Chris Weisenberger's presentation from the HUB South Shore event - Tax the law and so much more in May 2013.

1. 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.

2. OUTLINE
Costs
Transferring existing business to a Company
Liability Implications
Income Tax Credits
Investment and Transferability

3. COSTS

4. Christian Weisenburger Law, Inc.
start-up costs
Sole proprietor Partnership Company
Name Search and Reservation $62 Contact myself or Deb McLellan at namesearch@betterdocs.com to make process easier
Fees to Registry $61.66 $422
Corporate Minute Book $80
Corporate Seal $55
Legal Fees to Incorporate $550
Start-up Costs (plus tax) $58 $120 ~$1050 (without seal)
Shareholder/Partnership
Agreement
$500 - $3000 (often ~$750 - $1,000)

5. Christian Weisenburger Law, Inc.
ongoing and wind-up costs
Sole 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)

6. COSTS AND COMPLEXITY TO CONVERT
TO A COMPANY FROM A PARTNERSHIP
OR SOLE PROPRIETORSHIP

7. Christian Weisenburger Law, Inc.
transfer of existing business to Newco
Newco
Business Assets
Tangible assets
Accounts Receivable
Work-in-progress
Intellectual Property
Goodwill
Tax Consequences
Without 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 or
Partner
Transferred

8. Christian Weisenburger Law, Inc.
assignment of contractual rights to Newco
Newco
Rights
Real Property Lease
Equipment Leases
- e.g. photocopier
Supply Contracts
Purchase Contracts
Warranty Rights
Business licenses
Franchise 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

9. Christian Weisenburger Law, Inc.
assumption of obligations by Newco
Newco
Obligations
Debts
Obligations 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

10. Christian Weisenburger Law, Inc.
conversion costs
Sole 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)

11. LIABILITIES

12. 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

13. Christian Weisenburger Law, Inc.
liabilities – sole proprietor
Accounts
Receivable
Sole Proprietor
BUSINESS LIABILITIES
personal assets
business assets

14. Christian Weisenburger Law, Inc.
liabilities – partnership
Accounts
Receivable
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

15. Christian Weisenburger Law, Inc.
liabilities - company
Accounts
Receivable
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

16. 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

17. INVESTMENT AND
TRANSFERABILITY

18. 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

19. 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)

20. 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)