Fact Pattern Flashcards
Why choose or not choose a SP?
WHY CHOOSE
Non tax reasons:
SP is easy to form, easy to dissolve
Formation:simple. Comply with licensing requirements (fed, prov, municipal), register business name if different from that of SP
No need to register SP so no need to register dissolution, assets distributed only to SP in dissolution
SP has full control (subject to limits from creditors or delegation by SP)
Lots of people do this without ever making a deliberate choice of form
Corporation might be better due to limited liability, or might not (see ch13)
Tax reasons
Profits of SP taxed directly in hands of SP
SP can deduct losses from business against income from other sources
Corporations have to be taxed as income and then shareholder cant deduct bus losses from their income since corp is separate.
The corporation can carry start-up phase losses forward for a period of time (now 20 years under s. 111(1)(a) of the Income Tax Act) and apply them against future income from the business.
A general principle of tax saving, however, is that it is better to pay a tax later than sooner since you can earn income on the amounts not paid
SP can use losses immediately against other income, whereas corp cannot be use losses until turn a profit.
Corp if it is a small business can claim small business deduction to lower tax… not a complete exemption from the higher rate, and profits distributed will still be taxed at individual level. But it does allow tax to be deferred and that deferral is in the control of the taxpayer
At some point after the start up sole proprietorship business begins to turn a profit it may make sense to incorporate.
WHY NOT Choose?
Personal liability
Maybe not the best for funding?
Why choose/not choose a Partnership?
Why Choose:
Tax reasons - partners an deduct business losses against income from other personal sources or employ,ent since not a separate entity
Thus good for start up phase
Easy to start - no formal steps required (but written agreement recommended)
Corporations are often not available for professional businesses
Partnerships are a flexible form of association
Corporations require several statutory requirements to be met
Why not choose?
Personal liability and it applies to acts of any partner as each owes fiduciary to other
Why choose/not choose limited partnership?
Why Use Limited Partnership
Tax for Financing the start of a business - Losses (more likely in start up period) can be passed on to the limited partners who can use the losses against other sources of income
Note: does not apply to LPs that have publicly traded units
Greater degree of flexibility as opposed to a corporation
Why NOT use?
MUST register
LPs cant be involved in managing business of the Limited Partnership or they will be personally liable. But If limited partner acts solely in their capacity as an officer of the general partner, they will not be personally liable. (Nordile) (haughton graphic)
GP has to hold property (tron, harrison, edenvale)
Partner cannot assign interest in the partnership without consent of other partners
s.56(d): A general partner has no authority to admit another partner unless they’ve been given the right to do so
Separation of ownership and control puts limited partners at the mercy of the managers → can be avoided with partnership agreement
Why choose/not choose LLP?
Why choose?
s.104(1): Partner in a limited liability partnership is not personally liable for a partnership obligation
–> but can agree otherwise
BC gives full shield protection.
BC gives partners the protection from liability of LP but with the advantage that the partners in a LLP can take part in management without becoming personally liable for partnership debts.
Why not:
Complicated → Registration is required (s94), without it, partners are treated as if they were in a general partnership and s104 doesnt apply
Worth considering:
Tax treatment of partners with full shield liability protection is different from that of general partners or partners with partial shield liability protection.
full shield liability - can only claim losses associated with the carrying on of the partnership business against their income from other sources to the extent of the capital they have invested in the partnership
These restrictions on claiming partnership losses are referred to as the “at risk” rules (relating to the amount of investment, or funds put at risk).
There are also potential capital gains tax implications for full shield liability.
Partners could also enter into personal guarantees with creditors, thereby effectively waiving their limited liability with respect to those creditors.
Why choose/not choose a corporation?
Why Choose?
1. Limited liability
2. Perpetual succession
3. Ease of transfer of shares
4. Shareholder cannot obligate body corporate alone
5. Shareholder can contract with or sue a body corporate
6. Facilities to secure additional capital
7. Tax advantages can convert to the corporate form
Advantages: (1) One can control the timing of distribution through corporation which permits tax planning in reference to timings; (2) Tax paid at which is usually the higher tax rate for the individual can be deferred which provides a tax saving for the individual
**Tax advantages from reduced rate will be of no advantage without a profit
Downside;
Cost of incorporation - Incorporation fee, legal fees, filing of annual reports, maintaining corporate records, filing tax returns
Cost of complying with securities legislation
Not always available for professional association
Tax consequences for FN
Band itself enjoys a s87 exemption from tax on reserve and it is also a public body performing function of gov so it is exempt from tax on all revenue it brings in regardless of geographical taxation.
Tax Critique:
Double taxation: Even with the reduced tax rate for corporations, after the corporation is taxed, the shareholders will have to pay taxes on that money
Passed Losses: In partnerships losses incurred during start-up can be passed through other sources of income, which cannot be done in partnerships
Limited liability critique: It is common for creditors to ask for a personal guarantees from shareholders before advancing substantial amounts of credit; effectively reversing limited liability. Also common for lessors of property, suppliers
There may still be protection against personal liability for a relatively insignificant amount of trade credit
Protects against personal liability to tort claimants for torts committed in the business
However, there is a possibility a court may pierce the corporate veil. insurance against tort claims is recommended in corporations
