Winding Down A Business

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There are 2 prominent initiatives driving consideration of winding down a corporation:

1. First, retirement/capitalization on investment; sale to third party; or
2. While still operating, a desire to reduce complexity and possibly to merge holding companies with operating companies to result in fewer tax filings and simplification of administration.

These types of initiatives frequently arise from family maturation, change in business plans or maybe even declining business.

But regardless, many enterprises have complex structures of “tiered” corporations frequently determined by estate planning or for the purpose of segregating potential liability. The relevance of these related corporations should be seriously considered before the desire to simplify prevails over better business structure planning.

It’s natural to think of simply “shutting down”. Simple as that may seem, that will not stop government filing requirements, costs to complete tax returns and continual notices from various levels of government, sometimes rather costly as the result of the failure to file.

So we’ve counseled clients to consider amalgamations between and among holding companies and operating entities to result in just one corporation and therefore just one set of filings. Continuing a corporate existence to take advantage of corporate tax rates/income splitting and banking relationships should be considered. It is not infrequent that corporate structures have been established in a multitude of jurisdictions necessitating the bringing of a corporation from one jurisdiction (say, for example, the federal jurisdiction) into the jurisdiction of another company (say, an Ontario company).

One must also assess the effect of an amalgamation relating to liabilities. Remember that whatever were the assets and liabilities of each pre-amalgamation corporation automatically become the assets and liabilities of the post-amalgamated corporation.

There are admittedly certain savings and tax benefits, but at the same time before simply proceeding, serious consideration should also be given to the liability component of the effect of amalgamation.
We’d be pleased to assist you in your consideration.

Franchise Leases

pen-signature-21182892Most franchise operations involve either the franchisor holding a lease and subletting to a franchisee (for obvious control purposes) or the franchisee itself directly leasing space with direct liability to a Landlord.
Either way, the franchisor always seeks control over the location in the event the franchisor seeks to enforce its rights following a franchisee default.

So, for franchisees, here are your issues:

1. Who controls the location?
2. Can you operate any other business on the site in the event the franchise agreement is revoked or discontinued or the franchisor ceases to operate?
3. If the franchisor controls the lease, who controls the renewals if any?
4. What about personal liabilities either of the franchisor in its capacity as both the holder of the intellectual property of the franchise as well as the holder of the real estate?
5. Who owns the improvements located in the premises? (machinery, equipment)

It’s not easy to differentiate the relationships, but if you are a pending franchisee, don’t lose sight of the fact that the lease is as important and sometimes even more important than the franchise agreement.

Sale of Assets vs. Shares

Peter Welsh Law Partnership and Shareholder Agreements

Clearly one of the most fundamental issues for business vendors is the alternatives of an asset or a share sale.

For a moment, and setting aside the tax implications, a sale of assets has considerably fewer issues for a purchaser compared to purchasing shares.  For example, on a purchase of shares, all of the liabilities of the corporation whose shares are purchased become the liabilities assumed by the purchaser (not directly, but the liabilities do not go away).

In a share acquisition, the vendor is actually the shareholder whereas in the case of an asset purchase, the vendor is the corporate entity.

It is probably economically understandable that there would be a different price point for purchasing shares as opposed to assets:  In the case of purchasing shares, the vendor shareholder may well have a capital gains exemption and effectively receives more money into his pocket on a share sale than for an asset sale at the same price.  In the case of an asset sale, as above, the vendor is the actual corporation and may be faced with either recaptured depreciation or capital gains tax or both, but in any event the asset sale gives rise to taxes on the purchase price payable by the corporation.

Until late March 2017, an asset purchase and sale in Ontario had to comply with the provisions of the Bulk Sales Act which itself was a nuisance.

However, that statute was eliminated in Ontario late March 2017 (as it had been eliminated in all the other provinces and territories of Canada quite some time earlier).

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