The most common misperception regarding corporations is that the shareholders own the corporation. No one owns the corporation, it is a legal person. The shareholders own the shares. The corporation owns the assets.

LIABILITY

The primary advantage of incorporation is limited liability. One's personal assets are not at risk unless one personally guarantees the corporation's debts. There is a great deal of flexibility of structure in that the Articles, by-laws, and shareholder's agreements can be tailored to suit any requirement.

BORROWING REQUIREMENTS

Besides borrowing, capital is raised through the sale of shares in the corporation. Corporate securities are more marketable and allow for greater flexibility than does borrowing or the admission of new partners.

START UP COSTS

Ontario and federal corporations are created by filing Articles of Incorporation. The filing fee in Ontario is $360.00. If one desires a named company rather than merely a numbered company, a NUANS search helps to ensure that no other business is operating with the same or a similar name. The search costs about $65.00. The corporate seal costs about $60.00 and the share certificates and minute books cost approximately $60.00.

INCOME TAXATION

A corporation is taxed at a flat rate whereas an individual is taxed at progressive rates. This means that the greater an individual's income, the higher the tax bracket. It should be noted, however, that double taxation is possible in the case of a corporation, in that a corporation is taxed and then the individual is taxed on the interest and dividend income. A corporation is not subject to Average Minimum Tax. Incorporation provides many estate planning advantages. For example, a shareholder may transfer all common shares to the shareholder's children while retaining all of the preference shares. This way, the children, who are in a lower tax bracket, acquire all of the income while the preference shareholder retains control of the corporation through the voting rights.

DECISION MAKING

As each shareholder can own a different number of shares, there can be several degrees of risk taking and control. Any minority shareholder needs a buy-sell agreement in place to protect the shareholder's interest. Most shareholders agreements have such a provision.

TERMINATION

A corporation has a perpetual existence. It is not terminated until Articles of Dissolution are filed.

FRANCHISES

Many people are turning to starting up a business. Some look at purchasing a franchise in order to have an operation all ready to go. It must be kept in mind, however, that not all franchises succeed either. The following is a brief list of some of the concerns:

When did the company sell its first franchise?
How many franchises have failed in the past five years?
How many new franchises have commenced operations in the past five years?
What's the company's investment in the franchise network?
Will I have exclusive rights to my territory?
Can I buy another franchise outlet?
What training and ongoing support is available?
How many employees does the company have?
What advertising support will I receive?
Has the company expanded or contracted the product line?
How has this been implemented?
What is the franchisor's credit background?
Has the Better Business Bureau received any complaints?
Ask to review the most recent financial statements of the franchisor.
Ask for all public information on the franchisor's operations.
Ask for a copy of the trademark registration.
Talk to other franchise owners about their profitability and about the franchisor.
What happens to the franchise if I die tomorrow?
How long is the term of my franchise agreement?
Who signs the lease?

The homework that one must do before purchasing a franchise may be as much as is necessary to start from scratch. It is important to have your lawyer and your accountant review the franchise agreement, registered user agreements, any lease, and the answers to the questions noted above.

The comments contained in this article provide a brief overview only and should not be regarded or relied upon as legal advice or opinion. Debra J. Sweetman would be pleased to provide more information or specific advice on matters of interest to readers.

Debra J. Sweetman B.A.Sc., LL.B.
Barrister, Solicitor, Notary
340 Byron St. S., Whitby ON L1N 4P8 · (905) 666-8166 · Fax (905) 666-8163