Legal Structure Information Technology Entrepreneurial Work Term Presentation

Legal Structures for Businesses The objective for this presentation is to give you the information you need to make decisions about the three main types of business structures. You won’t necessarily be able to make those decisions by the end of this presentation, but you will have started the process! This presentation will focus on: Sole Proprietorship Partnership Corporation

Other types of business structures: Other types of business legal structures exist such as: Co-operatives, Limited Partnerships and even Social Enterprises. We will not be covering any of these in detail.

Business Structure No matter what type of legal business structure it’s important to take into consideration the following: Liability-who is responsible if anything goes wrong? Wages-how will the owners be paid? Taxes-how are taxes on profit recorded? Continuity-what happens if the owner(s) die or ends the business? A reference chart handout will be provided.

Sole Proprietorship One is the loneliest number?

Sole Proprietorships-What you need to know: One person-owns and typically operates the business No difference between the person and the business (you and the business are one, not seen as a separate legal entity) Any profit earned through the business is reported on the owner’s personal income tax You do not take a salary or wages as a owner; you take Owners Drawings (this is how it’s recorded on financial statements) The business ceases to exist if the owner dies or stops the business Full liability-if the owner is sued and insurance doesn’t cover the expense, personal assets may be taken

Sole Proprietorships Assets (such as equipment, inventory, client lists etc.) and the name of the business of sole proprietorship can be sold. Sole Proprietorships cost the least to register-approximately $150 (must perform a name search and once approved, register the business with the Registry of Joint Stocks Nova Scotia)

Partnerships Two (or more) can be as bad as one?

Partnerships-What you need to know: Involves two or more people There is no difference between the person (or people involved) and the business All parties involved are fully liable for their own actions and the actions of the other owner(s) Insurance does not necessarily cover if being sued and personal assets may be taken No continuity-if a partner dies or leaves the partnership then the business ceases to exist

Partnerships Continued No salary or wages are paid to the owner-an Owners Drawing is taken* Any profit that is considered revenue is divided based on the ownership of the business

Partnership Agreements Partnership Agreements are extremely important legal documents that help to protect you, your partner(s) and your business. Highly encouraged that business partnerships have one in place and have it notarized (reviewed and signed) by a lawyer. If you are seeking financing (a loan) from a commercial bank or other type of lender (Futurpreneur, Seed Capital Loan etc.), a copy of the agreement is typically required Partnerships are typically more expensive than a Sole Proprietorship as a Partnership Agreement is recommended ($500 +)

Partnership Agreements Continued Examples of items that may be included on a partnership agreement include: Break down of roles and associated responsibilities of the partners Profit share percentages-how much partners will be paid Financial control and signing authority for business related expenditures How disagreements will be handled How the business will be dissolved (if/when the time comes) Bringing in other partners Selling the business: Shotgun clause-what happens if one partner wants out Right of First Refusal-opportunity for one partner to buy out the other partner(s)

Corporation Incorporations (Inc.) Limited (Ltd.)

Corporations Corporations are considered separate from the owner(s); they have their own legal identity Owner(s) own shares in the corporations and can sell those shares so there can be continuity of the business Owner(s) can take a salary like an employee AND/OR can take dividends (which may offer more tax flexibility). Anyone owning dividend(s) becomes a Shareholder A dividend is a sum of money paid regularly (typically quarterly or annually) by a company to its shareholders out of its profits (or reserves)

Corporations Continued Income splitting is possible if another family member works in the business (may be beneficial for tax purposes as a lower tax rate is used) Corporate taxes are lower than personal taxes. As an incorporated company is seen as a separate legal entity; recorded profit is not recorded on personal taxes but filed by the business No EI (Employment Insurance) is taken if you own 40% or more of the business Liability is limited-incorporating your business does grant you some personal protection however, you still may have to give a personal guarantee on any loans taken AND you can be held liable if you have broken the law or done something wrong

Other Corporation Considerations A corporation may cost $750- $1,500 to set up (depending on the complexity of the business and any partnership agreement involved) Also, a corporation MUST do a separate tax return each year that is signed off by a chartered accountant (additional expense) Some organizations (such as Provincial Governments) will not let you bid on projects (that have been put out to tender) if you are not incorporated You can switch from a Sole Proprietorship or Partnership to a Corporation at a later date if it makes sense for your business (If you need to limit your liability for example)

Business Structure Factors Summary

Things you want to consider when making the decision about business structure: Liability-who is responsible? Risk-are you at risk personally? Tax implications-how are they recorded? Revenue and Profit-how will you be paid? Partnership-who is involved in your business and how? Investors & Lenders-what are the terms/expectations for repayment? Personal financial situation-are you or your family/partner/spouse tied financially to the business? Can you be impacted negatively? Personal assets-are they protected? Insurance-business and personal Personal goals-do you have a plan? Business goals-short term? Long term?