Taking over a business, need your opinions!

[lh0628]

My wife and I are taking over a clothing store with a friend, and we are unsure on a few things.

1. We are thinking of incorporating the business, our company name doesn't have to be the same as the store name, is this correct?

2. Should we register the business first, and then pay the lump sum takeover fee from the company instead of our own pocket? I'm thinking yes for tax saving purposes but I just want to make sure.

3. We might have to get the initial startup costs from my personal LOC, if I do this, would the interest be tax deductible? Do I prove it by showing the transfer in my bank statement? Or would it be easier to just apply for a loan under the business? Is the interest usually higher/lower than personal loans?

4. The people that we are buying the business from are also our friends, and we are sure that there will not be any issues. Can we not have a lawyer involved then with the contract?

5. Any other suggestions that I may not have thought of are appreiciated also.

Thank you for the help, cheers!

[Bytown]

I was looking at buying a dollar store last year.He was asking $200,000 so i said ok.I then found out he did owe many companys a tone of cash he was in debt $700,000 including back rent to the mall.Just becarful and do some research.

[cdnNick]

It would be well worth the money to get a accountant and lawyer to look over everything. Just because they are friends doesn't mean everything is in order businesswise. If it's a clothing store, I'm sure you are spending way more then a few thousand dollars so lawyer/accountant fees would be much in the grand scheme of things.

[gg4rest]

You will want to incorporate a company. You don't need to have the same corporate name as the clothing store. In fact, you could just be a numbered company (ie 85949, Inc) without even having to choose a name. I assume you want to incorporate provincially unless you plan on expanding to other provinces, then incorporating federally might be an option. When you incorporate, you take much of the liability from you personally and place it on the company. You should do all business transactions as a company. Banks provide Lines of Credit to corporations but I don't know how easy they are to get. You also will want to assign shares to you, your wife, and your friend based on the purchase price of the clothing store (ie if you and your wife put in 50% of the money, then you each should have 25% of the shares). This is important to mitigate issues such as a divorce, or falling out with your friend.

You should at least talk to a lawyer about incorporation and the requirements. You might be able to find information online.

[lh0628]

Thank you for the input everyone.

Can you recommend me some good books/websites that details the steps/aspects of incorporating a small private business?

Cheers!

[lh0628]

And also in general what would be the most efficient way of getting paid from the business.

I understand only net income (gross income - expenses) are taxed, but at what rate roughly? Our forecast is 20K - 40K net income/year.

I work a daytime job that pays about 45K/year, my wife goes to school, would it make more sense to just leave me out of this and put our share all under my wife's name?

If that is the case, then is this what she would get:

50% of net profit - corporate tax - personal tax?

[lh0628]

Bump:lol:

[gg4rest]

Here is a website to help start small businesses. It is courtesy of the Canadian Gov't.

http://bsa.canadabusiness.ca/gol/bsa/site.nsf/en/index.html

[grant]

1. We are thinking of incorporating the business, our company name doesn't have to be the same as the store name, is this correct?
Correct, you would be represent yourself as "abc corp, DBA xyz clothing"

2. Should we register the business first, and then pay the lump sum takeover fee from the company instead of our own pocket? I'm thinking yes for tax saving purposes but I just want to make sure.
Not sure what you're asking. Register the business with whom? If you're "taking it over" it ought to already have a business license, suppliers, bank accounts, etc.

What is a "takeover fee"?

If the current owners have a corporation, it's usually easiest just to buy that corporation (rather than transfer assets, contact information, getting landlord approval of new tenant, etc.)

3. We might have to get the initial startup costs from my personal LOC, if I do this, would the interest be tax deductible? Do I prove it by showing the transfer in my bank statement? Or would it be easier to just apply for a loan under the business? Is the interest usually higher/lower than personal loans?
Business loans are usually higher interest rate, usually only by a up to 2% though.

You can borrow from your LOC and give a shareholder's loan to your ABC Corp. The interest you pay on the LOC is deductible from your personal income tax.

Your bank statements ought to show interest accruing against your LOC, those statements should be sufficient to prove your interest expenses should the CRA care to check up on you.

If you really want to, the bank is probably willing to change the name on the LOC from you personally to your corporation. If you maintain your personal guarantees they probably wouldn't change the rate. There's not really much difference doing it this way, you'll be paying off the LOC with corporate cheques instead of personal cheques..

Tax-wise, it's a wash..

4. The people that we are buying the business from are also our friends, and we are sure that there will not be any issues. Can we not have a lawyer involved then with the contract?
It's definitely a good idea to have a business lawyer look over your purchase contract BEFORE you sign. He will probably suggest changes that will clarify issues you & your friends never thought of.

Otherwise you could end up in a situation where each of you "assumed" that an ambiguous issue would be resolved in your own favour.

[grant]

And also in general what would be the most efficient way of getting paid from the business.
If you put money into a corporation, that's a shareholder's loan. Your corporation can repay that loan with no tax owing. Typically people just have the corporation pay $0 interest on the loan.

Once the loan is paid off, your wife should receive a salary from the corporation. it will be a management expense to the corporation, and taxable income for your wife.

Because she has no other income, she'll enjoy her basic personal exemptions on the first $8000 and low marginal rates on the remainder.

You will need an accountant to help you out with this. For at least the corporate income taxes, and probably to help with your wife's personal taxes.

I recommend you do NOT declare dividends, because if you are both owners of the corporation, then you must receive a portion of the income and it will be taxed at your higher tax rate.

[grant]

I was looking at buying a dollar store last year.He was asking $200,000 so i said ok.I then found out he did owe many companys a tone of cash he was in debt $700,000 including back rent to the mall.Just becarful and do some research.
Oh yes that's the big risk with buying a corporation... you have to be careful what liabilities are attached to it.

Definitely speak to banks, suppliers, landlords, etc. to confirm the liabilities are what the seller claims they are.

[lh0628]

Thanks alot for the answers. It's making more sense now. I have a couple more though.

1. We are planning to buy the corporation outright. Should I just do a "Change of Directors" application with the provincial finance department? I guess it might be the easiest way, but wouldn't we then resume all possible liabilities that the company carries? i.e. debts that we might not know about.

2. Can we claim the purchasing price as expenses?

3. Can we transfer money from our personal bank accounts, have the company declare this money as 'loans'? And the company can pays the loan back as expenses thus making it tax exempt?

4. Can we use our personal credit cards to purchase goods, pay bills, etc for the company, and then have the company write checks to us?

[Octavius]

Thanks alot for the answers. It's making more sense now. I have a couple more though.

1. We are planning to buy the corporation outright. Should I just do a "Change of Directors" application with the provincial finance department? I guess it might be the easiest way, but wouldn't we then resume all possible liabilities that the company carries? i.e. debts that we might not know about.

2. Can we claim the purchasing price as expenses?

3. Can we transfer money from our personal bank accounts, have the company declare this money as 'loans'? And the company can pays the loan back as expenses thus making it tax exempt?

4. Can we use our personal credit cards to purchase goods, pay bills, etc for the company, and then have the company write checks to us?


1) Unsure, I have no experience in this area

2) Again, unsure, sorry

3) Ideally to minimize your risk to losing everything, you should issue a loan from your personal bank accounts SECURED on merchandise or accounts receivable or other such assets that the store may have. This way in case things go belly-up, you are actually considered a creditor of your own company, which means you'll get more of your initial investment back (as opposed to otherwise, where the creditors get paid first...and you get the scraps and bones that are left after they've picked through). In this case, you are no different than a bank loaning a company a money, and you stand a good chance at getting at least some of your money back if things do not work out

4) I would absolutely advise against using your personal credit cards at all with any transactions associated with the business. You run a number of risks if you do this (and yes, it far outweighs the "points, airmiles or cashback" that you would be receiving by doing this:

- If for some reason the company goes bankrupt, you are responsible for the amount on your credit cards. It doesn't matter that the goods were not yours to use, they are on your card. If you put 20k of goods on there and the company fails and you can't get the 20k back...well, you'll have to come up with a way to get 20k so that you don't get sued by your credit card company.

- There is another problem where there could be potential "blurring" of separate entities. This happens when you use many personal items such as bank accounts and credit cards in addition to the business bank accounts and business credit cards for the same purpose. The problem is that it should be relatively easy to differentiate what is a business expense and what is not. By "blurring" you could end up being seen by a court as 1 entity (yourself + corporation as ONE), as in you could lose your limited liability, and subsequently, the whole point for setting up a corporation to begin with. I would personally keep personal credit card and personal bank account use to an absolute minimum unless in emergency situations.

If I'm wrong about any of the above, feel free to chime in and correct me.

Good Luck.

[lh0628]

Thank you for pointing these out.

How do I issue a secured loan from me to my company? I would need some kind of contract I guess, but do I need anything special to make it legally binding? Are signatures by me and all directors of the company enough?

[grant]

1. We are planning to buy the corporation outright. Should I just do a "Change of Directors" application with the provincial finance department? I guess it might be the easiest way, but wouldn't we then resume all possible liabilities that the company carries? i.e. debts that we might not know about.
Yes, you will take possession of the corporation's shares, and become the new director(s).

Yes, the corp will retain all its current liabilities whether you know of them or not. You can protect yourself slightly from this by including in the purchase contract that the sellers are liable for all undisclosed liabilities. Your lawyer will help you with that.

2. Can we claim the purchasing price as expenses?
No. This is just like buying stocks in google.. you pay a price, and you get some shares. When you sell (or dissolve) the corporation you will have a capital gain (or loss).

The good news is, if you operate your business as a going concern for 2+ years, then capital gains from the sale are exempt up to a lifetime maximum of $500,000.

If you borrow money to make the purchase, interest expense on the borrowed money is deductible against your personal income tax.

3. Can we transfer money from our personal bank accounts, have the company declare this money as 'loans'? And the company can pays the loan back as expenses thus making it tax exempt?
A company cannot borrow money to pay for someone else to purchase it. It's just illogical.

The purchase price will never be an expense anyways. Stick with a personal loan.

4. Can we use our personal credit cards to purchase goods, pay bills, etc for the company, and then have the company write checks to us?
Yes you can! My company does that. Even better, have the company pay the CC bills directly to the bank.

Personally I have 1 personal CC which is used only for business purchases (it keeps the statements clean), but as long as business invoices = cheques to the CC company, no one will get confused.

[lh0628]

A company cannot borrow money to pay for someone else to purchase it. It's just illogical.

The purchase price will never be an expense anyways. Stick with a personal loan.

But you said here that I could write a check to the company as a loan no?

If you put money into a corporation, that's a shareholder's loan. Your corporation can repay that loan with no tax owing. Typically people just have the corporation pay $0 interest on the loan.

[grant]

But you said here that I could write a check to the company as a loan no?
that's when you were talking about incorporating, i.e., you were CREATING the corporation. The money you loan the corp, it would use to purchase the assets of a business.

Then you said you were planning on BUYING the corporation. Ostensibly the existing corp already owns the business assets, so you don't need to loan it money.

[lh0628]

Ok I see what you mean now. Thanks alot for the help!

[grant]

2. Should we register the business first, and then pay the lump sum takeover fee from the company instead of our own pocket? I'm thinking yes for tax saving purposes but I just want to make sure
I'm still curious what this "takeover fee" is you're talking about.

Who gets the money, and why?

[lh0628]

By that I meant the purchase price of the business. I was wondering if

- we pay from our personal bank account to the current owners' personal bank account

- we pay from our newly formed corporation to their corporation

[grant]

- we pay from our personal bank account to the current owners' personal bank account

- we pay from our newly formed corporation to their corporation
they are nearly equivalent.
Option #1 = you buy corporation
Option #2 = you buy assets

Usually sellers like Option #1 because they can get the money tax-free under the lifetime $500,000 exemption.

Option #1 is cheaper & easier for you (no incorporation fees), but as we've noticed, carries some risk of hidden liabilities.

[lh0628]

I see, thank you for your help. I'll set up an appointment with DT for a consultation session soon as well.