Franchises: Pros and Cons

December 13, 2016

Overview of Franchising Franchising is a method of distributing products and services based on a brand and customer recognition. Among other things, a franchisor will grant a license to a franchisee for the use of the trademark or the trade name for a specific fee. The franchisee is then able to use the franchisor’s business name and the operating system to set up their business. The franchisee is required to pay the franchisor a specific amount, better known as royalty, which is usually based on the sales of the business. Typically, the franchisor will draft a franchise agreement to be signed by the franchisee that includes details on how the franchise should operate. As such, pros and cons arise from opening or buying a franchise. Pros to Opening/Buying a Franchise  The following is a list of pros which may apply when opening/buying a franchise: Turnkey system – it is a proven system for operating a business and providing the particular goods and/or services Franchise support –unlike starting your own business where you may have little to no support, a franchisee receives support from the franchisor including guidance on how to setup the business, which suppliers and other partners to utilize, etc. Brand name – a profitable franchise with market awareness can reduce customer acquisition costs (marketing) which allows for the franchisee to have more time to operate the business and help obtain customers at a quick rate Lower inventory prices – as a collective group of franchisees with a high bargaining power with suppliers, each franchisee may be able to benefit from lower costs in purchasing inventory and/or equipment Staff recruiting –a franchise that has a recognizable name will typically have a greater recruiting pull than other types of businesses Idea generation – a franchisee does not have to generate a new idea for a business and can rely on the marketing and development of the franchisor, including new products, recipes, etc. Supply chain – an established supply chain is in place through the franchisor (reliable suppliers, contractors, etc.). Usually members of the supply chain will make sure they adhere to high standards in order to stay affiliated and recommended by a franchisor Profitability – a successful franchise and brand can lead to high profits for a franchisee Banking – some franchises may have a positive relationship with banks which will enable easier access to capital  Cons to Opening/Buying a Franchise  The following is a list of possible cons to opening/buying a franchise: Startup costs –a brand name franchise may be beyond the financial capability of some franchisees as the fees to startup are based on many of the pros mentioned above, in order words, you are paying for the pros (brand name, support, franchise fee, etc.) Royalty payments & Advertising – a franchise has ongoing costs in the form of royalties and advertising funds which are paid to the franchisor every year in return for support in operations and advertising Less flexibility – franchises all operate in the same manner with little to no room for idea generation and implementation from each franchisee, you must adhere to the rules […]

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Canada Revenue Agency Dispute?

November 27, 2016

No one likes taxes, but completing your annual tax return is an unavoidable part of life. Once you file your tax return with the Canada Revenue Agency (CRA), the process doesn’t stop there. The CRA will conduct an evaluation and then send you a Notice of Assessment or Reassessment.A Notice of Reassessment is a document that the CRA will send if they disagree with what you reported on your tax return. It will tell you how much tax you owe as a result of the reassessment. What happens if you disagree with the CRA’s assessment, and is there anything you can do? Fortunately, the situation isn’t hopeless and you have options. The first thing to take note of is the date on the Notice of Reassessment. If you disagree with the CRA’s assessment, you have 90 days from the date on the Notice of Reassessment to file a Notice of Objection with the Chief of Appeals of the Canada Revenue Agency. A Notice of Objection allows you to outline your position by filling out Form T400a or by writing a letter to the Chief of Appeals. The CRA will then decide whether to confirm the assessment, reassess it, or vacate it. It is important not to miss the 90 day deadline and that’s why hiring a tax lawyer, such as the team at Vellani Law, is so important. With many years of experience, they understand how to navigate tax laws and will assist you in the process and in drafting a compelling objection. If you have missed this 90 day deadline, the Vellani Law team can apply for an extension to file late. This can be applied up to one year after the normal deadline. The CRA will review this application, and depending on if it meets their rules, the extension will be granted. If you disagree with the CRA’s response to your Notice of Objection, you can further appeal to the Tax Court of Canada within 90 days of the CRA’s decision. If you miss this deadline, you can apply for an extension of up to one year. This extension will be granted in some situations, but to better your odds, it is helpful to have a qualified tax lawyer to provide the right advice during this process. Tax legislation and objection and appeal procedures can be complex, and there are limitations. You may want to use the services of an expert lawyer who can help you through the process and make sure you are receiving sound advice tailored to your situation.

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Partner & Shareholder Disputes

August 16, 2016

Two of the major differences between operating as a corporation versus other types of business entities (such as a sole proprietorship or partnership), are that the corporation is a separate legal entity or “person” under the law, owned by individuals known as shareholders, who own the corporation through corporation shares.  As a result, the shareholders and the corporation they own are separate and distinct from each other in terms of ownership of assets, taxes, and legal status. Corporations can have many shareholders and I find that multiple individuals are forming companies and/or “partnering” together more often than in the past. Forming a company with another individual can be beneficial because it enables one to pool capital with others to start the company, while minimizing risk and exposure. Partnering also allows individuals with different skill sets to come together to achieve a common goal – starting and successfully operating a profitable business. For most individuals, starting and operating a business is a major decision which will involve a lot of time, energy, effort, financial resources, and sometimes – emotion. The relationship between shareholders in a closely held private corporation is akin to marriage as all parties must rely on each other and work together in order to succeed. Acrimonious relationships between shareholders can be fatal to the operations of a company – if the owners spend all their time focusing on their relationships with each other, will they be able to focus on the business? If the owners distrust each other or feel they are not being treated equally, will they want to work towards a successful venture which they feel will be taken advantage of by others? Acrimonious relationships will not only harm shareholders personally, but it can lead to corporate instability, loss of revenue and even a possible closure or dissolution of the company. The following are a few ways to avoid shareholder disputes, or if a dispute does arise, how to solve the dispute with the least amount of disruption to the business: Conduct Proper Due Diligence: If you are looking for investors or partners, or even if you are thinking about starting a company with a friend or relative, due diligence should be conducted before the marriage is consummated. Not only should one focus on the financial and professional skills of their potential partners, one must also focus on the interpersonal aspects and whether or not all of the parties can work together to achieve their goals in a business setting. Shareholder Agreement:Many individuals like to refer to “partnership agreements” when dealing with others and a business. Although partnerships are a business entity where two parties come together to achieve a common goal, once a corporation is created, the parties are shareholders and any agreement between them as owners of a company would be called a “Shareholder Agreement”. A Shareholder Agreement is important because it lays out how to manage the affairs of the corporation and will address items such as: how the corporation is to be managed, how decisions are to be made, who shall have certain authority over areas of the business, who will manage the […]

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Commercial Leases

December 2, 2015

Many businesses enter into lease agreements without professional advice.  The moment you sign a commercial lease agreement, you have most likely made a long term commitment with a variety of obligations and demands – both monetary and otherwise. Many clients I meet do not realize the gravity of the agreement they are entering into. For some, they think of it as a monthly fee, others think they can just get out of it, or leave the premises without legal consequences or implications. However, when I explain the agreement they have just entered into from a high level, their view on the agreement suddenly changes. For example, a client may say, it is a $1500.00 per month commitment, what’s the big deal? It’s the cost of doing business, right? Yes – I suppose that is somewhat true, but in fact, what if it is a $1500 per month commitment over 5 years? That is a $90,000 commitment. Many clients have had experiences in the past when renting an apartment or home – however, leases in the commercial context are much different. Most of the protections afforded to tenants under rental housing legislation do not exist in the commercial context.  In the commercial context, parties are allowed to negotiate the terms of their agreement as they choose. Why Consult a Lawyer? When running a business outside of your home, you probably need to sign a commercial lease in order to rent a space to operate your business, whether to make your product, or to meet your clients and customers. Invariably, commercial leases heavily favour the creator of the lease – the landlord, and are unfortunately worded in complex legalese which, without proper advice, makes it difficult to truly understand and appreciate the obligations you are agreeing to, and the possible legal implications.  Seeking professional advice from a lawyer should be the first step you take when entering into commercial lease negotiations. Many clients I meet have the misconception that a lease is “written in stone” or cannot be changed to suit their needs or particular business. However, many landlords understand the commitment they are receiving from a tenant and thus are willing to make changes and concessions to “close the deal.” Offer to Lease Tenants and landlords typical begin by signing an “offer to lease” which outlays essential leasing terms such as rent, additional rent (maintenance, insurance, realty taxes), the term of the lease, etc. This legally binding agreement comes with the expectation that the offer to lease document will be replaced thereafter by a longer formal lease which will be much more in-depth and will involve a host of obligations and requirements which were not included in the offer to lease. The landlord then provides the tenant with their standard formal lease after the tenant signs the offer to lease. It is safe to assume that your landlord’s formal lease will be heavily structured in the landlord’s favour. Make sure you don’t sign away your right to change the standard form lease when you’re still in the “offer to lease” phase. Getting a lawyer involved right at the beginning stages is essential, as […]

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Shareholder Agreements

November 30, 2015

A shareholder agreement is first and foremost a contract which must be in writing and must be signed by the shareholders who are party to it. Shareholder agreements are a class of contracts that relate specifically to the relationship between some or all of the shareholders of a corporation and, often (although not necessarily), between those parties and the corporation. While shareholder agreements are specific to each company and its shareholders, most of these documents deal with the same basic issues. When Should a Shareholder Agreement be executed? It is always best to implement a shareholder agreement from the beginning. This will force the shareholders to think about rights, obligations, and commitments to set out expectations early on. Many times shareholders have verbal agreements or discussions in passing; this can often be forgotten, disputed or deficient. It is usually more difficult to enter into an agreement later on when progress has been made due to possible issues between shareholders. Once a dispute arises, an agreement will most likely not be entered into which leaves court action as the only avenue to resolve the dispute– this process is usually deficient, time consuming and costly. What type of rights and procedures do Shareholder Agreements encompass? A shareholder agreement may attempt to grant rights to the parties with respect to the shares held by them. These rights may include: limiting share transfers to the transactions permitted by the agreement and/or providing for certain rights of first refusal on any disposition of shares governed by the shareholder agreement; giving existing shareholders a pre-emptive right to purchase shares issued from treasury before they can be issued to other persons or entities; giving a shareholder (or group of shareholders) with a significant interest in the corporation approval rights over fundamental transactions such as a sale of the corporation or any of its material assets or the incurring of  indebtedness; and receiving certain financial and other information regarding the corporation beyond the minimum disclosure obligations of the applicable corporate statute. Shareholder agreements may also set out rules for the transfer of shares when certain events occur, such as the death, disability, retirement, individual bankruptcy or divorce of a shareholder. An agreement can include detailed provisions governing when a shareholder can or must sell their shares, or what happens to those shares after the individual shareholder has left. These provisions are complex and usually set out mechanisms to manage the transfer, including how the transfer price will be calculated and funded. Other shareholder agreement provisions may include non-competition clauses, confidentiality agreements, dispute resolution mechanisms and details respecting how the shareholder agreement itself is to be amended or terminated. Factors affecting the complexity of Shareholder Agreements Who are the parties (e.g. voting and non-voting shareholders)? What mechanism will be used by the shareholders to elect or appoint board members? What mechanisms will exist for shareholders to sell or transfer their shares (e.g. shotgun, put/call, consent sales, auctions, piggy back, drag a long, etc.)? What mechanisms will enable a shareholder to be bought out if a dispute arises or if they would like to move on from the business? What […]

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Do I need a Minute Book?

September 29, 2015

I tend to meet new clients that have incorporated their business but are unaware of their corporate law responsibilities. Although incorporating is usually the most preferable business structure, one must remember that once you incorporate, you have entered a new domain of laws and obligations. One such obligation is a minute book. Under Section 20 of the Canada Business Corporations Act and Section 140 of the Ontario Business Corporations Act, a corporation must keep certain corporate records at its registered office. A minute book is a binder which includes documents that are relevant to the creation, organization, and ongoing business affairs of your corporation. Upon request, a corporation’s shareholders and creditors (such as banks, lenders or suppliers) may examine the following records which must be included in your minute book when your company is incorporated: Articles of Incorporation, by-laws and their amendments and any unanimous shareholder agreements; minutes of meetings and resolutions of shareholders; copies of certain forms that have been filed, for example Initial Registered Office Address and First Board of Directors, Change of Registered Office Address and Changes Regarding Directors; and a share register showing the names and addresses of all shareholders and details of shares held. Other parties that may request to view your minute book are the Canada Revenue Agency, your accountant, and a potential purchaser of your business. Ongoing Maintenance: Your obligations under corporate law do not end once your minute book has been created during the incorporation process. Yearly and ongoing maintenance of your minute book should include the following: appointment and resignation of directors or officers appointment of accountants and/or auditors (if applicable) approval of financial statements recording dividends declared and paid to shareholders recording the existence of shareholder loans the approval of transactional business for the past year recording of share transfers and shareholders changes in corporate structure, ownership, articles, by-laws, etc. The Purchase and Sale of your business When negotiating the sale of your business, the buyer’s lawyer will want to examine the minute book to see who the directors and officers are (to ensure that the person signing the share purchase agreement has the requisite authority to do so). The purchaser will also want to confirm who the shareholders are, what class of shares they own, and how many shares have been issued. If the minute book has to be updated going back several years, the professional fees associated with piecing together your documents and information will most likely be more costly than if you maintain your minute book on an ongoing basis. Consequences of not having a Minute Book In addition to increased professional fees, although rare, government agencies may fine your corporation for not abiding by the law. At the same time, certain transactions you make during the year can be scrutinized, questioned and even worse, amended in a manner which could have negative financial and tax implications. For example, if your corporation did not accurately record declared and paid dividends to shareholders during the year, the Canada Revenue Agency would have the ability to challenge the dividend characterization and re-assess the payment as a regular salary. This would result in negative tax implications […]

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Should I Incorporate?

August 16, 2015

AN OVERVIEW OF INCORPORATION What is a Corporation? A corporation is a separate legal entity that exists independently from its owners (the shareholders). A corporation has the capacity, rights, powers and privileges of a natural person, so that it can carry on business, own property, borrow money, possess rights and incur liabilities. Commercial activity is generally carried on through a corporation to limit liability. A corporation is created when the company complies with the appropriate municipal, provincial, territorial or federal business licensing requirements, and completes the necessary registration requirements under the Ontario Business Corporations Act (the “OBCA”) or a similar statute in another province or territory of Canada, or the Canada Business Corporation Act (the “CBCA”), depending upon the jurisdiction where the business is incorporated. There are three main roles in a corporation: shareholders, directors, and officers. While these roles are notionally separate and can be filled by different people, the same person may actually perform some or all of the roles. The shareholders own the corporation through their ownership of shares. Shareholders do not personally own the assets of the corporation, nor are they personally liable for the liabilities of the corporation, except in limited situations. Furthermore, the share capital of a corporation can be divided into several classes or series with different rights attached to each class. Directors (which comprise the Board of Directors) usually oversee the management of the corporation. This includes tasks like setting the direction of the corporation and deciding whether to declare dividends to pay out to shareholders. Directors are elected by shareholders, and their meetings are subject to statutory requirements. As noted above, the director role and the shareholder role can be performed by the same person. If the Business were to be incorporated, you could fill both roles. This would allow you to take advantage of the limited liability offered as a shareholder, while still enabling you to manage the Business as a director. (See page 6, “Limits on Limited Liability” for further discussion). The day-to-day operation of the corporation is typically managed by its officers, who are appointed by the directors. Officers can be employees of the corporation and earn a salary, which will be taxed at applicable marginal income tax rates. Corporate operations are subject to the provisions of the corporation’s articles of incorporation, its by-laws, any shareholder agreements, the applicable corporate statutes and the common law. It is possible for you to be the sole officer (usually President and Secretary) of the corporation. Shareholder Agreements A shareholder agreement is an agreement relating to the relationship between some or all of the shareholders of a corporation. The agreement must be in writing, and must be signed by the shareholders, though not necessarily all of the shareholders. If you will be the sole shareholder of the company, then a shareholder agreement is not necessary; however, there may be some value to putting in place a shareholder agreement now in the event that you intend on adding additional shareholders down the road. Given the uniqueness of each Shareholder Agreement and the fact that it is difficult to predict what issues future shareholders […]

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