Businesses


Businesses are as diverse as the people who develope and operate them. It would be impossible to identify all of the possible issues that businesses have in the context of this website. A lawyer can help you identify issues and work with you to create a legal structure and/or documents to facilitate your business and protect your assets. Below are some of the typical issues considered by our client's


Incorporations


There are several options for structuring a business in Nova Scotia. Depending on the nature of the business, business owners can choose to structure their business as a sole proprietorship, a partnership, a limited partnership, or a corporation. A lawyer can help you determine the best arrangement for your business so that your business produces the most benefits for you.


Legal Consequences

If you are thinking of incorporating, it is important to understand the legal consequences of this decision. A corporation is a legal person under the law. Legally, it can do many of the things a person can do individually. A company can own property, has rights, can sue, and can be sued.


The basic rule is that a company is separate from the person or people who incorporated it. This means that if the company is sued, the owner is not personally liable. If there is a judgment against the company, it is paid out of the company's funds rather than the personal funds of the owner. By comparison, when there is a sole proprietorship, the owner of the business and the business itself are one and the same. This means that if the business is sued the owner will be liable for any judgments against the business.


When a business owner gets married or when a married business owner is looking to expand his or her business they can take advantage of incorporation as a way of protecting marital assets from creditors and protecting business assets from possible divorce.

Sometimes the courts can choose to ignore the difference between a corporation and its owner. For example, if a company is set up for the purpose of doing unlawful acts then a judge may look to the incorporator rather than the company for liability.


Tax Consequences

There are tax consequences associated with the decision to incorporate. In certain circumstances there is a tax benefit for having a sole proprietorship. If the sole proprietorship loses money, that loss is a tax deduction against the owner's other income. However, if the business makes money it will be counted as part of the sole proprietor's income. If a business is just starting up it is often more beneficial to the owner to have it as a sole proprietorship. This tax benefit must be weighed against the potential consequences of unlimited liability of the owner. If a business is established and making money, it may be better to incorporate. If you have a family you may wish to split income, which is an option that is available to persons with incorporated companies. Current proposed changes to the Income Tax Act would limit some of the current tax advantages but not eliminate the tax benefits of incorporation. It is important to discuss your goals with a lawyer who can provide specific advise.


Incorporation

Companies can be incorporated under either the Canada Business Corporations Act or the Nova Scotia Companies Act. Where a company incorporates depends on whether the company wants to disclose financial statements, get shares with certain characteristics, cost, time, whether shares are going to be offered to the public, whether an amalgamation is happening, and other opportunities under each statute.


In order to create a corporation you will have to choose a name for the company that is acceptable to the Registrar of Joint Stock Companies. Additionally, a corporation has to have a board of directors. There only needs to be one director, but directors must act in the best interests of the company.


Your lawyer can further explain the benefits and disadvantages of incorporation as well as guide you through the process of incorporation.




Family Trusts


Family Trusts can form a valuable part of our clients' overall Business, Tax and Estate Planning. As of 2000, changes to the Income Tax Act allow for additional types of Trusts to pass on wealth and control of businesses to family members. If you are considering whether a Spousal Trust, an Alter Ego Trust or a Family Trust might be a valuable part of your business and wealth planning, you should seek individual advice from an accountant and a lawyer who can assess your situation.





Sales of Businesses


The sale of a business has tax consequences for both the vendor and the purchaser. These tax consequences should be considered when determining which aspects of the company are best to purchase. A lawyer can help you analyze the costs and benefits of this kind of transaction.


The first question to determine when purchasing a company is whether you should buy only specific business assets of the company or the majority of shares of a company. The tax consequences of buying assets or shares are different. Usually it is better for the vendor to sell shares but it is better for the purchaser to buy assets.


The Perspective of the Purchaser


The purchaser will be concerned with which tax characteristics will enable him or her to shelter tax on income earned after the sale of the business is complete. If the purchaser has taken out a loan to purchase the business he or she will be concerned with how the interest can be deducted. If shares are purchased the interest will have to be deducted by the shareholder. If assets are purchased the interest will be deducted from the profit the business earns.


If the shares purchased were high then this is a benefit to the purchaser. It means that when the business is sold then the capital gains tax will be less.


If a purchaser buys shares of a company and there are non-capital losses, then these losses can be used to shelter future income.


The Perspective of the Vendor


When the vendor sells a capital property it will be subject to capital gains tax. Shares are considered to be capital property. This means that fifty per cent of their appreciation is subject to tax.


The tax rates of assets depend on the tax characteristics of the assets. The vendor company may have losses that offset gains.


After the assets are sold there is a second level of taxation in relation to distributing the proceeds from the corporation.


Business sales are complex and involve numerous considerations in order to determine the best sale arrangement. A lawyer can help explain your options as well as the benefits and drawbacks of each.




Employment Agreements


A properly drafted non-competition clause can protect your company's interests. Non-competition clauses prevent employees from competing with your company. They can serve as a deterrent to prevent employees from leaving your company, working for a competitor, or setting up a business that competes with your company.


A non-competition clause has three aspects that limit an employee's ability to compete with your company. It will limit the type of work the employee is allowed to do if he or she leaves your company, it will set out a time period in which the employee is not allowed to compete with your company, and it will indicate a geographic area in which the employee is not allowed to compete with your company.


Businesses must be careful when they draft non-competition clauses. The general rule is that a non-competition clause is void. The company has to prove that the non-competition clause was necessary and reasonable in order for it to be valid. The courts seek to strike a balance between protecting an employer's legitimate interests and promoting unrestricted trade.


In order to be found valid, a non-competition clause must have reasonable terms of duration, types of services, and geography. A non-competition clause must provide the minimal amount of protection for a company's business. If a non-competition clause is too restrictive it will be void.


In order for a non-competition clause to be work it must be carefully drafted so that a court will uphold it. If a non-competition clause is found to be unreasonable a court will declare it void and disregard it. Its effect will be completely lost.


The danger companies run in drafting their own non-competition clause is that if any part of the non-competition clause is found to be unreasonable, the entire clause will be unenforceable. This leaves a company vulnerable to competition.


Other appropriate clauses may include a non-solicitation clause. This kind of clause prevents employees from soliciting clients from your company. This kind of clause is less restrictive than a non-competition clause. In some cases a non-solicitation clause will be more appropriate than a non-competition clause, particularly if a non-solicitation clause is unreasonable given the circumstances.


A non-competition or non-solicitation clause that has been drafted by a lawyer can save companies time and money. A properly drafted clause can protect your company from competition whereas the courts will ignore a poorly drafted clause. Additionally, a properly drafted clause can prevent litigation and the associated costs.


A carefully drafted non-competition clause is a worthwhile aspect of a contract. If it is properly worded it can be an excellent tool to prevent your employees from competing with your company. Businesses should consider consultation with a lawyer a wise financial decision.




While care has been taken to ensure the information contained herein is accurate, the information provided is based upon the laws of Nova Scotia and is supplied for general interest purposes only. It is not intended, nor should be considered to be specific legal advice or opinion.


Last Revised by Thomas Dulong, September 27, 2017.


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