Starting a Business--Set-Up a Corporation:
There are several considerations when making such a decision.
The first advantage of incorporating is that it provides a limit to the
liability of an individual shareholder. Generally, the shareholders are only
risking the value of their shares in the corporation and the shareholder loans
that have been made to the corporation. The same cannot be said for a sole
proprietor, who is risking every personal asset that he or she owns when they
own their business personally.
Another important factor to consider is the tax advantage of incorporating. For
example, there are certain tax rate reductions available for qualified small
business Canadian corporations.
Other advantages to incorporating include: the continuity of life as the
corporation cannot die, the transferability of the shareholder’s interests and
the ability to raise capital.
Whether you set up a corporation depends upon the circumstances. It is a very
complicated question that requires an analysis of all the facts. There are
instances whereby it is better to delay incorporating.
Joint Venture vs. Partnership:
Generally, the definition of partnership is a business with the
intention of profit that is carried on by at least two persons or entities. A
partnership is not a legal entity, and each partner is an agent of the
partnership. Each partner is also jointly liable for the debts of the
partnership.
A joint venture is similar to a partnership in that it is also an operation
carried on with the intention of profit by at least two entities, but it is an
operation with a limited life (usually a specific project). As well, the
liability of the joint venture is not joint and several in that one joint
venturer is not liable for the liabilities of the other joint venturers. There
are certain tax advantages available to a joint venture that are not available
to a partnership.
Sell Shares of Corporation vs. Sell Assets of
Corporation: Generally, it is more advantageous for
the vendor to sell shares of the operating corporation than to sell the assets
of such a corporation. From a liability perspective, the selling shareholder has
removed the hassle of dealing with any hidden liabilities that may arise after
the closing date (subject to an indemnification that may be included in the
share purchase agreement). There may also be a tax advantage to the seller.
However, these advantages do not apply to the Purchaser.
What is a Holding Corporation:
In the Business Corporations Act (of Alberta) there is no
distinction between a holding corporation and an operating corporation. It is a
description of function that is based on fact.
Generally a corporation is considered to be a holding corporation if it owns the
shares in an operating corporation. If an individual owns shares in the holding
corporation, it provides the individual with the ability to shift excess cash
out of the operating corporation and into the holding corporation. This is
referred to as tax free inter-corporate dividend and it does not trigger a
corporate tax consequence. The individual also does not have a tax consequence
in such a circumstance as long as the individual does not subsequently transfer
funds to themselves personally from the holding corporation.
The transfer of funds to a holding corporation decreases the risk of loss that
can occur as funds held by the holding corporation are no longer at risk of
liability due to activities of the operating corporation.
Liabilities of a Shareholder: Our corporate laws provide for limited liability to shareholders as such liability relates to the corporation’s activities. The risks of liability to shareholders are limited to the value of their shares and shareholder loans owed to them by the corporation. If a corporation goes bankrupt, a shareholder’s other personal assets are not at risk (subject to certain improper acts by shareholders or in a situation whereby the shareholder has guaranteed a corporation’s debt).
Risks as a Director:
Unlike a shareholder, a director can be held liable for certain liabilities
of the corporation. These liabilities are based on certain legislative
provisions. Examples of liability are found in:
(1) the Excise Tax Act (of Canada) which provides that directors are liable for
unremitted Goods and Services Tax of the corporation; and
(2) the Income Tax Act (of Canada) which provides that directors may be liable
for employee’s withholdings that are not remitted by the corporation.
There are also situations whereby a director can be responsible for corporate
employee’s wages and certain environmental infractions.
These and many other types of director liabilities can usually be avoided by a
director if the conduct in question is determined to be appropriate in the
circumstances (traditionally known as the “due diligence” defence). An
individual should avoid consenting to become a director prior to familiarizing
themselves with the respective responsibilities that the position holds and the
potential director personal liabilities.