Corporate and Tax Structuring and Restructuring

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Corporate Reorganization: Planning for Better Growth

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Your business is constantly evolving. It is essential to protect what you have built as an entrepreneur and offer yourself a legal and tax structure that is most optimal for your business needs. Whether it is about integrating a new shareholder into the company or planning for succession, our business and corporate lawyers, in collaboration with other professionals, can create a holding company to protect your assets and liquidity, carry out a tax rollover of your assets, establish a trust, or proceed with any other transaction recommended by a tax specialist or accountant with expertise in taxation.

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The Case of the New Investor

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Changes in share capital and corporate governance are often necessary when integrating a new shareholder. Changes in share capital may involve the creation of a new class of shares to provide a return or control to the founders of the company.

For example, founders A and B may want to maintain control of the company. To achieve this goal, a new class of control shares that grants only voting rights can be created. In this scenario, founders A and B will have 60% of the voting shares, while the new investor will have the remaining 40%. Another scenario could involve creating a new class of preferred shares held by the new investor, granting only the right to receive dividends. In both examples, the goal of keeping the company under the control of the founders is achieved.

Of course, in the context of negotiations with a potential investor, discussions about the form of future share capital depend on a set of factors, including the financial and economic power balance between the parties.

The integration of a new investor also involves changes in governance. Typically, governance rules within a company aim to define the role and power of each shareholder in the management of the company.

For example, it may be anticipated that the new shareholder will have the power to appoint two directors to the board of directors or that certain powers of the board of directors, such as the power to declare dividends, will be removed in favor of the shareholders. It follows from the above that the integration of a new shareholder would not be complete without the drafting or revision of the unanimous shareholder agreement or the shareholder agreement. It may also be relevant to establish new internal rules or revise existing ones to ensure good internal cohesion within the company.

The review and negotiation of these documents are essential, especially when the balance of power between the parties is unequal.

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The Case of the New Investor

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Often, when recommending the creation of a holding company, it is because the operating company responsible for the company's activities has a surplus of liquidity, is owned by several shareholders, or the acquisition of a substantial asset is planned. A holding company consists of creating a new company that will hold the shares of the operating company. Therefore, the holding company will control the operating company, while you will control the holding company.

For example, if you operate a clinic in the healthcare sector, a residence for the elderly, or a professional services firm, you may eventually accumulate a significant amount of liquidity, money that far exceeds the actual needs of your business and working capital. With the advice of a business lawyer specializing in corporate reorganization, your accountant, and a tax specialist, it may be preferable to transfer some of this liquidity to another holding company that you will manage. From a legal perspective, the liquidity will be protected in the event of legal action or any other misfortune, while from a tax perspective (important to verify with a tax specialist or CPA), it may reduce or defer taxes payable depending on your situation.
In summary, the main advantages are as follows:

a) Tax Optimization

The main advantages of creating a holding company include favorable tax rules that allow for the payment of dividends without tax consequences when certain criteria of the law are met, including control of the operating company. Furthermore, when the operating company is owned by multiple shareholders, the holding company provides greater flexibility to shareholders by allowing them to invest the funds received from the holding company or declare dividends based on their personal needs.

b) Asset Protection

Another advantage of such a structure is the protection of substantial assets. Indeed, since the holding company has its own separate assets distinct from the operating company, the latter’s assets are protected from being used to fulfill obligations and do not serve as common collateral for the creditors of the operating company. In the event of a seizure of the assets of the operating company, the assets belonging to the holding company will not be subject to seizure. For example, the building owned by the holding company and in which a business owned by the operating company operates will not be seized in the event of action against the assets of the operating company.

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The Trust

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The trust is a powerful legal instrument that practitioners often recommend in practice to protect a family business or businessperson’s assets or. Indeed, when the company engages in activities that expose it to significant risks, it can be very wise to transfer assets to a trust.

With the creation of a trust, the company transfers its assets into a trust estate. The trust estate, consisting of the assets transferred by the company, thus constitutes a separate and autonomous affected estate from that of the company and the businessperson. The businessperson will then be appointed as trustee and the company as the beneficiary of the trust. By appointing the businessperson as the trustee, he or she will be responsible for administering the trust.

The main advantage of the trust compared to the business corporation for the businessperson is that no one, i.e., neither the company nor the businessperson, has ownership rights over the assets of the trust.

To fully understand the effectiveness of a trust, consider a scenario where a company holds assets worth $1,000,000, including a building worth $900,000. In this scenario, the company and the businessperson are later found liable to pay a sum of $900,000. Also, in this same scenario, the only assets of the businessperson amount to a house worth $300,000. Consequently, creditors can only recover a sum of $400,000, which includes the $100,000 in assets in the company and the value of the businessperson's house.

On the other hand, if the building had been owned by a holding company controlled by the businessperson, he or she could have seen their shares in the holding company seized to pay the sum to which they were jointly liable with the company. However, the transfer of assets to a trust cannot be made in bad faith to evade a legal judgment. Once again, each case is unique, and it is important to seek the advice of a professional before planning and conducting such a transaction.

In law, every good rule has an exception. In the case of the trust, the transfer of assets to a trust can be challenged by a creditor if the transfer is made with the intention to defraud, has the effect of rendering the person making the transfer insolvent, or if the transfer is made when the person is already in financial difficulty. Therefore, it is recommended to establish such a structure when the company is in good financial health.

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Tax Rollover

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Tax rollover is the transfer of an asset to a company in exchange for shares, which, with the advice of a certified professional accountant (CPA) or tax specialist, allows for the deferral of taxation.

Indeed, it may be interesting for an entrepreneur to use the tax rollover when transitioning from a sole proprietorship to a business corporation. When establishing the business corporation, the entrepreneur will want to transfer certain assets used in the sole proprietorship to the business corporation. According to tax rules, at the time of the asset transfer, the entrepreneur must receive consideration equal to the fair market value of the transferred assets. At this point, it is highly likely that under normal circumstances the transfer of assets to the business corporation will trigger a taxable capital gain for the entrepreneur. Therefore, the tax rollover becomes an interesting tax operation as it allows the entrepreneur to transfer assets to the business corporation without immediate or reduced tax consequences depending on their situation.

Of course, as in any field, there are sometimes complex nuances to the tax rollover, and it is important to seek the advice of a certified professional accountant (CPA) or tax specialist before proceeding with such transactions. The tax rollover is a key component, and some would even say the cornerstone, of the tax structuring or restructuring of a business. When well planned and executed, the tax benefits provided by the tax rollover are significant.

Whatever your situation, it is important to consult a corporate and tax reorganization lawyer for legal assistance and advice as well as guidance through all the procedures.