Non-Payment and Extending Credit: Ten Considerations for Contractors and Suppliers

I want to become an entrepreneur and start a business. Should I incorporate now, or start as a sole proprietorship and delay incorporation to a later date?‍

The advisability of incorporation is dependent on the particular facts and personal preferences of the entrepreneur. The role of the Lawyer and other professional advisors is to help draw out the relevant facts and explore personal preferences to assist the entrepreneur in making the decision that is right for her. Some of the relevant factors include:

‍Risk. Is the proposed business inherently risky? The shield of limited liability that an incorporated entity provides to the entrepreneur is an important benefit (note that the shield from liability is not absolute);

‍Tax. A valuable attribute of an incorporated entity is the relatively low tax rate (approx. 16%) payable on the first $500,000 of net income. This allows a profitable incorporated entity to grow much quicker using internally generated working capital than a similarly sole proprietorship where a marginal tax rate in excess of 50% of profits may be payable. An exception is where the sole proprietor has other sources of income and it is anticipated that the new business will suffer losses in the start-up year(s) – it may be possible to set off the losses against the other income and thus reduce the overall tax burden;

‍Costs. Incorporation of the business at an early stage is less expensive than incorporation once the business is up and running. Once the business (sole proprietorship) is up and running it is generally necessary to use a “rollover” transaction to transfer the business from the sole proprietorship to the corporation.

‍Separate Existence. An incorporated entity has a legal existence separate and apart from the entrepreneur. This provides for a number of real and perceived benefits including (generally): broader alternatives for raising capital; easier salability of the business and possible availability of lifetime capital gains exemption to avoid tax on sale, continuous existence past the life of the entrepreneur, public perception of greater substance, and easier separation of personal and business dealings.

I am a practicing family physician with two young children. My accountant mentioned the idea of incorporating my practice into a professional corporation. How does this work?

As a physician, you are generally permitted to create a physician corporation. The Ontario Business Corporations Act (OBCA) and the Regulated Health Professions Act govern physician corporations. Once incorporated, a Certificate of Authorization from the College of Physicians and Surgeons of Ontario (CPSO) is required for your professional corporation to practice medicine in Ontario.

There may be significant benefits to incorporation arising from income splitting through the payment of dividends to adult shareholders and the deferral of tax through retention of excess cash and investing in the corporation.

A professional corporation carries on the practice of medicine with you as both a shareholder and employee of your corporation. It is important to note that under the provisions of the OBCA, a professional corporation does not shield the shareholders from professional liability as acts of a professional corporation are deemed to be acts of the shareholders. Non-voting shareholders who are not members of the CPSO are exempted from any professional liability.

All voting shares of the corporation must be held by a member of the CPSO. Non-voting shares can be held by a parent, spouse or child (and minor children must have their shares held in trust). Professional corporations are only permitted to carry on the practice of the profession or activities that are related to or ancillary to the profession. Furthermore, a professional corporation is permitted to invest its surplus funds in passive investments.

A Lawyer with experience in incorporating professionals can help you set up your professional corporation such that your objectives may be realized.

I am considering the acquisition of a business. Long term contracts between the business and third parties are important to the business. Do such contracts affect the decision to acquire shares or assets of the business?

‍There are a number of factors to be taken into account when purchasing an existing business including tax, liability, due diligence and employee matters. Your question relates to the contracts between the business and third parties. These contracts may include rights obtained by the business necessary to carry on the business, such as licenses or franchises, or the benefit of sale or service agreements for the supply of products or services that generate revenue for the business.

A fundamental difference between an asset purchase and a share purchase is that in an asset sale the contracts must be assigned (along with the transfer of assets) while in a share sale the contracts remain intact (since only the shares of the business itself are transferred).A comprehensive review of all important contracts is advisable as early as possible during the due diligence process to determine rights and obligations. If third party consents are required, consideration must be given as to the risk that such consents may not be available in a timely manner, or at all, and whether the transaction may be better structured to avoid the necessity for assignment. In some less common circumstances there is an outright bar to assignment and consents cannot be obtained (this is the case in some government procurements). The acquisition of the business in such circumstances may only be achieved through a share sale to avoid termination of such contract(s). It should also be noted that some contracts contain provisions that deem a change of control from a sale of shares to be equivalent to assignment, and triggering the necessity for third party consent.