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This video and article originally appeared on the
Techopia website and have been reproduced with permission.
In this short video and article from Techopia, MNP’s Michael Dimitriou explains some of the reasons why it’s important to take a long-term view when deciding how to structure your new company.
“Michael, what is the best structure for my business and how should it evolve?”
In any business involving two or more people, the basic options are a partnership or a corporation.
A corporation is often the most beneficial. As a shareholder in a corporation, you often are not personally liable for most of the debts, obligations or acts of the corporation. On the other hand, you will be subject to more stringent and costly reporting requirements.
You can also issue shares in a corporation, and take advantage of various measures to reduce your tax burden, by splitting ownership with a spouse and/or children.
But all this hinges on creating, at the start of the business, a comprehensive plan that gives the business the flexibility to grow and pursue different types of growth financing.
One key document is a shareholders’ agreement.
A shareholders’ agreement specifies who can own shares in a company, how that ownership can be sold or transferred, the types of shares the corporation can issue, and what voting rights are attached to each type of share.
It’s much easier to hammer out these details with the help of an accountant and a lawyer at the outset, before the business has started to accrue value. Once a company begins selling products and services and has a value, sorting out these details becomes more complicated.
How you structure your corporation and its shareholder agreement can play a key role in reducing your tax burden when looking to exit the business and unlock equity.
Take the capital gains tax, which is levied on the profit realized on the sale of your stake in the business.
There is a life-time capital gains exemption that is capped at $800,000 per shareholder. If your spouse is also a shareholder, he or she can also claim this exemption, effectively doubling your household tax savings. Your children, if shareholders as well, can also take advantage of this.
But there is a catch – generally shareholders must have held their shares in the company for a minimum of two years. Business owners who are looking to sell their business and retire in six to 12 months may miss the boat. To take advantage of these tax savings, you must plan for your exit years in advance.
Take a long-term view when it comes to deciding how to structure your business. It doesn’t matter if you’re a retail business or a technology company. The longer you wait, the more complicated it becomes and the greater the risk of missing out on the full tax savings available.
For more information on structuring your business right, contact Michael Dimitriou at 613.691.4242 or
Client Groups:Private Enterprise
Related Topics:Business Structures; Technology; Shareholders; Capital Gains
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