on business as partners, having the proper agreement in place can assist in 2 ways- allowing the individuals to talk about the issues relating to the running of the business in advance of any problems arising and, if problems do arise, provide for a mechanism or resolving them or a means of allowing the parties to go their own ways with as little fighting as possible.
A properly structured shareholders agreement or partnership agreement allows the parties to deal with the management of their business and for the purchase and sale of their share of the business under various circumstances.
The agreement should set out who is running the business, their roles and what decision- making authority each party has. It should take into consideration who can sign documents on behalf of the company, what level of approval is required to do certain things on behalf of the company and other important matters related to operating the business and its finances.
As important as the running of the business, a good shareholders agreement will deal with the various situations where one party may wish to buy the shares of another or may want his or her shares purchased. What if one of the owners dies? Or becomes disabled? What if there is an insurmountable disagreement between the owners? What if one of them wants to retire from the business? How does the value of the business get determined and how is the purchase price to be paid? All of these and more are reasons that may trigger the need for a sale of the one owners share of the business. There is no one form of agreement that is appropriate for every situation. A proper agreement can only be drafted by a competent and experienced lawyer. Be sure that your professional adviser has the skills and experience necessary to fully protect you.
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