Issues covered by Corporate Law
Some of the
issues covered by corporate law are:
Incorporating
a Business
When a company is incorporated
a new legal entity is created.
Benefits
of Incorporating
- Personal Liability Protection;
This is the number
one reason why many people incorporate. In case of a lawsuit or judgment
against your business, no one can seize your personal assets unless
you have pledged these as collateral. There are other liabilities which
you will not be able to avoid by incorporating. For example, if you
do not remit certain taxes, you could be held liable as a director or
officer of the company.
- Potential Tax Advantages;
There are more tax
options available to corporations than there are to proprietorships
or partnerships. You can establish various pension, profit-sharing and
stock option plans which are favorable to the owners of the corporation.
For example, in most cases, a corporation can deduct your life and health
insurance premiums whereas you could not do this personally. You can
also pay salaries to family members thereby reducing your family's overall
tax burden.
- Flexibility in Personal
Financial Planning;
- Greater Control in Transferring
Ownership;
- Easier to Bring in Outside
Investors and Other Partners;
- A Company Survives Human
Death.
Protecting
Assets from a Financial Disaster
It is prudent, when starting
a business to plan for a disaster. The following are tips from Earl Sands,
a trustee in bankruptcy who has seen many of these tips ignored with disastrous
results:
- Get professional advice before the business
commences. This is the time to put a creditor proofing plan in
place.
- Incorporation not only has income tax
benefits, but also provides for a level of creditor protection. Consider incorporating if the size of the business warrants or the nature
of the business is litigious.
- Only one spouse should be a director
or officer. The other can be still be a shareholder or employee, but
should not be a director or officer. This should minimize the
risk of joint and several director's liability for certain statutory
debts.
- Always pay statutory debt on time (source
deductions, GST, wages and PST). Directors and officers can be
personally responsible for these debts.
- Don't have significant assets in your
personal name. If possible, consider having assets in a spouse's
name or a family trust. One should be cautious of the Family
Relations Act when placing assets in the name of a spouse.
- Do not give a personal guarantee to suppliers
or a landlord unless it is absolutely necessary. Do not give your
spouse's guarantee to a lender. Simply state "a personal guarantee
is not available". The results are surprising!
- Have only the corporation borrow funds
from the bank. Don't let the bank lend the funds in your personal
name. This will ensure the bank is the first person paid in the
event of a liquidation of a business. This will continue to apply
even if personal security is required for the loan.
- If a family member or a principal of
a company lends money to a company, have that person take back security.
Ensure proper documents are prepared and register the security. If the loan is not documented and registered, a trustee may be able
to recover any preferential payments made to the family member or principal
(payments within a year of the bankruptcy could be considered fraudulent
preferences under the Bankruptcy and Insolvency Act).
- Invest in RRSP's that are "judgment proof". If the worst happens you still have retirement funds.
- Be cautious of rapid business expansion.
Recognize the risks of expansion as well as the opportunities. Many businesses fail because they under bid a job, expanded too quickly,
or did not have the resources to finish a project.
- Plan for succession well in advance. A successful business requires a successor.
- If the business incurs financial difficulty,
seek professional advice early. Many businesses wait too long
- early advice may have saved them. Proposals to creditors made
under the Bankruptcy and Insolvency Act are very effective and
usually accepted.
- Know when to quit. If a business
is in financial difficulty, decide on the amount of personal funds that
will be expended to attempt to save it.
Directors'
Liability
When
a limited company goes bankrupt and there is a shortfall to creditors,
the directors in most cases are not liable for any shortfall.
The directors are liable for a shortfall only if they have given personal
guarantees for debt or if laws have been passed specifying that directors
will be liable if there is a shortfall. These statutory creditors are
as follows:
- Wages of employees
- Directors are responsible for wages in accordance with the laws in
the various provinces. An exception is in BC where directors are
not liable for wages effective with the Employment Standards Act
that came into force on May 31, 2002. Where the corporation is in receivership,
bankruptcy or subject to action under Section 427 of the Bank Act, the
director or officer of a corporation is not personally liable for severance
pay.
- Source Deductions
- Officers and directors are personally liable for unpaid source deductions.
- GST - Directors
and officers are personally liable for GST owing.
- Provincial Sales
Tax - Directors and officers are personally liable for PST owing
in some of the provinces. For example, in B.C. if they were "hands
on" managers and hence knew or should have known that PST should have
been remitted. [BC Court of Appeal "R. Vs. Thomas D'Sena" - 1995]
Commercial
Bankruptcy, Insolvency
Businesses
can be petitioned into bankruptcy or placed into receivership by the financial
institute or lender who has security. The lender, when he has evidence
to suggest the business is in serious financial difficulty, will take
this action in order to cut his losses and to realize on his security.
Lender use insolvency lawyers to ensure they are acting within the law
and to preserve their rights to pursue the principal personally for any
shortfall.
A
principal of a business often has compelling reasons for placing the business
into bankruptcy or convincing the lender to place the business into receivership:
- By
acting in a timely fashion the business assets may be sold for sufficient
money to pay off the creditors or get as much as possible for the secured
creditor and priority creditors so the principal's personal guarantees
and statutory obligations are not called upon;
- The
principal may simply be exhausted from the stress and pressure of fighting
a losing battle trying to save the company and want someone to take
over the winding up;
- The
principal may want a professional to liquidate the business so the creditors
are paid out in an orderly fashion in accordance with the security and
priorities they enjoy.
- The
principal may want a professional to liquidate the business so that
the creditors will know that the funds have been paid out correctly
and that a report will be made to the creditors so they know that no
funds were diverted by the principal.
Commercial
Proposals
More businesses "go under" or fail than is necessary! Very often a business
can be "saved" if caught in time. Even if a company is insolvent
it may be possible to save the company by using a provision under the
Bankruptcy and Insolvency Act to file a Proposal, (an arrangement) with
the creditors of the company.
The way a Proposal
works is that a company, through a Trustee in Bankruptcy, files the Proposal
("offer"), to the company's creditors asking them to accept
less than the monies they are owed in order that the company might survive.
The trustee
works with the owners of the company in drafting a Proposal that presents
a "win - win" situation for both the company and the creditors.
Typically, the creditors are asked to give up rights to the monies they
are owed in exchange for an offer by the company to pay so many cents
on the dollar (say, 25 or 50 or 75 cents) over time. Sometimes the company
pays back 100% of what it owes but it is granted a period of time, say
6 months or a year, in which it makes no payments.
In a successful
Proposal the company wins because it survives. The creditors win because
they retain a customer and also because they get some of their money whereas
in a bankruptcy they probably would get nothing.
There
are two types of professional a debtor can get help and advice from; an
insolvency lawyer and a trustee in bankruptcy. Every debtor who's business
goes into bankruptcy, receivership, or files a proposal must deal with
a trustee in bankruptcy as only trustees are licenced by the federal government
to administer bankruptcies and proposals.
A
debtor should seek advice from an insolvency lawyer if he has complicated
issues or if a considerable amount of money is involved. Trustees are
trained to recognize complicated issues that debtors have and often refer
debtors to an insolvency lawyer in order to avoid a conflict.
More
Commercial Insolvency Information
Bankruptcy
Predictor - Measure the financial strength of your company!
CCRA
(Revenue Canada) - Yes! They Will Make a Deal on Taxes Owed!
Business
Proposals - Saving a Company from Bankruptcy!
A
Proposal Story - An Article from the CGA Magazine
Business
Bankruptcies/Receiverships - What Happens?
Rent
Distraint!
Petitioning
a Debtor into Bankruptcy.
Insolvency
Prediction. - Formulas that predict whether a business will fail!
Creditor
Proofing - Protection in a litigious world!
 US Bankruptcy Information
Tax
Business
Information Service
This site included the following tax information:
- Prescribed
interest rates;
- Registration;
- Goods and
services tax/harmonized sales tax;
- Payroll
deductions and employers' responsibilities;
- Corporations,
individuals who are self-employed, and partnerships;
- Importing/exporting.
.
Links
to more Information
Corporate
and Insolvency Law
The Corporate and Insolvency Law Policy Directorate is responsible for
the review and revision of a number of Canada's business framework laws
in the insolvency and corporate areas.
Corporate
Information: Canada
This site contains profiles, news, and financial statements for hundreds
of Canadian public and private companies. It also includes links to Canadian
Trade Index, Canadian Patents Database, and Stock Exchanges. |
Canadian Corporate Law.
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