business[1] - "#$&*$,$ Presented by Robin...

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Unformatted text preview: !"#$%&##'(##)*$+,$)%# Presented by: Robin Longe February 19, 2007 -"./)#& ! To provide an understanding of different forms of business associations -"./)#& Why? ! employment ! contracting ! starting or becoming an owner of a business 0%,.)1"*,$)% Three basic types of business organizations: ! Sole Proprietorship ! Partnership ! Corporation 0%,.)1"*,$)% Sole Proprietorship ! individual owner ! no separate legal entity ! unlimited personal liability ! one level of tax 0%,.)1"*,$)% Partnership ! two or more persons are owners ! no separate legal entity ! unlimited joint and several liability ! one level of tax 0%,.)1"*,$)% Corporation ! any number of shareholders ! limited personal liability ! the corporation is a separate legal entity ! two levels of tax 2&3$%$,$)%# “Business” ! no real legal definition ! An enterprise organized for the purpose of making a profit through trade or service. 2&3$%$,$)%# "Individual" and "Person“ ! Individuals are people ! Persons include corporations, societies, banks, governments and individuals ! Each a separate legal entity 2&3$%$,$)%# "Limited Liability" and "Unlimited Liability“ ! extent that assets are available to satisfy creditors ! limited liability - only business assets ! unlimited liability - personal assets are also available 45))#$%6'+'!"#$%&##'7,."*,".& 1. 2. 3. Limiting liability Optimal tax position Control of decision making 45))#$%6'+'!"#$%&##'7,."*,".& No form of business organization optimizes all three objectives. 7)8&'-.)/.$&,).#5$/9'2&#*.$/,$)% ! an individual who carries on business alone rather than in combination with others or through a corporation ! simplest and most basic form of business association 7)8&'-.)/.$&,).#5$/9'2&#*.$/,$)% ! no distinction between the individual and the business 7)8&'-.)/.$&,).#5$/9'2&#*.$/,$)% Proprietor: ! enters contracts ! employs employees ! owns assets ! liable for obligations ! sue or be sued on own behalf 7)8&'-.)/.$&,).#5$/9'2&#*.$/,$)%' ! management control is the responsibility of the proprietor 7)8&'-.)/.$&,).#5$/9'(1:+%,+6&# ! inexpensive to set up ! income and losses directly attributed to the proprietor ! management decisions not shared ! minimal regulation 7)8&'-.)/.$&,).#5$/9'2$#+1:+%,+6&# ! unlimited personal liability ! not able to benefit from certain tax advantages which may be realized through incorporation ! more difficult to “transfer” ownership of the business ! difficult to raise capital -+.,%&.#5$/9'2&#*.$/,$)% ! one step above the sole proprietorship in size and complexity ! legally “the relationship between two or more persons carrying on business in common with a view to a profit” -+.,%&.#5$/9'2&#*.$/,$)% ! two or more persons ! business activity ! share in losses and revenues on an equal basis unless agreed otherwise -+.,%&.#5$/9'2&#*.$/,$)% ! not a separate legal entity ! may enter contracts and sue or be sued in the firm name ! joint and several liability -+.,%&.#5$/9'2&#*.$/,$)% ! duty to render accounts ! full disclosure of partnership information -+.,%&.#5$/9'2&#*.$/,$)% ! duty of a partner to not compete with the partnership and if one does, all profits must be paid to the partnership ! partners must account for any benefits received without the consent of the other partners -+.,%&.#5$/9';).<+,$)% ! simple and inexpensive to set up ! formed by agreement (written or oral) or by conduct ! may be a partnership whether you intend to or not -+.,%&.#5$/9';).<+,$)% ! free to structure partnership as partners see fit ! contributions to the partnership ! management ! divisions of losses and profits -+.,%&.#5$/9'(1:+%,+6&# ! share the risks associated with business ! share the responsibilities of management ! write-off tax losses -+.,%&.#5$/9'2$#+1:+%,+6&# ! no limit to liability ! each partner fully liable for the acts of their partners ! liability to third parties, such as creditors, remains unlimited ! inability to “transfer” ownership ! difficulty in raising capital -+.,%&.#5$/9'2$#+1:+%,+6&# ! no distinction for tax purposes between the individual and the partnership ! cannot benefit from tax advantages which may be realized through incorporation 4)./).+,$)%#9'2&#*.$/,$)% ! a legal entity or “person” separate and apart from shareholders ! legal rights and obligations ! income and losses separate from owners 4)./).+,$)%#9'2&#*.$/,$)%' ! shareholders own the corporation through shares and appoint directors 4)./).+,$)%#9'2&#*.$/,$)% ! directors oversee management of the corporation ! directors appoint officers 4)./).+,$)%#9'2&#*.$/,$)% ! officers manage the day to day operation of the corporation 4)./).+,$)%#9';).<+,$)% ! created by fulfilling the formal requirements of either a federal or provincial statute ! foreign corporations can be “recognised” under federal and provincial statutes 4)./).+,$)%#9';).<+,$)% Jurisdiction ! federal corporation can carry out business throughout Canada ! provincial corporations can only carry on business as a right in own province 4)./).+,$)%#9';).<+,$)% Jurisdiction ! foreign corporations carrying on business in the province must register 4)./).+,$)%#9';).<+,$)% ! ! ! ! ! ! name requirements name reservation file incorporation documents have registered and records offices issue shares appoint directors 4)./).+,$)%#9'(1:+%,+6&# ! shareholders have limited personal liability ! limited to the value of shares purchased in the corporation 4)./).+,$)%#9'(1:+%,+6&# ! immortal ! taxed independently of shareholders ! potential tax benefits 4)./).+,$)%#9'(1:+%,+6&# Raising capital: ! borrowing with limited liability ! shareholders pool resources ! separation of investment capital and management ! diversification 4)./).+,$)%#9'2$#+1:+%,+6&# Cost: ! Incorporation ! maintenance ! statutory compliance requirements 4)./).+,$)%#9'2$#+1:+%,+6&# ! limits on transferring money to shareholders ! two levels of tax 4)./).+,&'=):&.%+%*& ! shareholders can participate in management through the election of directors ! directors are responsible for the management of the corporation 4)./).+,&'=):&.%+%*& ! directors have exclusive power to manage the corporation ! subject to terms of any shareholders agreement 4)./).+,&'=):&.%+%*& Criteria for directors: ! at least one director ! federal corporations must have 25% resident directors ! no criminal record for fraud, etc. 4)./).+,&'=):&.%+%*& Directors’ duties: ! honesty ! good faith and best interests of the corporation ! care, diligence and skill of a reasonably prudent person ! corporate opportunities 4)./).+,&'=):&.%+%*& Duties owed to whom? ! at common law duties only owed to corporation ! oppression and derivative remedies ! employees ! creditors 75+.&5)81&.'(6.&&<&%,# Used to specify rights between shareholders such as: ! restriction on share transfer ! rights to appoint directors ! share sales on death ! management of the company >,5&.';).<#')3'>.6+%$?+,$)% ! Limited partnerships ! LLP’s ! Trusts 4)./).+,&'7,."*,".&#' +%1' 4)<<&.*$+8'@+A -+.,'B 0</).,+%*&',)'C%6$%&&.# ! Nature of careers have evolved; ! High likelihood of involvement either buying or selling a business; ! Importance of being informed. 0%$,$+8'D"&#,$)%#',)'4)%#$1&. 1. Who will purchase what from whom? 2. What will be the price? 3. Where will the purchaser get the money? 7,."*,".&#')3'2&+8# 1. Buyer purchase assets of the business; 2. Buyer purchase shares of the company that owns the business; 3. Seller company amalgamates with the buyer company (less common). 4)%#$1&.+,$)%#'3).'2&*$1$%6',5&'7,."*,".&')3' +'2&+8 ! Cost consequences; ! Planned operation of the business; ! Compromise between the buyer and seller. (##&,':&.#"#'75+.&'2&+8 ! Asset purchase deal: acquisition of only those assets the purchaser wants to acquire; ! Share deal: acquisition of all the assets of the corporation (also intangibles). (##&,':&.#"#'75+.&'2&+8 Advantages to an Asset Deal: ! Can choose assets (equipment, vehicles etc.); ! Limits assumed liabilities (litigation, debts, etc.). (##&,':&.#"#'75+.&'2&+8 Disadvantages to an Asset Deal: ! ! ! ! May exclude assets difficult to define; Often higher taxes; More documentation; Higher legal and accounting costs. 4)%#$1&.+,$)%'EF9'G+H&# ! Often a determining factor in how deal is structured: ! Asset sale – tax on tangible personal property (Social Service Tax Act), and also the Excise Tax Act (GST); ! Share sale – no sales tax payable by the Buyer. 4)%#$1&.+,$)%'EF9'G+H&#'I*)%,JK Asset deal: ! Purchaser may have to pay Sales Tax and GST; ! Seller will recapture on depreciation or make capital gains on the disposition; ! After tax proceeds will be taxed again when distributed to Seller’s shareholders. Share deal: ! Seller of shares will pay tax on capital gain; ! Purchase price will be allocated among the various assets; ! Resulting capital gain and recapture computed for each asset. 4)%#$1&.+,$)%'EB9'@$+L$8$,$&#'+%1' C%*"<L.+%*&# Asset sale: ! Buyer should ensure title is free of encumbrances: ! title search, litigation search, PPR search; ! obtaining warranties and indemnities from the seller (no liens on equipment, or right of another party to the assets); ! Buyer may want to hold back a portion of the purchase price. 4)%#$1&.+,$)%'EB9'@$+L$8$,$&#'+%1' C%*"<L.+%*&# I*)%,JK Share sale: ! Buyer may be concerned about title to assets and shares or claims against the shares by third parties; ! Obtain representations and warranties ! Search company’s minute book to see how the shares were transferred; ! Buyer may be concerned about undisclosed liabilities: ! Look at audited financial statements ! Possibility of undisclosed actual or contingent liabilities of the corporation, will favour an asset deal. 4)%#$1&.+,$)%'EM9'4)<<$##$)%# Asset Sale ! Agents commissions on sale of land and assets. Share sale ! Usually no commissions. 4)%#$1&.+,$)%'EN9'4)%:&O+%*$%6 4)#,# Asset Sale ! Extensive set of conveyancing documents to be prepared. ! May be high registration costs or other fees (PTT). Share Sale ! Generally fewer conveyancing instruments (fewer fees and other costs). 4)%#$1&.+,$)%'EP''4)%#&%,#',)'G.+%#3&. Asset Sale ! May need consent of third party granting leases, licenses, or permits (includes equipment leases, operating permits, etc.) Share Sale ! May need third party consent if ‘change the control’ provision is present in contract, lease, licence or permits. 4)%#$1&.+,$)%'EQ9'R$%).$,O'0%,&.&#,# Asset Sale ! Company may be prohibited from selling, leasing or otherwise disposing of all its assets without shareholder approval (unless done in the ordinary course of business): ! Shareholder resolutions may be required. ! Dissenting shareholders may have to be bought out. Share Sale ! Buyer will likely want all outstanding shares which minority may not be willing to sell. 4)%#$1&.+,$)%'ES9'0%,+%6$L8&# Asset Sale ! Buyer can make allocation of purchase price to goodwill. ! May be difficult to transfer name and other intangibles. Share Sale ! Buyer may pay more for shares than total value of assets because of intangibles. 4)%#$1&.+,$)%'ET9' C</8)O&&'4)%#$1&.+,$)%# Share Sale ! Buyer inherits the workforce of the business, and all obligations of the company owed to the employees; ! Employment Standards Act, a person’s employment is deemed continuous, regardless of the change in ownership (employees will be given credit for severance). 4)%#$1&.+,$)%'ET9' C</8)O&&'4)%#$1&.+,$)%#'I*)%,JK Asset Sale ! Buyer may be able to pick and choose which employees to keep, and leave severance obligations with the Seller. ! Buyer should be aware: ! For unionized workforces, the agreement may bind the new buyer ! Notice provisions in the Employment Standards Act for an employer who wishes to terminate the employment of 50 or more employees in a single location within any 2 month period. 4)%,&%,')3'+%'(##&,'-".*5+#&'(6.&&<&%, ! ! ! ! Identification of parties; Description of the assets; Excluded assets specified; Allocate purchase price to particular assets for tax reasons; ! Assumption of liabilities – ie current accounts payable or and bank loans. 4)%,&%,')3'(##&,'-".*5+#&'(6.&&<&%,' I*)%,JK ! Formula to arrive at net purchase price; ! Effective date of purchase; ! Warranties and covenants (re: condition of equipment, etc.); ! Responsibilities for specified matters (environmental clean-up). 4)%,&%,')3'+'75+.&'-".*5+#&'(6.&&<&%, ! Identification of parties; ! Schedules for contracts, leases, financial statements, etc.; ! Number and class of shares to be purchased/transferred; ! Sale price (usually a fixed dollar amount). 4)%,&%,')3'+'75+.&'-".*5+#&'(6.&&<&%,' I*)%,JK ! Payment type (cash, assumption of liabilities, exchange of property, issuance of shares of the buyer, promissory notes); ! Representations and warranties; ! Indemnity clauses (Buyer will want recourse in case Seller misrepresented the assets or liabilities). 4)%,&%,')3'+'75+.&'-".*5+#&'(6.&&<&%,' I*)%,JK ! Payment type (cash, assumption of liabilities, exchange of property, issuance of shares of the buyer, promissory notes); ! Representations and warranties; ! Indemnity clauses (buyer will want recourse in case the seller misrepresented the assets or liabilities). 7,&/#')3'+'GO/$*+8'G.+%#+*,$)% 1. Investigation (due diligence) Business / legal issues the Buyer should consider: ! Review audited financial statements of the seller; ! Caution if over 50% of sales to less than 4 customers and ensure contracts will continue after the sale; ! Document Seller’s promises regarding profitability, gross margins, cash flow, capital expenditures and warranties regarding management commitments, contractual arrangements and legal actions; 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 1. Investigation (due diligence) Business / legal issues the Buyer should consider: ! ! ! ! Consider if payment of purchase price should be conditional on business achieving certain sales or profit forecasts; Ensure that the buyer’s bankers, auditors, directors and controlling shareholders are aware of transaction if consent and involvement will be required at closing; Ensure that governmental authorities or others whose consent to the transaction is required are contacted early; Investigate important employment contracts. 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 1. Investigation (due diligence): Searches the Buyer should conduct: 1. Registrar of companies (charge against the assets / prohibition against selling assets); 2. Personal Property Registry for notices of encumbrances on personal property; 3. Land Title Office – for charges on title of land, copies of leases; 4. Workers compensation claims? 5. CCRA: Income taxes and GST paid? 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 2. Negotiating / deciding on the deal’s structure ! ! Parties, lawyers and accountants will meet to decide the structure of transaction, the price, how the price will be paid; If parties have have signed a letter of intent, client will need to be advised of the implications of the arrangement and any negative effects. 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 3. Drafting and Signing the Agreement ! Buyer’s lawyers will often draft the Agreement which sets out essential elements of the transaction; ! Buyers will try to obtain as many representations, warranties, covenants and indemnities as possible; ! The Seller will want to limit giving reps and warranties. 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 4. Preparing for closing ! Buyer will complete investigations, ensure the conditions for its obligation to close have been satisfied, compete financing arrangements, formulate its takeover plan, approve and sign any necessary documents; ! Directors’ and/or shareholders’ meeting may have to be held in advance to approve the purchase; ! Third party consents may also be needed; ! Lawyers will prepare the closing agenda which includes all corporate documents, conveyancing and security documents; 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK 5. Closing ! Agreement likely provides a certain date when Closing will take place; May want to fix an outside date by which transaction must have occurred or else will terminate; At Closing – parties will ensure conditions satisfied; Property will be transferred to buyer and purchase price will be paid to the seller. ! ! ! 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK Closing Procedures ! Directors’ resolution of the seller authorizing the sale; if substantially all of the assets are being sold, obtain a shareholder’s resolution ! Ensure that the agreement and documents of transfer and conveyance cover all assets purchased; ! Ensure the new banking forms are prepared for filing with the bank. ensure the bank is notified if bank accounts are being transferred; ! Ensure the Buyer produces either sufficient monies to cover sales tax (if applicable). 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'I*)%,JK Closing Procedures (cont.): ! Non-resident Sellers, ensure a certificate has been obtained or monies withheld pursuant to s. 116 of the Income Tax Act; ! For share transactions - record the transfer in the share register, issue new shares, and cancel old shares; ! Prepare employment contracts if they are required; ! Prepare documents securing the unpaid purchase price. 7,&/#')3'+'GO/$*+8'G.+%#+*,$)%'4)%, 6. Post-closing: ! Lawyers register conveyancing documents and complete the financing arrangements; ! Usually agreement will contain covenants to ensure completion of tasks (filing security documents and notification of assignments). ...
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This note was uploaded on 10/09/2009 for the course ENSC 1146 taught by Professor Michaelsjoerdsma during the Spring '07 term at Simon Fraser.

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