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The Financial Advisor Guide to Business Insurance PrinciplesSelf-Study Course # 6

BUSINESS INSURANCE PRINCIPLESOVERVIEWIt really doesn’t matter if your clients own a large or small business, they need

you to help them solve all the problems where insurance could offer the solution.

To work for themselves, to be their own boss, to run their own business--for

many workers these phrases describe the entrepreneurial dream. In recent

decades thousands of individuals have set off to pursue that dream. Indeed, an

increase in the number of small businesses has created much of the growth of

new jobs in the Canadian economy.

Becoming a successful entrepreneur, however, is not an easy task. It requires

skill, motivation, hard work, and good luck. It also requires information in large

measure. The would-be business person stands on the brink of a new future

with a thousand questions that need answers. The time you take to insure your

business is just as important as the time you took to build it.

Insurance is one of the biggest precautions your clients and prospects should

take to protect their business. Regardless of the size of the business, they are

susceptible to all the same hazards as a homeowner, such as storm damage,

liability, theft or even death, disability or retirement.

Taking Care of Personal and Business Needs Your clients and prospects have invested time and hard work into their business.

That’s why it’s important that they periodically evaluate any financial plan,

including their life insurance to ensure that their personal and business goals are

still being met as the needs of their family and business change over time.

You must understand that all business owners have different needs. To help you

better understand their planning needs and to provide strategies that may be

helpful for their situation, we have categorized their needs into three categories.

Business Insurance Principles – SSC #6Pro-Seminars Limited © 03/12

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Phase I - Start UpIf you’re business clients are just starting out, they are probably concerned with

issues that involve cash flow as well as strategies to help protect their family and

business.

Phase II - Growth & MaturityIf the business is already growing strong and maturing, you can help them begin

to focus on retirement planning and maintaining flexibility to access money if

necessary.

Phase III - Succession PlanningIf they are ready to retire and pass their business onto the next generation, you

can offer life insurance products that can be an important part of their estate and

business plans.

In addition, through the course of your relationship with them, you can help them

understand how life insurance can be an important part of an estate plan, setting

up a trust, and securing their retirement by using the many tools that are

available to you.

Continuing the Family Business

Do they have a business continuation plan? Typically, successful family and

closely held businesses follow a business plan aimed at maximizing profits. But,

to maximize the value of their businesses for their own benefit and their heirs,

business owners will need more. A business continuation plan may complete the

equation.

Why Does the Business Owner Need Business Continuation Planning? Three common characteristics of closely held businesses make business

continuation planning essential.

First, many closely held businesses lack successor management.


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If a chosen successor isn't there to open the doors, stock the shelves and direct

operations, the business may fail.

Finding a buyer and getting a fair price for the business may be difficult,

especially following the owner's disability or death. Unlike publicly traded

companies, a marketplace for buyers and sellers of closely held businesses

doesn't usually exist.

Finally, if you do not hold a majority of controlling interest, you or your heirs

should expect a reduction in your anticipated sales price. Buyers are often

unwilling to pay fair market value for a minority interest that lacks management

control.

Assuring the Preservation of the Business

So what's the bottom line? Unless they plan for the eventual disposition of their

business interests, the value may be diluted, not maximized.

Business planning is a complex undertaking, generally requiring the efforts of

more than one professional. The first step is putting together your team. Here

are the key members you should include.

Estate and Business Planning Lawyers

Choose a lawyer who specializes in estate planning and business continuation.

The choice could mean the difference between successfully achieving goals and

failure.

Insurance Professional

An insurance professional can assist in determining the best type of policy and

coverage that will be needed to meet any goals.

Certified General Accountant

A CGA can assist the business owner(s) in complex business valuations.


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Financial Planner

The financial planner may be the life agent or accountant or another member of

the team with broad knowledge and special training in financial planning. He/she

can coordinate the efforts of the team.

What Can You Expect from this Course?Upon completion of this course, you will be more knowledgeable in the

organization and operation of businesses. You will be able to distinguish the

differences between the four types of business structures, with the emphasis on

the advantages and disadvantages of each legal entity.

You will explore the effects of death, disability and retirement on each business

situation. You will have a working knowledge of financial statements and how to

use the ratios to help establish an insurance need.

Every person, and every organization - whether living or non-living - is exposed

to risks, which can result in losses. The main function of insurance is to minimize

or to eliminate the effects of risks on individuals and organizations, to act as a

“transfer mechanism” whereby responsibility for losses from risks which occur

are transferred to insurers, and by which risks are “managed”. An insurance

company is a “business” too, and like any other business it needs to be run well

and profitably.

INTRODUCTIONWhenever a business owner dies or is seriously disabled, there are many

questions that must be answered. There are questions about the future of the

individual family, their business, its valued employees as well as their creditors.

In a recent study, it was found that over two-thirds of businesses did not have

any life insurance of any kind. Many of these same organizations were unaware

of the business uses of life insurance.


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When the remaining one-third was looked at, it was found that many were

underinsured or has very limited coverage for the other contingencies of disability

and retirement.

Two goals of the agent/broker when dealing with Business InsuranceWhen an Advisor / Agent / Broker takes a look at business situations, it is wise to

look not only at the owner, but also to the other employees of the company. With

this said, there are two main functions of an agent’s / broker’s work with the

business owner.

1. An Advisor / Agent / Broker must take the time to uncover and then

discuss any problems or dangers that may be uncovered in the interview

process. When any areas of concern are discovered, the Advisor/ Agent / Broker

MUST take the time to discuss them in depth. 2. Secondly, the Advisor / Agent / Broker MUST convince the business owner

that the problem has to be solved without hesitation, and then try to help

solve it.

THE FIVE MYTHS OF SALES PROSPECTINGMyth #1 - Prospecting is salesThis is the number one mistake made by small business owners and sales reps.

Prospecting is a separate function from sales. Just as marketing is distinct from

sales but closely linked. Prospecting is simply discarding all the unqualified

leads and retaining the "gold". The job of prospecting is to find qualified leads

that may buy your product.

Myth #2 - Prospecting is a numbers gameThe old school of prospecting for business relies on contacting large numbers of

cold contacts. However, quality supersedes quantity. You must find prospects

that have a propensity and possible motive to buy your suggestions and

recommendations.


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Myth #3 - Scripts are for kidsMany sales people insist on prospecting without any script. Scripting provides

the framework of a successful prospecting campaign. It allows you to test what

key benefits and qualifying questions work. The script must be personalized so

the presentation does not sound "canned".

Myth #4 - Prospecting takes timeIt only takes a few minutes to determine if the lead wants your benefits and can

afford your company's product or service. Don't waste time on people

unmotivated or unable to buy. Remember to focus on the "gold".

Myth #5 - Close them on the appointmentFar too many sales reps focus on setting the appointment. "Would Friday

morning or afternoon, be better for you?" And then only 20% of appointments

show up. What went wrong?

Prospects will sometimes find it easier to agree to an appointment rather than

saying they are not interested. If a prospect is remotely interested, then offer a

much subtler approach...send them an information package. This allows you to

build interest and turn the lead from warm to hot.

Sales prospecting done right can have a huge impact on your sales revenue. It

does not take an armour suit and great courage to deal with the fear of rejection

during prospecting. Just keep an open mind to challenge the old sales

approaches and the myths of prospecting.

IN MANY CASES, THERE IS ONLY ONE SOLUTIONMore often than not, the solution is cash and plenty of it! In most cases, this

money will not be available unless the business prospect realizes that there is a

problem before it becomes a problem and takes the necessary steps to avoid a

crisis. If they wait and death or disability happens, then a solution is certainly out

of reach.


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PROSPECTING IN THE BUSINESS INSURANCE MARKETIt is essential that Advisors / Agents / Brokers understand the business insurance

market in order to take advantage of its many opportunities.

Prospecting is the key to success in the insurance business. This is true whether

you are looking for individual or business insurance sales. Both cases involve

understanding whom to contact, determining where to find them, and deciding

the best approach.

To this extent, we have provided some information on how you can do this. For

some, it may mean a change in how you do business while for others this

information will just be a review as you are doing it already.

SEVEN HABITS OF BUSINESS SUCCESSThe elusive dream of business success captures the imagination of aspiring and

existing business owners everywhere. A vision of flowing profits, industry

respect, thrilled customers, and a balanced life. This vision is only possible by

developing habits that drive business success. Take the time to learn the 7

habits of business success.

Habit 1 - Cultivate Inner Networks Entrepreneurs practicing the art of business success know the power of

networks. They take the time to identify and build relationships with key peers,

mentors, and advisors. This inner network provides support, direction, and an

increased number of people to assist. Having an inner network of 5 people who

have a network of 5 more, grows the network exponentially.

Habit 2 - Customer CentricBusiness success requires an unwavering commitment to the customer. This

commitment encompasses a mindset of understanding the customers' world.

Understanding the customer’s wants and needs provides the business with a

greater opportunity to earn a loyal customer base. Focus away from business

and profits, and toward what you can do to improve the life of your customers.


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Habit 3 - Humble HonestyBusiness success requires the ability to know your strengths and weaknesses.

Being open and honest about yourself and your business creates growth as an

individual and as a company. Don't spend time developing weaknesses. Find

help for weak areas, enabling you to focus on strengths. Take the time to know

yourself and your business.

Habit 4 – AdaptabilityBusiness success requires the ability to adapt to changing situations. Nothing

ever goes as planned. The world of business is full of surprises and unforeseen

events. Using the habit of adaptability allows business owners to respond to

circumstances with the ability to change course and act without complete

information. Being flexible allows you to respond to changes without being

paralyzed with fear and uncertainty.

Habit 5 - Opportunity FocusedProblems are a regular part of business life. Staff issues, customer

misunderstandings, and cash crunches- the list is endless. To achieve business

success, look at both sides of the coin. Every problem has an opportunity.

Being opportunity focused makes the game of business fun and energizing.

Habit 6 - Finding A Better WayProductivity is the cornerstone of business success. Formulate the habit of

finding a better way to make your business more productive. This will create

more time to focus on the critical issues that drive sales and profit. Productivity

can be enhanced by technology, automation, outsourcing, and improving

business processes.

Habit 7 - Balanced Lifestyle ManagementA business can consume an owner's time and energy. It's easy to allow the

business to take control of your life. Business success requires the habit of

balancing all aspects of your life.


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Separating time for daily business tasks, profit driven tasks, and free time is a

habit that will make your business and life more enjoyable. Take the time to plan

each week.

Learning and instilling new habits in your daily business life can have a dramatic

effect on your level of success. Review each of the 7 habits. Choose one habit

to focus on for a month or until you achieve mastery.

FIVE KEY TRAITS Stellar sellers and entrepreneurs share the same strong traits. An entrepreneur

will excel because they have such enthusiasm for their service, and their

ebullience is embraced by prospects accustomed to the same-old, same-old

hackneyed pitches. A great closer will possess an aura of competence and zeal

that makes him top of the office each month.

The five key traits of successful entrepreneurs are:1. Creativity

Having an appreciation for the non-obvious solution is a must if a sales pro is

going to outpace the pack. While an average salesperson depends on business

cards and leave-behinds, a true rainmaker brings a unique vision to his work that

makes him stand out.

2. Passion

Genuine love for a product gets salespeople through the inevitable dark times,

and it makes their offers all the more irresistible to their clients. Passion, like

creativity, cannot be faked, so it has great weight with customers.

3. Integrity

Why are some professions so poorly regarded? Because the perception is that

they lack integrity and that they'll say anything to get the sale. Many sales and

communications experts believe that integrity tops the list of qualities salespeople

need.


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Feeling good about a purchase is a hallmark of buying from a salesperson with

integrity. Trust brings customers back, and that's a key factor to the success of

any salesperson. The importance of selling with integrity has been heightened

by the recent poor ethical and financial performance of huge corporations.

Customers still buy the salesperson!

4. Tenacity

Shelving feelings of rejection to keep plugging away is another essential

requirement for sales success. It takes personal courage to get up every

morning and say “I am going to be the best.” It also requires a certain steely

quality to persist in the wake of one dismissal after the next. Sales require

someone who can always see possibilities, even in difficult situations.

5. Commitment

The sales cycle for any big deal can typically take months, even years. Keeping

an eye on the prize, while continuing to sell to other prospects simultaneously,

takes commitment. Selling is never easy. You must have a burning desire.

Success is the result of a person's willingness and intent to make things happen.

SO WHERE DO YOU START TO PROSPECT FOR BUSINESS INSURANCE?1. Understand whom you want to meet.

In a business setting, this will usually be the business owner – the person

who makes the major decisions and signs the cheque. Initially, Advisors

/Agents / Brokers may feel somewhat intimidated by the thought of dealing

with business owners. But it is important to remember business owners and their

organizations can benefit greatly from services that you provide.

2. Determine where to find these prospects.

Your personal clients can provide you with an unlimited number of prospects.

Always try to find out where your clients work, etc. Another excellent way to

meet business owners is by getting involved in your community, because that’s

what many business owners do.


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Join a service, fitness or racquet club. Become a member of church

committees or a volunteer for charitable organizations.

Some suggestions for locating business prospects are – your present Group

Insurance clients, Business Insurance clients, Personal insurance clients Local

newspapers, financial reports and any business people you know.

3. Choosing the best approach.

This all depends on the circumstances. Referred leads seem to be the

method of choice for many Advisors / Agents / Brokers. A good way to

familiarize the prospect with your name is through a brief pre-approach letter that

outlines why you want to see them and reviews the products and services you

offer.

In this era of time restrictions and growing competition, it’s not easy to

prospect for new business. That’s why you need a prospecting plan that is

strategically focused and easy to execute.

The final step is to get out and do it. Any successful Advisor / Agent / Broker

will tell you that great intentions are noble, but great intentions don’t get the

job done!

WHY FOCUS ON BUSINESS INSURANCE? Many financial professionals now recognize that it is more rewarding to prospect

among businesses than consumers, for several reasons:

1. You can easily identify small businesses in your market and access data

about them.

2. Business owners always have financial needs to address. Unlike some

consumers, they can’t afford to “stand pat."

3. You can develop powerful referral networks by focusing on specific industries

or types of businesses.

BECOME A RECOGNIZED EXPERT Business Insurance Principles – SSC #6

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There are many professionals who are trying to get noticed by the businesses

community. Yet, because the marketplace is more discriminating and sceptical,

it's hard to get noticed. To enjoy the greatest return on your marketing efforts,

you need to rise above the crowd. You need an edge over the competition. In

short, you need to become noteworthy by establishing an expert reputation.

Not so long ago, expertise was equated with the number of years you were in

business or the university or professional levels that you had achieved. That has

changed as people have come to be more interested in results. If you can

deliver, people will be interested in you no matter how brief your business

experience or how bare your walls are of any recognition.

Experts are sought after. They get more business with less effort and command

higher fees and earn more than their counterparts.

Journalists come to them for information. They are asked to speak at

conferences. They out-position their competitors and break out of the anonymity

trap because they know more and are recognized as knowing more. Becoming an expert can help you achieve "top of the mind" awareness among

members of your target market. By packaging your knowledge into articles,

speeches, and workshops your name can immediately come to mind or be the

first one mentioned when members of your target market turn to others to find

what they need.

Publish

Publishing articles, columns and books are powerful techniques to establish your

expertise. Publishing pre-sells others on your abilities and exposes you to

thousands of prospects.

And reprints of published articles make excellent, low cost sales literature, easily

replacing expensive brochures, mailers, and newsletters.

There are endless opportunities to publish. Thousands of business, trade and

Internet publications covering every imaginable industry and audience are fairly


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easy to break into, even for beginners. If you have a good idea, tailored to a

specific readership, there are hundreds of publications hungry for articles.

BUILD YOUR BUSINESS INSURANCE REFERRAL BUSINESS Growing a small business is tough work. The sales function is a time consuming

task with a constant need to fill your "sales funnel" with fresh, qualified prospects

on a regular basis. Finding the best qualified leads for your business does not

come from a cold contact situation but from building a strong referral business.

The business of referrals makes sense for most people for the following reasons: 1. Referral business reduces your sales expenses and sales cycle. With less

time calling cold prospects, your small business can focus on customers and

their circle of influence.

2. Referrals can build your level of satisfied customers. The cycle self-

perpetuates with more satisfied customers referring others to your company.

3. Referrals increase your sales revenue.

If the prospect of building the referral end of your business is so enticing, why do

so few businesses do it? Because they use the wrong approach in building

referrals and have limited success.

So, how do you Build Referrals?Set A Target

In business, measure the results to improve performance. Set a clear goal with a

time line (For example, 10% increase in referral business over the next 10

weeks).

Timing

Conventional sales wisdom claims the best time to ask for the referral is

immediately after the close. This tactic is far too aggressive. Business Insurance Principles – SSC #6


Give your clients time to experience your service or product before asking for a

referral. Ask for the referral at close only if your client is already delighted with

your business.

Your Top 20Not all customers are referral candidates. Find the top 20% that are ecstatic

about your business and ask them for referrals. Make sure their network is the

type of client you want.

Give and You'll Receive

Give your clients extra service and follow-up support before asking for referrals.

When you give willingly to your customers, they will return the favour.

Type of Customer

Inform your referring clients of the type of customers you can help. Provide a

clear picture of the customer demographics for your small business.

Rewards Program

Provide special rewards to your referring customers on a regular basis.

Thank-You

Businesses need to establish trust to build referrals. Create a basic thank you

letter that can be personalized and sent to each referral you receive. Treat your

referral sources with the utmost of care and you will not only build a foundation of

trust but keep hot prospects coming to your door.

These tips are simple but when executed on a regular basis they can drive your

referral business and build sales revenue. Start today and watch your referrals

grow.

COMPETITIVE ADVANTAGES


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In today's economy, big and small businesses are seeking every opportunity to

win sales through competitive advantages. Smart owners of small business

know a sales strategy can create a competitive advantage.

Selling consists of two main functions

1. Tactics

2. Strategy

The tactics of selling are very important but equally vital is the strategy of sales.

Sales strategy is the planning of sales activities: methods of reaching clients,

competitive differences and resources available. Tactics involves the day-to-day

selling such as prospecting, sales process, and follow-up. Competitive Advantages of Strategic Sales Planning Increased closing ratio by knowing clients hot buttons

Improved client loyalty by understanding needs

Shorten the sales cycle with outside recommendations

Outsell competitors by offering the best solution

SUGGESTIONS THAT HELP YOU WITH BUSINESS INTERVIEWSThe presentation is starting. Dim the lights. Time for a nap. These are the

thoughts of many audiences subject to yet another boring business presentation.

1. Dig Deep

Having an effective business presentation that will have the audience on their

feet requires more than the usual factoid dropped into your PowerPoint. Find a

relevant fact beyond your topic norm. Give them the unexpected. The one

obscure and contradictory piece of information that will raise heads and stimulate

discussion. Where do you find such information?

Go past the typical quick search engine scan. Check out educational websites

for new research, interview industry mavericks, or scour the business press.

2. Avoid Info Overload


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When you overload your audience, you shut down the dialogue that's an

important part of decision-making. When you remove interesting but irrelevant words and pictures from a screen,

you can increase the audience's ability to remember the information by 189%

and the ability to apply the information by 109%.

3. Practice Delivery

A knockout business presentation is so captivating it makes you forget about the

speaker and become absorbed in the talk. Practice your delivery over and over

until you remove the distractions including nervous tics and uncomfortable

pauses. Pay particular attention to your body language. Is it non-existent or

excessive? Good presenters work the stage in a natural manner.

4. Forget Comedy

Business presenters will flirt with the temptation to deliver the stand up humour of

Chris Rock. Remember your audience didn't come to laugh; this is a business

presentation. Leave your jokes at home. It's ok to throw in a few natural off the

cuff laughs but don't overdo it.

5. Pick Powerful Props

You don't need a box full of props like the watermelon-smashing comic,

Gallagher. A few simple props to demonstrate a point can be memorable in the

minds of your target audience.

6. Minimize You

Your audience doesn't care as much about your company history, as they do

about whether you can help them solve the specific problems they face.

Write a script for your presentation that makes the audience the protagonist, or

the main character, who faces a problem that you will help them to solve.

7. Speak the Language


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A knockout business presentation doesn't leave people wondering what you said.

It might be tempting to throw in a few big words but are you alienating your

audience? Always explain terms and acronyms. The number of smart executives

who aren't up on the latest terminology would surprise you.

8. Simple Slides

Beware of the PowerPoint presentation. Many corporate brains will turn off at the

sight of yet another PowerPoint presentation. Over 400 million desktops

currently have the PowerPoint application. If you want your business to stand

out, don't be like everyone else. Use slides in your knockout presentation to

highlight and emphasize key points. Don't rely on your slide projector to run the

show.

It all comes down to what your audience walks away with in the end. Did you

deliver another boring business presentation? Or did you persuade or motivate

everyone to action? Apply the previous information and watch your results

increase.

THE FIRST INTERVIEW WITH THE BUSINESS PROSPECTAdequate preparation and planning for an interview are critical steps in the sales

process. They ensure effective use of the interview time and also help to build

confidence.

The first step is to learn something about the prospect and the business he or

she represents. Information can be obtained from friends or acquaintances of

the prospect, and existing client bases.

The InterviewThe initial interview will likely be the most important opportunity to make a good

impression on the prospect. In most cases, you would not go into this meeting

expecting to make a sale.

Generally, the initial interview is considered a success if you begin to establish a

relationship with the business owner and secure a follow-up interview.


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Building RelationshipsIn order to begin to build a relationship with the business owner, you need to sell

yourself as much as you sell the company you represent. A short visual

presentation, which includes the following, can be useful:

Your qualifications and experience in the market.

Your companies’ reputation.

A review of how you operate.

Get the “Soft Facts”Concentrate on the “soft facts” during the initial interview.

Ask questions such as:

How did you get started in the business?

What are the reasons for your success?

What are your plans for the business?

This line of questioning is non-threatening and will give you a good idea of the

kind of individual you’re dealing with. It will also help you to qualify the prospect’s

insurability, insurance need, ability to pay, and accessibility. And the questions

will allow you to determine which areas should take priority in future discussions. THE FACT FINDAt this point, you have probably used the time allotted for the initial interview.

In most cases, completion of a detailed fact-find will have to wait until your next

interview. Make sure that you get a commitment from the owner for a follow-up

interview.

Why Complete a Fact Find?A successful fact-find will help you and the prospect identify potential business

insurance needs. It can also help to prioritize needs, allowing the prospect to Business Insurance Principles – SSC #6


focus on the problem at hand. Also, the fact-find provides a permanent record

you can refer to when any business is placed, and can be used in a follow-up

when outstanding needs are reviewed. A fact-find provides an effective way to guide the discussion with the business

prospect. It helps ensure your time together is used wisely. A good fact-finding

interview will enhance your professional image.

Hard facts in your fact-find, and the soft facts and other information gathered

during the interview, are key ingredients that will help you make the best possible

recommendations for your business prospect.

A good fact-find should include: General information about the business and the owners.

A list of soft fact questions to use during the interview.

Questions to develop the business needs should be centered on the following:

Business Loan protection

Buy-Sell funding

Disability, Critical Illness and Long Term Insurance

Employee benefits and pensions

Employee Assistance Programs

Personal needs of the business owner

Whatever format you use, make sure that you are familiar with the fact-find

before the interview. Your image can be harmed if you’re not prepared and don’t

have answers to queries such as, “Why is that question important?”

You have put a lot of time and effort into approaching the business prospect.

You owe it to yourself to ensure the fact-find is done properly, because it will help

ensure that your recommendations are appropriate. This in turn will lead to the

successful conclusion of the case.


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We have included some different forms of Fact-Finds and questions to use with

the business prospect.

Example 1 Questions to Ask a Business Owner

If you had died last night – How would these questions be answered today?

Who is running the business?

To whom do they report?

How does your spouse get income?

Who will pay the creditors?

Does the bank have your personal guarantees?

Are there partners?

What will they want?

Should your shares be sold?

Will your partner(s) buy them?

At what price?

Where will they get cash?

Is this what you want?

Example 2 Small Business Five-Minute Fact Finder

1. How’s business?

2. Are you a corporation, a partnership, or sole proprietor?

3. Who would or who could run this business if you are not around/

4. Is it a relative? Or is it an employee?

5. Can you give me the names of all the owners and their percentage of

ownership?

6. What is their age? Are they in good health?

7. Was this business purchased? What price did you pay for it? How long

ago was that?

8. How long do you plan to continue in business?

9. What plans do you have for retirement?


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10. If today was a good day and someone offered to write you a cheque for

the value of this business, how much would that cheque have to be?

Example 3 How Secure is the Financial Future of Your Business?

Have you made the necessary plans for safeguarding thefuture of your business?

This handy 10-point planning checklist will help determine whether adequate plans have been made.

YES NO N/A1. I intend to continue to own the business for the foreseeable

future2. I have a good idea of what the business is worth today3. My professional advisors have updated my estate plans

within the past five years4. My will has been updated to reflect my estate plans for

passing on the business5. My spouse is fully capable of running the business in the

event of death or disability6. I am aware of the tax implications of a sale or transfer of

the business in the event of my death or disability7. The business has enough cash on hand to pay off bank

debts in the event of my death or disability8. If there are other owners involved in the business, we have

a written buy-sell agreement that is adequately funded9. The business is financially able to cope with the death or disability of a key employee10. The business provides group insurance and pension

benefits to our employees and their family members

An Advisor / Agent / Broker should know how to help the business owner answer

these questions. In order to do this, you have to become familiar with Business

Insurance and the different types of business ownership, and how they apply in

various situations.

PROSPECTING FOR BUSINESS


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The primary sources of prospects can be found in your present client files. Most

of these policyholders work for or with small businesses. Small business firms

can be classified as having gross revenue of 1.5 million or less in a fiscal period

(1 year or less). Most Canadian businesses will fit that category.

Qualifying Business ProspectsLike family insurance prospects – business insurance clients need to meet the

same qualifications:

Ability to pay

Need for insurance

Be able to qualify medically

Be accessible

The more prospects you approach the more skill you develop. It is essential to:

Do your homework – know as much background as possible.

If at all possible – be referred.

Develop a working relationship with a team of advisors – accountants,

lawyers, and trust officers.

If you are new to business insurance, contact a veteran, offer to do joint work and

split the commission. You do the initial prospecting; your “expert” comes in at the

presentation and close.

A good Business Insurance Advisor Must Have Two Qualities:

1. Technical Skill

2. Sales Ability

The technical skill can be developed by study, but the sales ability can only be

developed by interviews.

BUSINESS INSURANCE IN MORE DETAIL


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The meaning of “Business Insurance”The term “Business Insurance” includes insurance, which is started with the

object of rendering assistance in the administration of a business, in times of a

crisis.

Business Insurance provides collateral security in times of financial strain. It also

provides funds with which to absorb the shock, which a firm suffers in case of the

death of one of its valued employees, and lastly it assists a person who has an

interest in the business by getting this interest out of the business or acquiring a

more complete interest in the business.

Whatever the situation, available cash is required to prevent tragic losses.

Insurance on the life of the owner is usually the best and often the only means of

making this cash available.

The purpose of “Business Insurance”The purpose of Business Insurance is to protect the viability of the business and

the lives of the people who own it. The protection of the people involved and

their assets is primary of course, but the guarantee of a business to carry on is a

close second.

The human life values in business rest on two abilitiesThe first is a mental ability that is creative and the other is a manual ability or skill

that enables the individual to produce a product that will generate a profit. Some

businesses like professional practitioners require only one, but manufacturing or

a service industry, requires both.

Business Insurance provides us with the ability to protect both of these vital

aspects of a business operation.

The term “Business Insurance” thus refers to insuring human life values of

business owners and employees in order to develop a sound business and to


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help preserve the value of any business interest, as well as to transfer control in

accordance with the owner (s) wishes.

Business Insurance usually falls into one of three categories:1. The funding of business arrangements to enable the survivor(s) to carry on

after the death of the owner or one of the owners – Buy and Sell Agreement

between partners or shareholders.

2. Insurance to provide for recovery of loss of income in the event of business

interruption due to the death of one of the owners. It would be as wise, in

most instances, to insure the human life values, as it is to insure the physical

assets.

3. The third category is one of protection by insuring the employees and their

dependants from the financial hardship that can be created at death, disability

and retirement.

The Insurance we place on the lives of the owners and their employees is used to:1. Transfer ownership of an owner to a new owner, a partner or another

shareholder(s) in the event of death, disability or retirement.

2. Insure Key Persons – Often success of a business rests on the shoulders of

one or more very talented employees. These vital components, if the

business is to continue successfully, should be insured in the event of their

death or disability. Business life insurance can enable key employees to

purchase the business at the owner’s retirement.

3. Employee Benefits - Provides coverage for the business’s most important

asset, the employee.

4. Collateral Security – An insurance policy is of value as a security for a loan or

debt because it may have a definite cash value, which a creditor may secure

to cover the loan.


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The Four D's of a Business Exit1. Death

The issue of the death of a small business owner should be considered during

the start-up of a business.

Unfortunately, during the creation of many buy/sell agreements the issue of

death is only addressed at the urging of a life insurance agent. At the meeting,

your client arbitrarily decides how much insurance they can afford and how much

their company is worth, when in fact they do not know.

2. Disability

Death is not as likely to end the business relationship as disability. Small

business survival will often take prescient over paying a disabled partner. If the

person is important to the business, the financial strain impacts the business and

the family who depends on the income.

3. Divorce

You can imagine the torn feelings if a disability occurs, but what if the partners

cannot get along? How do they split a partnership without financially ruining each

other? It may be complicated by many personalities, some may not even be a

part of the dispute, yet may be affected financially.

4. Departure

The Business Owners may all be happy working together, but what happens if a

partner decides to leave for another opportunity or simply to take life easier. Who

is going to do the work? What is owed the leaving partner? Where is the money

coming from? What happens if the business owner wants to retire?

These are all important considerations for a business exit strategy.

A Fair Buy/Sell AgreementAlthough we will go into more detail later in the course, it is important to mention

it now briefly.


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For the small business owner, each one of the four D’s has special demands on:

family, income, taxes, and transfer of control of assets. An agreement, commonly

called a buy/sell agreement, can be used to handle the four D's.

Creating a Business Exit StrategyOnce your client understands the four D’s, they can include the following actions

in the creation of any business exit strategy:

1. Consider incorporating their small business to legally recognize themselves

and their business as separate entities.

2. Find a method of determining the value of the corporation that can be done at

least annually and will qualify under Canada Revenue Agency (CRA)

standards.

3. Develop an employee benefit plan that will assist with the departure of each

partner in case of death, disability, or retirement.

4. Plan for who retains company ownership and who gets paid off.

The great entrepreneurial dream is to: build a business of your own; bring it to

life; and make it successful. How your clients plan their small business exit

strategy will determine their financial success. Just as building a successful

business takes planning, hard work, and a little luck, so does leaving it.

Business Insurance therefore, rests on the same risks that face families: Death,

Disability, Divorce and Departure (Retirement).

THE EXECUTOR / EXECUTRIX, THE LAW AND BUSINESS INSURANCEIt does not matter what the business structure is, upon death certain

complications occur depending on the form of structure chosen.

Although the size of the company and the amount of assets could be different in

each business form, the services of an executor / executrix will be needed to a

varying degree.

The first obligation of the executor / executrix is to wind-up the business. If the

executor / executrix decide to continue the business they are:


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Personally accountable to the estate and business creditors.

Liable to the heirs of the estate for any losses.

Unable to receive any of the profits.

What are an Executor / Executrix?An estate executor / executrix – or, in Ontario, an estate trustee — is the person

or party named in the last Will and testament of the deceased and who has the

primary responsibility for the administration of the deceased’s estate.

The executor / executrix’s role is to act as the alter ego of the deceased; his or

her fundamental job is to wind up the affairs of the deceased and distribute the

estate to entitled beneficiaries. The duties of the executor / executrix can be

onerous, and one should give consideration to the demands of time and effort

before agreeing to undertake the responsibilities that come with this role.

Handling an estate can be a time consuming project. This is why it is best to

have a professional such as an estate lawyer to work with the executor /

executrix to look after all the details.

Who Should the Executor / Executrix Be?Your executor / executrix should be someone you consider trustworthy. He or

she should know and be in agreement with your wishes regarding bequests to

your heirs.

There are several things to take into account when pondering the question of whom you should choose as executor / executrix:

He or she should be capable of performing the duties required as estate executor

/executrix. If your estate is complex you may consider a professional executor/

executrix - a trust company, chartered accountant or legal advisor.


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If you anticipate controversy or conflict among beneficiaries you may choose

someone other than a family member (or beneficiary) to ensure impartiality.

Your executor / executrix should of course be someone likely to outlive you.

Your executor / executrix should be someone who is a nearby resident so that

duties may be performed without undue inconvenience and delay.

One named in a Will as executor / executrix is under no obligation to serve. Make

sure you have discussed your wishes with your executor / executrix beforehand;

that he or she understands the duties required of them and is comfortable with

the performance of those duties.

Ensure he or she knows your wishes regarding burial arrangements. Appoint an

alternate executor / executrix in case the primary named executor / executrix is

unable or unwilling to perform those duties at the time of your death.

Executor / Executrix ServicesRecommended Approach

An initial meeting between each of the executor / executrix, the estate lawyer (if

one has been selected) is recommended to discuss the scope of the work

required including reviewing the will, the contents of the estate, projected

timelines for administering the estate, areas of concern, asset protection,

documentation required for probate of the will, etc.

Depending upon the complexity of the estate and the wishes of the executor /

executrix, it will be possible to develop a specific list of services to be provided

that can be used as a terms of reference administering the estate.

Lawyer Compensation

The hourly rate for foreseeing over the Executor / executrix or Executrix can be a

per hour rate, or an all inclusive based on many factors. After reviewing the

complexity of the estate and the extent to which the executor / executrix require

help, it will be possible to estimate the number of hours' work that will be involved

in helping to organize and administer the estate.


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Estate Executor / Executrix CompensationAlthough family members and close friends may perform the services of an

executor / executrix or estate trustee without compensation, the courts have

traditionally allowed such persons as well as trust companies to charge for their

services. In fact, most trust companies that agree to act as an executor /

executrix or estate trustee request that the testator execute a fee agreement and

incorporate the agreement by reference into the Will. The courts in estate

matters have developed a scale of charges so that executor / executrix can

determine with some precision the amount of compensation they are likely to

receive. This scale, based on the value of property in the estate, has been in use

since 1975.

Courts allow the executor / executrix a fee of:

2.5% on capital receipts (i.e. where an executor / executrix gathers in capital

assets of the estate, such as real property, the compensation on a $100,000

property would be $2,500).

2.5% on capital disbursements (i.e. where the executor / executrix distributes

capital property to beneficiaries; the compensation on the transfer of a

$100,000 property would be $2,500).

2.5% on revenue receipts (i.e. where the executor / executrix receives

income, such as bank interest).

Where the estate is not distributed immediately, an annual care and

management fee of 2/5 of 1% on the gross value of the estate (i.e. where the

gross value of the estate is $100,000, the annual compensation would be

$400).

This guideline is generally followed but the courts will establish what a fair and

reasonable figure is by looking at the following five factors:

1. The size of the estate,

2. The actual care and responsibility involved,

3. The time occupied in performing the duties

4. The skill and ability shown; and


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5. The success resulting from the administration. The executor / executrix(s) usually need to propose their fee to the beneficiaries

who in turn need to approve it. If the beneficiaries do not agree with the proposed

fee, and it is not possible to negotiate a compromise, the accounts will need to be

passed before the court.

Typically, the Executor / executrix Services costs are paid out of the Executor /

executrix' compensation, so it is worthwhile to estimate the overall value of the

estate and determine how much compensation will be available to the executor /

executrix.

What Information is Required?The following is a summary of some of the pieces of information that will be

important in administering the estate.

Personal Information about the Deceased Full name, date of birth, Date of death, SIN, did the deceased have a will?

Was the deceased?

Married? When? To whom?

Divorced? When? Did the deceased have any known children? List all names

and dates of birth of any children, or additional spouses with different last

name. Did the deceased have any other dependents?

Was the deceased employed at the time of death? Where?

Did the deceased own any businesses? If yes, please provide details. Assets and Liabilities in the Estate Did the deceased own a house or other primary residence? If so, give its

address, and indicate whether there are any other owners listed on the

property's title.

Did the deceased own any cottage property? If so, describe it and indicate

whether any other names appeared on the title.


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Were there any mortgages on any of the above real estate holdings? How

much and with which institution.

List all bank accounts, investment accounts, individual stocks or securities,

etc., owned by the deceased at the time of his/her death and indicate whether

they were jointly owned with anyone else.

List all RRSP / RRIF investment accounts held by the deceased at the time of

his/her death. Did he/she name a beneficiary on these accounts?

List all life insurance policies held by the deceased and indicate who was

named the beneficiary of these policies.

List all credit cards held by the deceased.

List all loans held by the deceased.

List all vehicles owned by the deceased.

Did the deceased own any property, investment accounts, etc., in the United

States?

Did the deceased own any property, investments, etc., in foreign countries

other than the United States?

List any other valuable items owned by the deceased such as antiques,

artwork, furniture, electronic items, etc.

Are there items of sentimental value that will need to be distributed among

family members?

Other Relevant Information Is there anyone who is not specifically named in the will but who might make

a claim against the estate? What would be the grounds of that claim?

Are there any dependents of the deceased who have immediate financial

needs as a result of the death?

If so, who is currently looking after these children and does the will name a

guardian for these children?

Does the client know anything about the beneficiaries of the estate that might

be relevant in executing the estate? (For example, are any of the

beneficiaries mentally incompetent, addicted to drugs or alcohol, etc.?)


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Do they know of any personality conflicts among the beneficiaries that might

have an impact on the responsibilities of the executor / executrix?

Where are the beneficiaries of the will physically located?

Do they have any other concerns about the estate, other than those

discussed above?

Executor / Executrix Interpretation of the Will Describe any and all of the specific bequests listed in the will.

Indicate to whom the "residue" of the estate is directed.

Are there assets (such as household furniture, silverware, etc.) that will need

to be distributed between or among 2 or more beneficiaries?

Executor / Executrix Tasks and Responsibilities Preliminary Arrangements

Obtain deceased's identification and credit cards.

If the deceased was employed at the date of death, advise their employer of

their death.

Locate most recent Will and any codicils or memoranda.

Arrange the funeral service and burial/cremation.

Obtain ten original death certificates from the funeral home.

Review the deceased's financial affairs and begin a list of relevant

information. Complete list as information becomes available and update as

required.

Provide the beneficiaries named in the Will with a copy of the Will or relevant

portions.

Take steps to meet any immediate financial needs of the deceased's

dependants.

Determine whether it will be necessary to probate the will. If so, arrange the

necessary court application and payment of probate fees.

Securing the Assets


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Where the deceased carried on business as a sole proprietor or as the

owner-manager of a corporation, make arrangements for the business to

continue and/or for the security of all physical assets and documents.

Redirect the deceased's mail to your address.

Arrange safe storage of personal valuables and important documents.

If the deceased's home will be vacant, advise the insurance company and

arrange to have someone check the property frequently.

Review property insurance arrangements, maintaining appropriate coverage

and arranging any necessary new or additional coverage.

Cancel any leases, health insurance coverage, driver's license, cable,

telephone, club memberships, subscriptions, credit cards, professional

memberships, and arrange for payment of any refunds.

Advise Canada Pension Plan, Old Age Security Plan, Veteran's Pension and

employer-sponsored pension plans of the deceased's death, as well as

applicable professional groups and associations as required.

If the deceased received benefits under a private insurance policy, contact

the insurer to advise of the deceased's death, and arrange payment of any

sums owing under the policy.

If the deceased was receiving spousal or child support from a spouse or

former spouse, advise the spouse or former spouse of the deceased's death.

If the deceased was the sole or a co-executor / executrix of an estate whose

administration is not complete, or the sole or a Co-Trustee of a trust, advise

the co-executor / executrix or Co-Trustees of the deceased's death and obtain

professional advice as to whether you have any responsibilities.

Assembly, Inventory and Valuation of the Estate

Open a bank account for the estate.

Obtain a valuation as of the date of death for all assets.

Determine the adjusted cost base for tax purposes of each capital property.

Close all of the deceased's bank accounts and transfer balances into the

estate bank account, including business accounts, if the deceased was a sole


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proprietor of a business. Ascertain for each account the balance at the date of

death and the interest accrued to the date of death.

Contact employer(s) to arrange for payment of amounts payable to the estate

as wages or under employee pension plan(s) of which the deceased was a

member.

Apply for CPP death benefit. Assist with the application for CPP survivors'

benefits for eligible dependants, if any.

Clear and close the deceased's safety deposit box.

If the deceased was in a business partnership, obtain a copy of the

partnership agreement to ascertain the estate's entitlements and liabilities.

If the deceased owned shares in a private company, obtain a copy of any

shareholders' agreement to ascertain the estate's rights and responsibilities.

Contact life insurance companies to arrange for payment to you, for deposit in

the estate bank account, of life insurance proceeds payable to the estate.

Have transferred to your name as Executor / executrix (or Trustee, if

applicable) title to all real estate owned by the deceased, and advise all

holders of mortgages or other encumbrances of your name and address.

Consider whether any RRIFs and or RRSPs of the deceased are to be rolled

over to their spouse or other eligible dependants and, if so leave them in

deceased's name.

Contact all financial institutions and brokers etc. to have transferred into your

name as executor / executrix all GICs, investment accounts, bonds, stocks,

and other investments and notify all disbursing agents of your name and

address for receipt of distributions.

Collect any debts or payments on debts owing to the deceased.

If the deceased was a capital beneficiary of an estate or trust not yet

distributed, or an income beneficiary of an estate or trust, contact the

executor / executrix(s) and/or Trustee(s) to advise them of the deceased's

death and to obtain a copy of the Will or trust document. Ascertain any

outstanding entitlements.


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Consider which assets should be sold or liquidated and which should be

retained, and act accordingly.

Paying Debts, Legacies and Tax Compliance If it appears the debts and liabilities in the estate will exceed the assets in the

estate, obtain professional advice to ensure you divide available assets

appropriately among the various creditors of the estate.

Advertise for creditors, in accordance with the applicable law. Include an

advertisement for any appropriate business or trade names.

Pay balances on all credit cards, lines of credit, utility accounts, and owing to

other creditors, including judgment creditors.

Arrange to pay all debts associated with the deceased's business or

partnership as appropriate.

Determine the deceased's income for the year until the date of death,

including capital gains/losses, both realized and deemed.

Determine the tax obligations in Canada and elsewhere, if assets were held

by the deceased outside of Canada.

Ensure the deceased's obligations under any marriage contracts, cohabitation

agreements, paternity agreements, separation agreements or court orders

are paid or provided for. Obtain appropriate releases.

Ensure that the time for dependants to make claims for support from the

estate and/or for the spouse of the deceased to make a claim for a division of

matrimonial property has expired or that such claims have been resolved by

court order or settlement and paid.

Pay all legacies. Transfer specific bequests to beneficiaries. Pay amounts to

which minor beneficiaries and incompetent adult beneficiaries are entitled to

their proper representatives, if any. Obtain a receipt from each beneficiary.

Consider making an interim distribution to residuary beneficiaries depending

on the value of the estate and the status of claims.

Prepare and file all necessary income tax returns to the date of death, and for

any prior years, obtaining professional advice and assistance as needed.


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Prepare and file estate income tax returns for period subsequent to the date

of death.

Request clearance certificates from all relevant tax authorities.

Final Distribution of the Estate Prepare and distribute to the beneficiaries your final report, accounts and claim

for compensation. If approval in writing of all beneficiaries, including the

appropriate representative of any minor, unborn and incompetent adult

beneficiaries, is received, you may take the compensation claimed and proceed

to distribute. If such approval is not forth-coming, bring an application before the

court to pass your accounts and fix your compensation.

Establish any ongoing trusts provided for in the Will, transferring funds and/or

assets to a separate account for each trust. Distribute remaining assets among

residuary beneficiaries specified in the Will.

Estate Administration with Testamentary TrustsA testamentary trust is any trust that is created through the provisions of a Will

and comes into effect only when the testator dies. The assets of the trust are

stipulated in the Will as are the beneficiaries, the length of time the assets will be

held in trust and the terms by which they are to be administered.

Such trusts provide a means of providing for named beneficiaries and have

certain significant tax advantages due to preferential treatment under the Income

Tax Act as well as other non-tax estate planning benefits. The terms of the trust

usually provide for the payment of income and/or capital to the beneficiaries.

The executor / executrix or trustee named in the Will is usually - but not

necessarily - the trustee of the testamentary trust. As such he or she is the legal

owner of the properties within the trust and has full authority over the

management of its assets and may make discretionary allocations among

beneficiaries of the trust unless otherwise stipulated in the Will. The executor /


37

executrix are obligated to make decisions regarding the investment of the trust’s

assets and file tax returns on behalf of the trust.

The most common uses of testamentary trusts are to provide for minor inheritors

- children and grandchildren - and as a means of providing a benefit to a spouse

usually over a spouse’s lifetime.

The trustee manages the assets in the trust for the benefit of the child/children

and distributes the income and capital at the trustee’s discretion. The full assets

of the trust may devolve to the beneficiary when an age of responsibility has

been attained or as stipulated in the Will.

Specifically, the responsibilities of the executor / executrix with respect to the

administration of the estate assets through a testamentary trust may include:

1. Set up the trust fund(s) as directed by the Will.

2. Maintain accounts and records for trusts, and issue regular statements to

beneficiaries.

3. Make income payments to beneficiaries. Exercise discretion—where allowed

under the terms of the Will—to meet the particular needs of beneficiaries.

4. Provide continuous investment management of securities, mutual funds, real

estate and mortgage investments.

5. In the case of the continuation of a private business, serve as a director or

officer, arrange for competent management and provide supervision.

6. Maintain residences, cottage, farm or other property, including the supervision

of repairs and insurance.

7. Be prepared to account regularly to the court (where necessary) on the

administration of the trust.

8. Provide tax advice to beneficiaries and, if necessary, assist beneficiaries with

income tax returns.

9. Make final distribution of estate on death of life tenant(s) or upon beneficiaries

reaching age of entitlement. Final income tax certificate of clearance from the

CRA is necessary before the estate can be wound up.


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10.Consult the estate lawyer regularly throughout this process.

Allowable Investments within a Testamentary TrustThe estate executor / executrix may be responsible for investment of assets

within the testamentary trust. To that end every executor / executrix should have

an investment plan that reasonably assesses risk and return. The executor /

executrix may, at his or her discretion, hire a professional investment advisor to

assist in the development and execution of the investment plan. The executor /

executrix must maintain authority and responsibility for the overall investment

plan and must ensure that the investment plan is followed and revised as

necessary. Under the Trustee Act, an executor / executrix is not liable for

investment losses if the conduct of the executor / executrix that led to the loss

conformed to a plan or strategy for the investment comprising reasonable

assessments of risk and return that a prudent investor could adopt under

comparable circumstances.

The Trust’s funds must be invested as directed by the investment powers spelled

out in the Trust’s deed. Executor / executrix in Ontario usually have one of the

following four investment powers:

1. The executor / executrix must make investments in accordance with the

Trustee Act. The funds of these trusts must be invested in the way set out in

the Trustee Act as amended on June 29, 2001.

2. The funds of the Trust must be invested prudently but investments are not

limited to investments authorized by law for executor / executrixes. The

Trustee Act provides a useful guide to making prudent investments.

3. The funds of the Trust are limited as to kinds of investments allowed, as laid

out in the Trust document the executor / executrix is constrained by these

restrictions in his or her investment choices even if other investments might

provide a higher return.

4. The investment powers are not specified in the Trust document. In these

cases the executor / executrix must follow the requirements of the Trustee

Act.


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TYPES OF BUSINESS STRUCTURESBusinesses are organized into one of three types of endeavour.

1. SOLE PROPRIETORSThe most numbers of businesses in Canada are of the sole proprietorship type.

Most small business (and some not so small) started out as the dreams and

concepts of one person. They are responsible for every aspect of the business,

although after a while they may employ others to carry out these duties.

A sole proprietorship is an unincorporated business that is owned by one

individual. It is the simplest form of business organization to start and maintain.

You can operate a sole proprietorship under your own name, or under another

name you've chosen (as long as you don't add any of the legal designations of

other forms of business, such as Ltd. or Inc.).

An advantage of legally setting up your business as a sole proprietor is that

setting up and administering the business is comparatively easy and

inexpensive. If you choose the sole proprietor form of business and operate it

under your own name, for instance, you don't even have to register your

business.

And as a sole proprietor, you declare your business income on your personal

income tax form, rather than having to file a separate tax form, (as you would

have to do if you choose the corporation form of business).

However, if you set up your business as a sole proprietorship, legally your

business is considered to be an extension of yourself, meaning that you assume

all responsibilities for the business.

This means that as a sole proprietor, you are personally responsible for all the

debts and liabilities of your business. So if your business fails, any of your

assets, including your personal assets, can be seized and used to discharge the

liability you’ve incurred. This personal liability is the biggest disadvantage of


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choosing to operate as a sole proprietorship, although there are others such as a

lack of tax flexibility. The success of the sole proprietorship depends on the

ability of the proprietor to actively run the business. Death causes a problem for

the estate of the sole proprietor. Estate liquidity is often a key concern, because

the estate may not have sufficient cash to cover income tax, lawyer’s fees, and

other immediate expenses while still providing an income for the surviving

spouse and children. Estate liquidity is important because it gives the executor /

executrix time to consider options – sale or transfer of the business – even when

faced the bank and other creditors demanding payment. As you will see, life

insurance provides the necessary cash at death.

The Sole Proprietor shares many of the same succession problems as the

incorporated business, with the added responsibility of being solely responsible

for the business legal liabilities. Since the sole proprietor alone receives the after

tax profits, the sale of his or her business after death is limited to:

A. Family successor or buy-out

B. Employee(s) buy-out

C. Outsider buy-out

Each of these methods has its own inherit danger. “A & B”, may not have the

money and it may be difficult to find an outsider “C” with the desire and the cash

to purchase the business.

The best answer may be to provide for succession of the business with a

properly funded, binding Buy-Sell Agreement using the Criss-Cross method

funded by either direct payment by the Life Insurance Owner or a Split-Dollar

Arrangement. The Insurance proceeds will retain their tax-free status when paid

at death. The split dollar option will certainly benefit the family member or

employee with limited funds.

Advantages of Sole Proprietorship


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1. Easy to set up - simplest and least expensive business organization to set

up.

2. Low start-up costs - sole proprietorship usually has low start-up costs.

3. Minimal registration requirements - certificate of compliance, business

license, registration of business name, and GST/HST registration.

4. Owner has complete control - sole proprietor is boss.

5. Government regulations - minimal government stipulations to follow.

6. Tax advantages - lower tax rate and losses may be applied against other

income of proprietor.

7. Continuity of business - sole proprietorship will continue till business

owner's death or if he/she decides to dissolve business.

Disadvantages of Sole Proprietorship1. Unlimited liability - creditors can look beyond business assets to the

proprietor's personal assets for payments.

2. Difficulty in obtaining start-up costs - the amount of equity that can be

raised is limited to the proprietor's personal wealth.

3. Due to the risk of sole proprietorships - it is often difficult to obtain

financing.

4. Employment insurance benefits - if the business does not succeed the sole

proprietor is not eligible to collect employment insurance benefits.

5. Tax disadvantage - profits must be added to personal income.

6. Termination of business - legal life of business terminates with death of

business owner.

Probably the biggest disadvantage of this type of business arrangement is that

the business ceases at death of the owner. However, if the owner wishes the

business to continue they should:

Stipulate in the Will that the executor / executrix and trustees are not

responsible for the deceased’s prior business debts as well as subsequent

business debts incurred while carrying out their duties.


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The will should state how the business is to be disposed of.

The executor / executrix should execute the Buy-Sell Agreement, if any.

LIQUIDATIONIf the business is to be wound-up, the next decision is whether the business

should be wound-up as a going concern or should be liquidated. The business

assets and good will are deemed to have been disposed of separately.

As a going concern, the problems are:

The need to find an immediate buyer and settle for a fair price.

The need to settle quickly, so as to find proceeds for the estate.

Most wind-ups take on the characteristics of a forced sale and the accounts

receivable and the inventory shrinks to less than 50% of their listed value. The

final conclusion would be an astounding reduction in value.

To offset this, the business owner should do two things:1. Properly draw a will with discretionary powers:

The power to sell the business without restriction and to determine the sale

price and how it is paid; to adjust the terms of sale to fit the buyer’s needs.

To retain and operate the business temporarily until the best buyer can be

found under favourable conditions.

This power would include the right to borrow funds for operating capital or

estate settlement needs.

The power to change the form of business.

To hold the Executor / executrix harmless from personal liability for any

course of action taken.

2. Buy Life Insurance:

If Life insurance is in place, the proceeds will:

Pay estate settlement costs.

Supply working capital for the temporary continuation of business.

Cash to pay creditors and suppliers.


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Offset business liquidation shrinkage.

FAMILY RETENTIONThe best solution to disposal may be to a family member, provided the right

conditions exist:

If there is a history of family ownership and family goodwill exists.

If the business produces a good return on investment.

If the family can provide competent management.

If the estate can provide liquidity for settlement of just debts and business

capital to continue.

If it is more profitable to continue than to wind-up the business.

PRE-ARRANGED SALEA properly drawn, funded Buy-Sell Agreement will guarantee the asset value if an

employee (s) has shown the interest and ability to continue the business. Upon

completion of the agreement, Life Insurance should be purchased to fund the

agreed upon purchase price (or its evaluation process).

Why a sole proprietor needs a buy-sell agreement

As a sole proprietor, your client and their business are intertwined. Their death

could also mean the death of the business.

That death could cause many problems including:

The employees could be out of a job.

Customers and clients could be at a loss for services.

Competitors could take advantage of a weakened business position.

Their estate could be in turmoil because of debts and tax liabilities.

Their heirs might have to settle for below market prices.


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A buy-sell agreement can help the sole proprietorship by naming a buyer at a

pre-agreed price creating stability and peace of mind for their heirs. Flexibility can

create opportunities for a key employee to buy the business through life

insurance. They could also leave the business to a family member.

Premium payments may come from:

The employee’s earnings.

The employer could increase (bonus) the employee’s wages somewhat in

excess of the required premium.

The employer could loan the premiums to the employee and increase the Life

Insurance enough to fund the Buy-Out as well as pay the loan, plus interest at

death.

Funded by a split-dollar agreement:

At death funds are provided by the Buy-Sell.

At retirement prior to death, the cash surrender value can help provide

retirement funds, which are available, because the Buy-out has commenced.

Note: Insurance should stay in force until Buy-Out is complete. It would appear

prudent for the buyer to be insured by the retiree, especially in Sole Proprietor

and Partner Buy-Outs.

Advantages of the insured employer-employee Buy-Sell agreementTo the Proprietor

A buyer for the business is established.

The proprietor is assured that the family will receive a fair price for the

business.

The business is stabilized. Customers, suppliers and creditors, aware that

plans have been implemented for the orderly continuation of the business,


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may be more favourably disposed toward long-term business dealings with

the proprietor.

The services of the employee will be retained. Rather than eventually starting

a competitive business, the employee will be eager to do a bigger and better

job for the present employer.

To the Estate and Heirs

The estate receives full value for the business immediately.

The estate can be settled promptly and efficiently.

The family is relieved of business worries.

To the Employee

No fear of a job loss upon owner’s death.

Guaranteed funds to purchase the business at exactly the needed time.

Removal of the burden of principle payments and interest payments typical of

all other forms of financing.

No need to contend with interference from executor / executrix who must be

chiefly concerned with protecting the interest of the beneficiaries.

HOW DOES A SOLE PROPRIETORSHIP PAY TAXES?A sole proprietorship pays taxes by reporting income (or loss) on a personal

income tax return (form T1). The income (or loss) forms part of the sole

proprietor's overall income for the year.

Their income tax return must also include financial statements or one or more of

the following applicable forms: Statement of Business Activities (form T2124),

Statement of Professional Activities (form T2032).

A sole proprietor must file a personal income return if they:

1. Have to pay tax for the year;

2. Disposed of capital property or had a taxable capital gain in the year;

3. Are required to make Canada Pension Plan payments on self employed

earnings or pensionable earnings for the year;


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4. Received a demand from Canada Revenue Agency (CRA) to a file a return.

This list does not provide all situations whereby the sole proprietor must file a

return. If unsure, contact a tax services office.

HOW DOES GST/HST AFFECT A SOLE PROPRIETORSHIP?As a sole proprietorship, they have to register for the GST/HST if their worldwide

annual taxable revenues exceed $30,000. Sole proprietors have GST/HST

reporting periods for which a return has to be filed. The GST/HST reporting

period is based on their estimated total annual taxable revenues.

2. PARTNERSHIPSA legal form of business operation between two or more individuals who share

management and an expectation of mutual profits from the joint venture. They

may each have similar or different talents. A partnership is a business formed by

two or more co-owners. Like a sole proprietorship, a partnership is easy to form.

Just a simple verbal agreement is sufficient but if money and property is at stake,

a formal agreement should be written. A partnership can be formed either as a

general or limited partnership.

What should be included in the partnership agreement?The partnership agreement should outline the following: objectives of the

partnership; amount of investment of each partner; how are gains/losses divided;

duties/participation of partners; provision for death, retirement, or succession;

any special conditions; and dissolution of the partnership.

If the business will be owned and operated by several individuals, you’ll want to

take a look at structuring your business as a partnership.


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If you decide to organize your business as a partnership, be sure you draft a

partnership agreement that details how business decisions are made, how

disputes are resolved and how to handle a buyout. You'll be glad you have this

agreement if for some reason you run into difficulties with one of the partners or if

someone wants out of the arrangement.

The agreement should address the purpose of the business and the authority

and responsibility of each partner. It's a good idea to consult an attorney

experienced with small businesses for help in drafting the agreement.

Here are some other issues you'll want the agreement to address:

How will the ownership interest be shared? It's not necessary, for example,

for two owners to equally share ownership and authority. However, if you

decide to do it, make sure the proportion is stated clearly in the agreement.

How will decisions be made? It's a good idea to establish voting rights in case

a major disagreement arises.

When just two partners own the business 50-50, there's the possibility of a

deadlock. To avoid this, some businesses provide in advance for a third

partner, a trusted associate who may own only 1 percent of the business but

whose vote can break a tie.

When one partner withdraws, how will the purchase price be determined?

One possibility is to agree on a neutral third party, such as your banker or

accountant, to find an appraiser to determine the price of the partnership

interest.

If a partner withdraws from the partnership, when will the money be paid?

Depending on the partnership agreement, you can agree that the money be

paid over three, five or 10 years, with interest. You don't want to be hit with a

cash-flow crisis if the entire price has to be paid on the spot on one lump sum.

What are the Advantages and Disadvantages of a Partnership at a Glance?Advantages:

Easy to set up - a partnership is easy to form.


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Low start-up costs - partnerships usually have low start-up costs.

Minimal registration requirements - certificate of compliance, business

license, and GST registration.

Government regulations - minimal government stipulations to follow.

Tax advantages - lower tax rate and losses may be applied against other

income of partners.

Continuity of business - partnership will continue till one of the partner’s

death or if one of the other partners decides to dissolve business.

Incorporation – it is not difficult to convert a partnership to a different

business structure.

Disadvantages:

Unlimited liability - creditors can look beyond business assets to the

partner's personal assets for payments.

Difficulty in finding partners – it is difficult to find a compatible partner to do

business with.

Difficulty in obtaining start-up costs - the amount of equity that can be

raised is limited to the partner's personal wealth. Due to the risk of

partnerships, it is often difficult to obtain financing.

Employment insurance benefits - if the business does not succeed the

partners are not eligible to collect employment insurance benefits.

Tax disadvantage - profits must be added to personal income.

Sharing of control/profits - partners need to compromise and agree on

beneficial terms.

Potential of conflict - since everything is shared great potential for conflict.

Termination of business - legal life of business terminates with death of

partner unless partnership agreement states otherwise and the partners

decide to continue the partnership.

THREE GENERALLY ACCEPTED “TESTS” INDICATING A PARTNERSHIP:1. Carrying on business in common with a view to profit.

2. Joint and several liabilities.


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3. Each member of a partnership can bind all members by their business

decisions.

Partnerships can be informal or formal: Commence operation and proceed as “partners”.

Execute a legally drawn “Partnership Agreement”.

The Partnership Acts that exist have many more options than the Incorporation

Act and work in many cases as a default system. The partners are empowered

to draw up agreements, but in the absence of such an agreement, the law has

rules and legal solutions in place.

THERE ARE TWO TYPES OF PARTNERSHIPS:1. Commercial Partnership.

2. Professional Partnership.

1. Commercial PartnershipIn the Common-Law Provinces Commercial Partnerships come in two main

classifications:

A. General Partnerships.

B. Limited Partnerships.

In Quebec the classifications are known as:

Commercial Partnerships (Dealing with Commerce).

General Partnerships (Registered Name).

Anonymous Partnerships (No Name or Firm as such).

Limited Partnerships (General and Special Partners).

Civil Partnerships (Professional, Realtors).


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A. General PartnershipsThe general partners own and operate the business and assume liability for the

partnership, while the limited partners serve as investors only; they have no

control over the company and are not subject to the same liabilities as the

general partners.

Personal liability is a major concern if you use a general partnership to structure

your business. Like sole proprietors, general partners are personally liable for the

partnership’s obligations and debts. Each general partner can act on behalf of

the partnership, take out loans and make decisions that will affect and be binding

on all the partners (if the partnership agreement permits). Keep in mind that

partnerships are also more expensive to establish than sole proprietorships

because they require more legal and accounting services.

All the partners share in gains/losses and all have unlimited liability for all

partnership debts, not just some particular share. The way partnership

gains/losses are divided is described in the partnership agreement.

B. Limited PartnershipsUnless you expect to have many passive investors, limited partnerships are

generally not the best choice for a new business because of all the required

filings and administrative complexities. If you have two or more partners who

want to be actively involved, a general partnership would be much easier to form.

One or more general partners has unlimited liability and runs the business for

one or more limited partners who do not actively participate in the business. A

limited partner's liability for business debts is limited to the amount contributed to

the partnership. This form of organization is common in real estate ventures, for

example.

Each Province, except PEI has a Limited Partnership as well as a Partnership

Act. These Acts define a Limited Partnership as one with one or more General


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Partners and one or more Limited Partners. The Limited Partner’s liabilities are

limited to the amount of investment they provide.

They can contribute capital to the firm as an investment and are entitled to a

return on their investments as well as a portion of the profits, but have no

authority to transact business for the firm or bind it. They can give counsel and

have the right of examination.

PARTNERS CAN CONTRIBUTE Investment capital and credit or cash.

Property or patents.

Skills and labour

There are no legal restrictions on amounts invested. All property, supplied or

purchased becomes partnership property. It is held in Trust for the partners as a

group. There is no ownership of individual property, only partnerships interest in

the firm. Partners are entitled to share in the ownership, profits and liabilities and

debts.

Partnership DetailsIn all the following cases a partner must give a true accounting:

Receipts and expenses received on behalf of the firm.

Profits – combined return on capital and labour.

Private profits – are accountable to the firm for profits arising from any

partnership transaction that resulted in personal profit.

LiabilitiesJointly

Each partner is liable jointly with all the other partners for debts and obligations.

Severally

Each partner is responsible for each other partner’s debts and obligations.

New Partners


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No prior liability, unless by agreement.

Retiring Member

Liable for pre-retirement liabilities, unless agreed upon otherwise. If notice is

given at large to the public, liability for post-retirement obligations ceases at

retirement.

Classes of PartnersGeneral Partner

Has an equal interest to all others.

Active Partner

General partner, listed on the firm name.

Silent Partner

Name does not appear in firm name.

Ostensible Partner

Lends their name and credit, has no financial interest, but is equally liable.

Nominal Partner

Represented as a partner, personally or by the firm as a partner, becomes fully

liable.

Limited Partner

Contributes capital is liable only to the extent of contribution.

Dissolution and Wind-upThe partners cease to carry on business together and this is known as

dissolution. The business if it ceases to do business is said to be “wound-up”.

This involves the liquidation of the Company property, payment of debts and

distribution of the net proceeds.


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The dissolution of the partnership does not automatically lead to a wind-up of the

business. It may be restructured as a new partnership, sole proprietorship or

even as a Corporation, if all parties are in agreement.

Causes of Dissolution

Expiration or Term (Partnership was for a fixed term of months or years),

termination of undertaking, death of a partner, insolvency of a partner, and any

event that makes it unlawful to carry on business.

Actions that initiate Dissolution

Giving notice in accordance with the partnership agreement.

Giving notice at any time, in the absence of an agreement.

Apply for a court order when a partner has been found:

Mentally incompetent.

Permanently incapable of performance.

Prejudicial conduct.

Wilfully breaking the agreement.

The partnership can also be divided if the partnership is being operated at a loss

or other justifiable circumstances.

PARTNERSHIP AGREEMENTSPartnership Agreements provide a basis of agreement and “spell out” in detail

how this particular partnership will operate and what rights the individual partner

will have in relationship to the business and each other.

They should include:

Names of partners and firm.

Nature and place of business.

Terms of partnership.

Capital contribution and distribution.

Management, special duties, financial authorization including Company

books.


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Financial arrangements: expenses, profits and draws.

Agreement specifies resolution of: death, disability, disillusion, expulsion and

retirement.

Sale or assignment of interest.

Methods of evaluation of partnership interest.

Causes and methods of firm wind-up.

Arbitration of disputes, non-competition clause, insurance arrangements and

anything else felt to be vital to the firm’s well being.

How Partnerships are registeredA limited partnership is not deemed to exist until it is registered with the Province

of domicile. Partnership entities are allowed between 15 days to 6 months to

register in various Provinces. Until it is registered it is liable as a General

Partnership.

Registration consists of filing in the appropriate office a declaration signed by all

partners.

A general partnership must contain:

Each partner’s name and address (residence).

Name of the firm and its mailing address.

Date of formation.

A statement specifying that those named are the only partners.

Limited Partnership must include this additional information:

General nature of the business.

Each special partner(s) name, residence and amount of capital subscribed.

Time of dissolution.

A new filing is required when there is a change:

In membership names.


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Firm’s Name.

Dissolution of firm.

Extension of agreement beyond expiry date.

Failure to do so results in Limited Partners being deemed as liable as General

Partners. All partners cease to be members, but remain liable.

TAXATION OF PARTNERS AND PARTNERSHIPSAn interest in a partnership is treated as a Capital Property. It can be acquired

and disposed of by a partner and results in a capital gain or loss.

While a partnership is not taxed as a separate entity, it can enter into

transactions (endeavours) the results of which are taxable incomes or losses for

the individual partners on a “flow through” basis. (Section 96 ITA)

A partnership by itself does not pay income tax on its operating profits and does

not have to file an annual return. Instead, each partner includes a share of the

partnership income or loss on a personal, corporate, or trust income tax return.

Each partner also has to file either financial statements or one or more of the

following applicable forms: Statement of Business Activities (form T2124),

Statement of Professional Activities (form T2032). The partner does this whether

or not he actually received his share in money or in credit to his partnership's

capital account.

A partnership has to a file a partnership information return if, throughout the fiscal

period, it has six or more partners or if one of its partners is a partner of another

partnership.

How does the HST/GST affect a partnership?A partnership is considered to be a separate person and must file a GST return

and remit tax where applicable.


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SOURCES OF PARTNERSHIP INCOME OR (LOSSES)Business IncomeMade on an accrual basis, however for professional partnerships they may elect

to modify the accrual basis and a farming operation can elect the cash method.

The Partnership as a business can deduct:

Business expenses (including depreciation of fixed assets and goodwill).

Capital Cost Allowance

Individual Partners can deduct:

Depletion allowances.

Exploration and development expenses.

Charitable donations.

Capital Cost Allowance (CCA)This is an allowable deduction for depreciation and/or obsolescence of capital

property called a capital cost allowance. It applies usually to buildings and

equipment by class to a prescribed maximum.

The CCA is claimed by the partnership but upon wind-up (or disposition), it is

recaptured by each individual partner.

How income is allocatedPartnership Income is allocated on a “flow through basis: and is based on the

terms of the partnership agreement. The flow through carries with it all the

attributes of source and is taxed at personal Income Tax rates along with non-

partnership income and losses of a similar source and type.

The individual partner is entitled to:Dividend Tax Credit

If an individual has received dividends from a taxable Canadian corporation, they

must be grossed up by one-quarter when they are included in taxable income. A

dividend tax credit equal to two-thirds of the gross-up amount, or 13.33 per cent

of the full taxable amount, reduces the federal income tax payable for the year.


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Dividends from non-resident corporations must be included in income, but are

not subject to either the gross-up or dividend tax credit.

Stock dividends are treated as ordinary taxable dividends, which are added to

the cost-base of the shares held. Unlike stock dividends, stock splits are not

taxable.

Foreign Tax Credit

All Canadian residents are taxed on world income from all sources. Income

earned in other jurisdictions may have tax withheld. Foreign tax paid may be

claimed as a tax credit against Canadian tax, subject to limitations. A separate

credit calculation is required for business income and non-business income for

each country of source.

Canadian Small Business Deduction (CSBD) If the partnership is a Corporation, Canadian-controlled private corporations

(CCPCs) are eligible for a tax rate reduction known as the SBD.

For 2012, this deduction lowers the basic federal tax rate on the first $500,000 of

active business income of CCPCs from 28 per cent to 11 per cent. CCPCs with

more than $15 million of taxable capital employed in Canada are not eligible for

the SBD while CCPCs with between $10 million and $15 million of taxable capital

employed in Canada have reduced access to it.

Further deductions for: Business Loss carryovers.

Charitable Donations.

Expenses incurred earning Partnership Income, but not reimbursed by the

partnership.

Partnership costs incurred in earning dividends from a Canadian Corporation.

Notes:


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Forward averaging and Farm averaging are available to individual partners

after combining partnership and non-partnership income losses.

Partnership may deduct spouse salaries.

Income splitting can be advantageous to Partner’s employee spouses.

Canada Revenue Agency may challenge income and losses attribution to

partnership share if it deems the allocation is made to reduce or postpone

Income Tax.

PARTNERSHIP INTEREST (P.I.)When a partnership interest is disposed of, it creates a Capital Gain (or loss).

Capital gains that have accrued since December 31, 1971 are subject to income

tax. Capital gains are realized when ownership of capital assets is transferred for

proceeds that exceed the original cost and selling expenses.

Only 50% of any capital gains you realize are included in your taxable income. If

the value of property held at December 31, 1971 exceeds the original cost, you

can use this higher amount in computing your capital gain.

Capital gains are also realized for tax purposes on any capital property you own

on your death — at that time, you are deemed to dispose of all your capital

assets at their fair market value.

Partnership Interest = Cost of Partnership + share of gains and capital Contribution – all losses and distribution of profits or gain.

Cost of Partnership Interest (Post Dec.31, 1971) is purchase price plus expenses

incurred to gain it.

Property transferred to the partnership or P.I. that was gifted or inherited is

valued at Fair Market Value (F.M.V.).

Adjustments to Partners A.C.B. (post Dec. 31, 1971)Additions:

Share of Income


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Contribution of Capital

Share of capital dividend received

Share of net proceeds of a Life Insurance Policy (Proceeds less ACB) of a

policy contributed by a shareholder from a liquidated corporation including

policies on their own lives.

Deductions:

Share of Losses

Share of charitable gifts

Share of distribution of profits or capital

DISPOSITION OF PARTNERSHIP INTERESTDisposition occurs at:

1. a sale of P.I. to an outsider:Fair Market Value is generally the sale price. The seller receives the proceeds

as a capital gain or loss and the buyer acquires the P.I. and an A.C.B.

2. At Wind-up:a) If assets are liquidated, the proceeds are treated as proceeds of disposition.

b) If assets are transferred to partner, they are deemed to have been disposed

of at F.M.V.

c) Disposal may result in a partnership gain or loss (including recaptured

C.C.A.). This realization then flows through to each partner.

Note: The two level taxation (Partnership Property and P.I.) can be offset by

Buy-Sell Agreements drawn to cover death, disability, disillusionment and

retirement.

3. Withdrawal of a Partner (Disillusionment or Retirement):a) Partnership interest can be sold to existing partner(s). The amount paid

increases the purchasers A.C.B.


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b) Partnership assets may be allocated to the withdrawing partners in return for

their partnership interest. Since this is in effect a partial wind-up, the tax

implications (Tax at two levels) apply.

4. Death of a Partner:When a partner dies, they are deemed to have disposed of their interest

immediately prior to death, and the proceeds are equal to the F.M.V. less the

A.C.B. This will result in a taxable Capital Gain or a Deductible Capital Loss in

the year of death plus the immediately preceding year.

The P.I. passes to the Deceased Estate and becomes the Cost Base to the

estate.

If the Partnership is subsequently: Wound-up, the FMV received by the estate becomes the proceeds for the PI.

If sold, the sale price becomes the proceeds of disposition.

If the PI is transferred, the beneficiary’s ACB is equal to the FMV credited to

the deceased partner.

4. Property Transfers:a) Transfer of property passes at the FMV.

The transfer of property passes at the FMV as to partnership property and

interest. This results in a Capital Gain or Loss to the partners. Under specified

conditions this result can be transferred.

b) Transfer of Capital Property to the Deceased’s Spouse.

If both the deceased and their spouse are Canadian residents, the Capital

Property transfers to the spouse (or spousal trust) at the deceased’s ACB. In

that event no Capital Gain or Loss is realized, but is deferred. The legal

representative can elect; however, to precipitate the Capital Gain or Loss, which

will affect the terminal tax returns.


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c) Transfer from a Partnership to a Sole Proprietor

Three months after a Canadian Partnership is wound-up, if a single partner

carries on the business, there will be a deemed realization at FMV of the

Partnership Interest transferred. The disposition will be received by the

partnership as a gain or loss.

Professional PartnershipLittle needs to be said of a Professional Partnership, since they operate in similar

fashion to their General or Limited counterparts. The main difference is how the

partnership interest and their assets are evaluated at death or withdrawal from

the practice.

The major problem is the valuation of goodwill. The deceased or withdrawing

partner generated part of the goodwill, but the remaining growth was from the

contribution of the remaining partner(s).

The purchase price of the partnership interest depends on the following four

values:

1. Tangible assets.

2. Share of account receivable generated by deceased partner.

3. Value of work in progress.

4. Goodwill.

Several solutions or a combination are available to fund the buy-out. A properly

funded, binding Buy-Sell Agreement will go a long way to guarantee the desired

result.

Lump sum payment for the full value.

Continued payments for accounts receivable and work in progress until value

received.


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Agreed upon percentage of the firm’s income for a certain number of years.

DEATH AND THE PARTNERSHIPFor ease of understanding, we will consider the partnership to have two partners,

one of which has just died. (Little would change for several partners)

It is no longer a partnership and the survivor becomes a “Liquidating Trustee”.

The business as the partners knew it ceases to operate.

The surviving parties (survivor and the Estate of the deceased) cannot: Draw Income

Enter into new contracts

Accept new orders

Borrow money

Business can only be carried on until it has been wound-up, reorganized or

liquidated.

If the surviving partner decides to carry on, they are responsible for: Any new losses

Paying interest on the deceased capital to the estate

Paying one-half of all profits earned to the estate

Without a Partnership Agreement, the survivors are faced with one of several

choices. If the deceased did not have a valid will, the process is further

complicated. Since any partner or their representatives can apply to the courts to

wind-up the partnership, a successful organization could be ordered into a forced

liquidation or sale.

If reorganization is elected, there are several options available, each with its own

concerns:

1. Surviving partner buys out the heirs:


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Requires agreement on price.

Method to finance the purchase.

2. Heirs buy-out the surviving partner: Requires agreement on price.

Requires method to finance purchase.

Requires the experience to operate the business.

May have to employ a manager.

Exposes them to unlimited liability.

Disposed partner may become competitor.

3. Sale of Business to suitable outsider: Purchaser must be acceptable to surviving partner.

Must have the cash or access to the cash to buy in.

Is available now and has the talent.

The purchase is a risk to all parties involved.

4. Rollover to surviving heirs. Heirs must obtain clearance from estate executor / executrix after debts;

taxes and administrative costs have been paid.

Heirs must have the time and talent.

Since this is a new arrangement, a new partnership balance must be found.

5. Disability buy-out. Resembles the above and is outlined in Business Insurance and Disability.

Problem Solved!A properly funded, binding Buy-Sell Agreement written prior to the death of a

partner provides for the most welcome alternative to the above. It produces a

willing knowledgeable buyer with cash who must buy-out the deceased

partnership interest.


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It is wise to protect the working arrangement and succession of the business with

a Buy-Sell Agreement.

PLAN FOR CHANGES IN PARTNERSHIP OWNERSHIP WITH A BUY-SELL AGREEMENTYour partnership agreement isn't complete unless it governs what happens when

a partner leaves the business. Most business partnerships start with the best

intentions, but not every partnership ends that way. That's why buy-sell

agreements are so important. A buy-sell agreement is a contract between

business partners that dictates who can buy a departing partner’s share of the

business and establishes a fair price for the partner's stake. The agreement also

describes how to determine a company's value if all the owners decide to sell.

Many business partners overlook a critical element of their partnership

agreement that can save them both money and angst: buy-sell provisions.

When you create buy-sell, or buyout, provisions for your partnership agreement,

you and your partners can prepare for events that have been the downfall of

more than a few successful small businesses -- namely, the death, divorce,

bankruptcy, or retirement of one of the owners.

What Events Should You Cover Under a Buy-Sell Agreement?Your buy-sell agreement will instruct and remind you and your partners how you

have agreed to handle the sale or buyback of an ownership interest when one

partner's circumstances change.

Typically, the events that trigger a buy-out of a partner's interest under a buy-sell

agreement are:

An attractive offer from an outsider to purchase a partner's interest in the

company,


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A divorce settlement in which a partner's ex-spouse stands to receive an

ownership interest in the company,

The foreclosure of a debt secured by an ownership interest,

The personal bankruptcy of a partner, or

The disability, death, or incapacity of a partner.

Partner BuyoutA typical buy-sell agreement covers a potential sale or buyback situation when a

partner leaves a business. The agreement may specify to whom a departing

partner can sell (usually they must sell to someone else in the business), and it

also sets a fair price for their share of the business. This protects the remaining

partners by guaranteeing that the departing partner will sell their share to a

suitable owner, and it protects departing partners by assuring them a fair price for

their shares of the business.

Business Buyoutit’s not easy to determine a fair price in advance. A company's owners must

agree on a price that, years from now, will represent their firm's true value.

This is obviously a calculated risk: You cannot know today if your business will

prosper in the years ahead or struggle to make a profit. Still, picking a fair price

or a formula for setting the buyout price is essential.

There are five common ways to determine a buyout price: 1. Fixed price

The partners simply agree on a price for the business and put that number in the

buy-sell agreement.

2. Book value

The partners set a price based on the net value of the company’s assets minus

its liabilities as shown on its most recent year-end balance sheet.

3. Multiple of book value


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If a small business has been up and running for several years, its real value is

probably greater than its book value. The multiple-of-book-value method takes

into account intangible assets that add to a company's worth such as patents,

copyrights, brand names and trade names.

4. Capitalization of earnings

This method measures a company's value based on its past profits. This works

well for established companies with a solid financial history.

5. Appraisal

A buy-sell agreement can stipulate that, at the time of a buyout, a professional

business appraiser will establish the company's value.

No matter which buyout method you and your partners choose, it's important to

have an agreement to avoid future disputes or lawsuits that may delay a

transaction or affect the value of your business.

Types Of Agreements The Buy-Sell agreements can take several forms, such as:

An agreement between the business and the individual owners (stock

redemption agreement or stock retirement plan).

An agreement between the owners (a cross purchase or "criss-cross"

agreement).

An agreement between the owners and key person, family member or outside

individual (a "third party" business buy-out agreement).

A combination of the foregoing.

Basically, these are either a Cross Purchase Plan or Entity Purchase PlanCross Purchase Agreement

Each partner agrees with each of the other partners to purchase his or her share

of the business at the time of death. The Partners may take out a life insurance


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policy on the life of the other(s) to fund the obligation. At the time of the first

death, the surviving partner(s) collects the insurance proceeds. The survivor

then uses the insurance proceeds to buy the business share from the deceased's

family. This type agreement can be used with two or more partners.

Entity Purchase Plan

Each partner agrees that upon death his or her share of the business will be sold

back to the business. The business may buy life insurance policies on each of

the partners to fund the obligation. At the death of a partner, the business

collects the insurance proceeds and buys the business interest from the

deceased partner's heirs.

Transfer Restrictions The agreements commit the owners not sell ownership in the business prior to

death, without first offering it to the persons named in the agreement. This is

called a right of first option or refusal.

Life Insurance to Fund the AgreementWhole life insurance has generally been used to fund a buy-sell agreement. In

recent years, Universal Life has been also been used for funding.

The life insurance industry also offers "Business Value Life Insurance" with a

death benefit determined by the value of the business rather than the terms of

the policy. The death benefit can grow as the value of the business grows.

Premiums may also be higher as the death benefit increases.

Purchase Price The purchase price can be based on an appraisal, set predetermined price, book

value, or a formula of assets and earnings. Payment Terms Agreements may

provide that the price will be paid in cash, in instalments, or other means. You

may also select a combination of cash and instalments. Of course, if the

insurance proceeds are sufficient to pay the price in cash many agreements


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provide that the purchase is to be paid in full in cash from the insurance

proceeds.

In the event that no legal contract exists, such as a Buy-Sell Agreement, Sole

Proprietorships and Partnerships will, by law, be shut down and the assets sold,

piecemeal or intact.

The owner(s) with foresight would certainly want to guarantee that their estate

would benefit from the business interest they laboured to create, rather than the

proceeds of a forced liquidation.

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP?Advantages

1. Easy to set up - a partnership is easy to form.

2. Low start-up costs - partnerships usually has low start-up costs.

3. Minimal registration requirements - certificate of compliance, business

license, and GST registration.

4. Government regulations - minimal government stipulations to follow.

5. Tax advantages - lower tax rate and losses may be applied against other

income of partners.

6. Continuity of business - partnership will continue till one of the partner’s

death or if one of the other partners decides to dissolve business.

7. Incorporation - not difficult to convert a partnership to a different business

structure.

Disadvantages

1. Unlimited liability - creditors can look beyond business assets to the

partner's personal assets for payments.

2. Difficulty in finding partners - difficult to find a compatible partner to do

business with.


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3. Difficulty in obtaining start-up costs - the amount of equity that can be

raised is limited to the partner's personal wealth. Due to the risk of

partnerships, it is often difficult to obtain financing.

4. Employment insurance benefits - if the business does not succeed the

partners are not eligible to collect employment insurance benefits.

5. Tax disadvantage - profits must be added to personal income.

6. Sharing of control/profits - partners need to compromise and agree on

beneficial terms.

7. Potential of conflict - since everything is shared great potential for conflict.

8. Termination of business - legal life of business terminates with death of

partner unless partnership agreement states otherwise and the partners

decide to continue the partnership.

3. THE CORPORATIONFor many years now there has been a definite trend toward the corporate form of

doing business. The need for specialization of talents, wider ownership of the

business organization and increased capital needs lead many businesses to

select the corporate form instead of the proprietorship or partnership form.

A corporation is a business created as a distinct legal entity composed of one or

more individuals or entities. Starting a corporation is somewhat more

complicated than starting the other forms of business organizations, but not

greatly so for a small business.

Forming a corporation involves preparing articles of incorporation (or a charter)

and a set of bylaws. Canadian firms can be incorporated under either the federal

Canada Business Corporation Act or Territorial Law.

Should you incorporate federally or provincially?Provincially incorporated companies are legal entities in the province or territory

in which it's incorporated. The shareholders are not protected by limited liability if

it does business outside of its home province. Provincial incorporation is less

expensive than being federally incorporated.Business Insurance Principles – SSC #6


What should be included in the bylaws?The bylaws are rules describing how the corporation regulates its own existence.

For example, the bylaws describe how directors are elected. These bylaws may

be a very simple statement of a few rules and procedures, or they may be quite

extensive for a large corporation.

CORPORATIONS COME IN TWO TYPES:Private and public corporations may be incorporated federally under the Canada

Corporations Act. A firm operating nationally or in several provinces may find

this advantageous. A federally incorporated business must still register in each

province in which it does business.

A Public Corporation is a legal entity that has a distinct personality for tax and

legal status in addition to its owners. Its original shareholders who provide the

start-up cash or assets in exchange for their shares start it. The Corporation may

eventually be owned by a large number of shareholders.

Although the shareholder losses all rights to the cash or assets they invested, the

shares they purchased convey new rights. These include voting rights, the right

to elect directors, right to dividends (a share of profits), the right to buy and sell

their stock, the right to examine the Corporation books and finally to share in any

surplus on the winding up of the Company.

The shareholders liability is limited to the total sum of their financial investment,

except in the case of fraud or wrongdoing.

In a professional Corporation the shareholders are subject to unlimited liability in

the event of malpractice.

As a legal entity, the Corporation is subject to its own separate tax account with

the Federal, Provincial and Municipal authorities.


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Private Corporations or closely held Corporations are Corporations that are

identical to Public Corporations except that the shares are owned by a very

limited number of shareholders, which usually personally manage the Company.

The Company may appear identical to a partnership with the major exceptions

being limited liability of the shareholders and its status as a separate legal entity.

STARTING A CORPORATIONSetting up a Corporation requires the application for a Charter or Articles of

Incorporation to be filed with the appropriate Provincial or Federal Regulators.

This is a contract that exists between the legal jurisdiction, the incorporations and

their shareholders. When approved a charter is granted.

Federally incorporated companies are considered legal entities anywhere in

Canada. Therefore, the shareholders are protected by limited liability anywhere

in Canada.

Articles of IncorporationThe articles of incorporation should include the following:

Corporation’s name;

Location of its Head Office;

List of incorporations including addresses and numbers of shares held and

price paid for shares.

Authorized capital, classes of shares holding the capital number of shares of

each class and its issue price;

Any restrictions to sale of shares or classes of shares.

List of first directors including addresses.

Its intended life;

Its business purpose, and

Any additional information required by law.


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This information must be supplied to regulators in the jurisdiction in which the

firm is incorporated.

By-laws

To set the new Company in motion, the Board of Directors at their first meeting

must present and choose the Corporation By-laws. This details the code of

regulations, instructions for operation, duties and obligations of the Company and

its officers.

By-laws usually include:

Date and place of the Shareholders Annual Meeting.

How special shareholder meetings are called.

Method of voting and choice of proxies.

How elections are held, terms of office for shareholders.

Order of business at shareholders meeting.

Duties and powers of shareholders.

Authority and duties of officers.

Corporate policy on dividends and debt repayment.

Rules on stock transfer.

Method of amending the Charter and By-law.

HOW IS A PUBLIC CORPORATION MANAGED?The management of a company is divided into two parts. One is the day-to-day

operation and management of a company that is provided by the officers of a

Company and the other is broad long rang management that is overseen by the

Board of Directors and the Shareholders.

Shareholders do not exercise direct control, unless they are Officers or Directors

(or both), but indirectly since they elect the Directors. Shareholders do have a

great interest in the financial well being and direction of the Company since they

have and are part owners of the company assets because of the shares they

own and this gives them certain basic rights.


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Shareholders rights include:

Sale or transfer of shares.

Pre-emptive right (purchase of new share issues proportionate to what they

already own).

Dividends and profits (in proportion to the number of shares they own).

Inspection of Company’s books and financial statements.

Attend shareholders meetings and exercise their “common stock” right to

vote.

Annual General Meeting (AGM)The Shareholders Annual Meeting is usually held once a year. A Shareholder

has one vote for each voting share they hold (Common Shares usually).

If they do not attend they can vote by proxy, which is written permission for

someone else to vote for them.

Shareholders give direction by voting on a variety of issues presented such as:

Election of Directors

Appointment of Auditors

Approval of Pension Plans

Increasing Capital Shares or Bond Issues

Amendments to the Charter

Since proxy casts the vast number of votes therefore control generally resides

with the Officers and the Directors of the Company. If the Company Officers

(President etc.) control the proxies, they control the Board, not vice versa.

The Board of Directors is elected by the Shareholders and is the managing body

of the Corporation. The authority they exert rests in them as a group and not

individually. The Shareholders elect the Board and the Board elects the Officers,

thereby delegating the management authority to them.


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Limitations to the Board’s power are outlined in Law, legal procedure and in the

Corporations Charter and By-laws.

Official decisions are outlined in the Board’s Minute Book (motions forwarded

and passed, defeated or tabled). These minutes give authority to a variety of

transactions, including the corporate accountant’s authority for entries regarding

the Corporate Capital.

Directors Duties and Obligations Include: Set up and oversee the general business policies.

Establish Dividend Policies.

Appoint and terminate Senior Officers and establish their salaries and

bonuses.

Authorize Contracts.

Oversee financial transactions like loans.

Authorize Corporate Litigation.

Directors can be held liable if: They fail do disclose personal business dealings with the Company.

Voting on issues in which they have a personal interest.

Personal use of Company funds.

Violating the Company Charter or the rights of Shareholders.

Declaring illegal dividends.

Cancelling Capital Stock Subscriptions.

Making false reports.

Issuing stock at a discount (unless permitted by law).

Transferring Company property in the event of bankruptcy.

Company OfficersThe number and type of Company Officers are set out in the By-laws.

They may include:

President and/or Chairman of the Board (one of which will be CEO).


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Vice President(s) who oversee division or operations.

Secretary who records minutes and may combine duties with the treasurer.

Treasurer who handles finances and financial records.

Controller who hands on financial oversight.

A variety of other positions named in the by-laws.

HOW IS A PRIVATE CORPORATION MANAGED?Private Corporations operate much in the same manner as Public Corporations,

except that their shares are owned by a small number of shareholders, maybe

one or two in number.

A basic conflict arises frequently between majority and minority shareholders

interest. Major Shareholders are active in management and want to reinvest

money and increase their income, whereas minority shareholders are not active

in the business, but may wish to increase their income through dividends, profits

and by limited executive incomes.

THE CANADIAN BUSINESS CORPORATIONS ACT (CBCA)Corporations operate under the regulation authority of the CBCA, but Financial

Sector intermediaries have their own rule markers (Act). The purpose of the Act

is to protect the interest of shareholders, creditors, management and the public.

The objectives of the Act are as follows: An exact statement of Rights of the concerned parties and their rights to

judicial intervention.

Eliminates administrative discretion and ensures that all decisions are open to

appeal through the courts.

Disperses with excess formalities, the remainder of which is simple and

codified.

All regulations must be published 60 days prior to the effective date in the

Canadian Gazette.

Provides for minimum legal and accounting jargon.


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The Act Contains Interpretation section dealing in part with definitions.

Provides the Corporation with the rights and powers of a natural person,

except as limited by its charter.

Third parties are protected even if the transaction is contrary to the Charter,

leaving shareholders, directors and officers bound by the restrictions.

Requirements that a Corporation must maintain a Canadian office whereby the

Charter By-laws and records are maintained. Records may be kept in Microfiche

or computer records as well as written form.

Corporate rights to re-purchase their own shares by using corporate funds equal

to the amount that their surplus exceeds liabilities and capital. The corporation

must cancel their re-purchased shares and reduce their capital account

accordingly.

What does Corporations Canada do?Corporations Canada will check that your articles are complete and in proper

form, and that the proposed name is acceptable. If so, the Director will issue a

Certificate of Incorporation showing the date of receipt of your articles as the

effective date of incorporation. If you prefer, you may request a later

incorporation date instead.

A notice setting out your corporation's name and incorporation date and other

information will appear on Corporations Canada's website.

Please note that Corporations Canada processes applications for incorporation

within established timeframes, based on the method by which documents are

submitted.

HOW ARE CORPORATIONS FINANCEDTypes of Financing


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Starting a new corporation or expanding its operation requires capital. In a small

(and not so small) corporation, the initial financing may come from personal

capital sources or the original planners may go to the merchant bankers and the

marketplace for funds. After a company has been in operation for some time

they generally have a track record that they can trade on.

Long Term FinancingGenerally, long term financing is accomplished through a new share issue (equity

financing) or the issue of various types of bond or debenture.

Bonds are a contractual arrangement for borrowing money secured by a pledge

of assets:

First Mortgage Bonds – Secured by assets such as buildings, land and

machinery.

Second Mortgage Bonds – Security pledged, already has been pledged for a

prior issue.

Collateral Trust Bonds – Secured by other securities the company owns.

Debentures – Bonds secured by the general credit of the organization.

Convertible Bonds or Debentures – Are issued with warrants.

Interest Bonds or Debentures – Pay interest only when a profit is earned.

Financing ProvidersLarge corporations go to the market place (stock market or brokerage market)

and an investment dealer will underwrite the issue or act as a commissioned

agent and sell to other investment dealers. The amounts raised are usually in

the millions of dollars.

Small corporations go to the banking industry or merchant bankers and get

financing, based on the securities they can provide. The amounts they can

borrow are generally much smaller that large scale bond issues.

Equity FinancingShare issues are handled much like bond issues.


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Shares are issued as:1. Initial Capital

Initial capital is usually from common shares. The common shareholder shares in

a portion of the remaining profits. Of course, the shareholder also has a vote and

can elect directors. The net earnings of a corporation are either paid out as

dividends or held as retained earnings and used for re-investment and

expansion.

The size of the dividend is regulated by how much net profit, board of directors’

intent, but also may have some restrictions due to bond guarantees as to

minimum levels of retained earnings.

Common Share Ownership has the following advantages:

Right to share in growth of earnings and assets.

Right to sell shares.

Right to vote on Board of Directors and certain issues.

Limited personal liability.

Right to attend company meetings and examine the books.

Right to an annual report.

Receives a tax credit on Canadian Corporate Share dividends.

Disadvantages:

Last to receive a portion of assets on wind-up of a company.

Dividends are only paid when declared and is related to amount of net

earnings.

Dividends (common shares) are paid after bond interest, and preferred share

dividends.

2. Preferred Shares

Preferred Shares rate higher than common, but are less guaranteed than bonds.

They are less an indication of company ownership and geared more towards

investment income.


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Dividends are usually fixed by the share certificate, but affected by profitability of

the company and the intent of the board of directors.

Bonds (a debt) come before preferred shares at the wind-up of the company.

3. Internal Financing

Self-financing can take place from retained earnings and is the most secure

method of expansion. It works particularly well in small corporations, but some

Public Corporations have grown to huge proportions using their own money.

4. Alternate Methods of Financing

Short Term Financing – Less than 1 year – banks and trade credit.

Commercial Paper – A form of unsecured promissory notes that are sold at a

discount.

Account Receivables – The sale of accounts receivable for immediate cash.

The borrowing of money using the A/R as collateral.

HOW DOES A CORPORATION PAY TAXES?A corporation must file a corporation income tax return (form T2) within six

months of the end of every taxation year, even if it doesn't owe taxes. The

corporation must also attach financial statements to the tax return.

How does the GST affect a corporation?A corporation must register for GST if its taxable worldwide annual revenues are

more than $30,000. Corporations have reporting periods for which a return has to

be filed.

ADVANTAGES OF A CORPORATION:1. Ease of transferring ownership - ownership (represented by shares of

stock) can be readily transferred.

2. Limited liability - shareholders are not held accountable for corporation's

debt, obligations, or acts of the company over and above the amount paid or

owed for the purchase of shares.


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3. Unlimited life - the corporation does not cease to exist, unlike sole

proprietorships or partnership, with the death of shareholders because it is a

separate legal entity.

4. Access to capital - corporations can raise capital by issuing and selling new

shares in the company or by issuing debt.

5. Tax advantages - lower tax rates.

DISADVANTAGES OF A CORPORATION:1. Must pay taxes – a corporation is a legal entity and must pay taxes.

2. Double taxation - monies paid to shareholders in dividends are taxed again

as income to those shareholders. This means that corporate profits are taxed

twice at the corporate level when they are earned and again at the personal

level when they are paid out.

3. Added costs - additional costs are incurred due to the complexity and legal

requirements of incorporating.

4. More regulated - due to all legal and taxation requirements.

4. CO-OPERATIVESPeople around the world have been forming co-operatives for more than 150

years. In Canada, co-operative history began before the turn of the century. Our

first co-operatives were creameries and grain growers' co-operatives, but

gradually more types were added including retail stores, credit unions, a range of

agricultural co-operatives, and community service co-operatives such as

recreation, health clinics and daycares.

Co-operatives range in size from small agricultural co-operatives to large

industrial enterprises. They form a system of stable and enduring enterprises

which make tremendous contributions to the economic and social health of

communities, and provide thousands of jobs. They operate side-by-side with

privately-owned businesses operated as sole proprietorships, partnerships and

investor-owned corporations. Co-operatives are legally-established organizations

which conform to our provincial laws. They are financed by selling shares to


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members, issuing securities approved by the Co-operatives Securities Board,

and by debt capital.

A co-operative is a corporation organized by people with similar needs to provide

themselves with goods or services or to make joint use of their available

resources to improve their income.

Their business structure ensures: All members have an equal say (one vote per member, regardless of the

number of shares held);

Open and voluntary membership;

Limited interest on share capital;

Surplus is returned to members according to amount of patronage.

There is no requirement to incorporate as a co-operative in order to run your

business collectively and cooperatively.

However, it is illegal in Ontario to use the word "co-operative" in connection with

the name of an enterprise unless the group is incorporated under the Co-

operative Corporations Act.

There are three important differences between co-operatives and other types of business: 1. Purpose,

2. The way financial surplus or profit is used or distributed, and

3. The ownership and control structure.

PURPOSE OF CO-OPERATIVESThe purpose of a private business, whether it is the corner drugstore or the

largest manufacturer, is to make a profit for its owners on the capital they have

invested. This is done by offering goods and/or services for sale to the public.

The purpose of a co-operative business is generally to provide its members with

goods and/or services, usually at competitive prices. Savings, which belong to

the members, are fundamentally different from profits on invested capital. For


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example, a member of a retail co-operative may receive his or her saving through

lower prices at the time of purchase, as in a direct-charge co-operative, or

through a patronage refund at the end of the year. The amount of the refund

depends on the total surplus earned by the co-operative, and on the dollar-value

of a member's purchases. Refunds, also called patronage refunds, are in

proportion to a member's use of the co-operative. The greater the use, the

greater the potential savings.

DISTRIBUTION OF SURPLUSIn a private business, profit is the money left after all expenses are paid. Profits

or earnings can be reinvested in the business, or distributed to the owners in

relation to the number of shares they own. Shares are a specific portion of the

capital of a co-operative.

The more money invested, the greater the potential for profit. In the case of an

investor-owned corporation, the part of the profit which is returned to

shareholders is distributed as dividends paid on shares. Such dividend rates are

normally set by a corporation's board of directors.

In a co-operative business, any surplus at the end of the fiscal year is allocated

to members' accounts as a patronage refund. All or part of these funds may be

paid to the members, or kept in the business as additional members' shares or

loans. In either case, the amount allocated to a member is in proportion to that

member's use of the co-operative. In a worker co-operative, patronage dividends

are normally based on hours worked and, in effect, increase the members'

wages.

WHERE IS THE CONTROL IN A CO-OPERATIVE?In most businesses, control is in the hands of the owners, whether one or many.

Further control is determined by the individual or group which owns the most

voting shares.


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In an investor-owned corporation, shareholders vote according to the number of

shares they own. The more shares, the more votes. If individual shareholders

cannot vote or choose not to, they may assign their voting rights to other

individuals who then become the absent shareholders' proxies. Thus, even in

large corporations, if one person owns enough shares (either directly or by

proxy), that person can effectively control the operation.

In a co-operative, each member has only one vote regardless of the amount of

money that member has invested in the co-operative, and proxies are not

permitted. Thus, the control structure of a co-operative is democratic.

Another important difference in the ownership and control structures of private

and co-operative businesses is the way boards of directors are chosen. In non-

incorporated private businesses, individual partners usually exercise direct

control.

Public and private investor-owned corporations have boards of directors who

guide the affairs of the corporation in the interests of the shareholders. They are

elected by the shareholders, and those with the most shares exercise greater

control. The directors may or may not be shareholders themselves.

Incorporated co-operative businesses and organizations also have boards of

directors. These directors are members (or delegates in the case of federations

or other co-operatives with delegate structures) who have been democratically

elected by other members or delegates.

LOSS OR LIABILITY PERTAINING TO THE CO-OPERATIVEIn a sole proprietorship or partnership, the owner or partners are legally liable for

all debts, operating losses or other liabilities incurred by their business. In all

corporations, including co-operatives, the liability of shareholders is limited to the

value of the shares they hold.

COMMUNITY SERVICE ORGANIZATIONS (NON-PROFIT CO-OPERATIVES)


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Organizations such as child care centres, community recreation halls, and

community health clinics may be incorporated as community service co-

operatives, non-profit corporations or business corporations. Boards of directors

are elected in all cases. In co-operatives, the principle of "one member-one vote"

is mandatory. In non-profit corporations, voting may be restricted to one member-

one vote, but the restriction must be specified in the articles or bylaws. In

business corporations, voting is based on the number of shares a person holds.

In community service organizations, whether co-operatives or charitable non-

profit corporations, any surplus must be retained within the organization or

donated to another non-profit organization or co-operative. It is never distributed

to members or shareholders.

If the co-operative is set up as a community service co-operative (non-profit), it

must be noted as a restriction in the articles.

It could be worded as "this organization is established as a community service

co-operative, and any surplus resulting from the yearly operation shall be

transferred to reserve for future use and no part of the surplus shall be payable to

any member."

INFORMATION ON FEDERAL CO-OPERATIVESFederal co-operatives fall under the Canada Cooperatives Act. Federal co-

operatives are registered through the Corporations Directorate of Industry

Canada. Fees are now $200 when submitted on-line and $250 for all other

means.

To apply for incorporation, at least three persons, or one or more cooperative entity, must send the Director, appointed under the Canada Cooperatives Act, the following: Articles of Incorporation, Form 3001

Notice of Registered Office, Form 3003

Notice of Directors, Form 3006


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A declaration signed by all the applicants that, after incorporation, the co-

operative will be organized and operated and will carry on business on a co-

operative basis, and that forms 3003 and 3006 filed with articles of

incorporation indicate that the cooperative, when it comes into existence, will

be in compliance with the Act.

If the proposed co-operative is a non-profit housing co-operative or a worker co-

operative, a declaration signed by all the applicants that the co-operative will be

in compliance with either Part 20 or 21 of the Canada Cooperative Act. Part 20

includes specific provisions applicable to non-profit housing co-operatives and

Part 21 includes specific provisions applicable to worker co-operatives.

A name search report, specifically a Canada-biased NUANS report. The name

must not be confusing with other names, including corporate names, and it must

include the word "co-operative", "cooperative", "co-op", "coop", "coopérative",

"united" or "pool" or another grammatical form of any of those words.

Anyone wishing to form a co-operative association under federal law must

complete certain forms. The following fees are required for document filings and

services rendered.

Note: The Canada Cooperatives Act came into force on December 31, 1999.

The Canada Cooperatives Act replaced the Canada Cooperative Associations

Act on that date. The new Act modernizes the corporate governance rules

relating to non-financial cooperatives and is partly modeled on the Canada

Business Corporations Act.

The legislation provides cooperatives with greater flexibility in responding to the

demands of the competitive domestic and global marketplace. Cooperative

principles and values are set out clearly in the Act. Any actions a cooperative

takes must be consistent with these principles.


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The Canada Cooperatives Act governs the incorporation of federal co-operatives.

Co-operatives are business organizations owned by the members who use their

services. They are a separate legal entity which may enter into contracts in their

corporate name. Generally, each member of a co-operative is entitled to one

vote. Surpluses are shared by members in proportion to the degree they use the

services. The members elect the board of directors and decide what should be

done with any profit that is generated in the co-op.

ADVANTAGES OF CO-OPERATIVES:1. Owned and controlled by members

2. Democratic control: one member, one vote

3. Limited liability

4. Profit distribution (surplus earnings) to members in proportion to use of

service;

5. Surplus may be allocated in shares or cash possibility of development of

conflict Between members

DISADVANTAGES OF CO-OPERATIVES:1. Longer decision making process

2. Requires members to participate for success

3. Extensive record keeping necessary

4. Less incentive to invest additional capital

5. FRANCHISESAn important step in the small business start-up process is deciding whether or

not to go into business at all. Each year, thousands of potential entrepreneurs

are faced with this difficult decision. Because of the risk and work involved in

starting a new business, many new entrepreneurs choose franchising as an

alternative to starting a new, independent business from scratch.

Definition


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When it comes to starting a business, many people think of buying a franchise as

a shortcut to success. While there is some truth to this, not all franchises are

created equal, and not everyone is cut out to be a franchisee.

Franchising in its truest form is the art of taking a successful operation and

multiplying this success by selling to entrepreneurs the concept method and

usually the supplies that will create the identical success, many times over.

One of the biggest mistakes that business people make is to hurry into business,

so it's important to understand their reasons for going into business, and to

determine if owning a business is right for them.

If they are concerned about the risk involved in a new, independent business

venture, then franchising may be the best business option for them.

But they should remember that hard work, dedication, and sacrifice are essential

to the success of any business venture, including franchising.

A Legal and Commercial RelationshipA franchise is a legal and commercial relationship between the owner of a

trademark, service mark, trade name, or advertising symbol and an individual or

group wishing to use that identification in a business. The franchise governs the

method of conducting business between the two parties. Generally, a franchisee

sells goods or services supplied by the franchisor or that meet the franchisor's

quality standards. Franchising is based on mutual trust between the franchisor and franchisee. The

franchisor provides the business expertise (marketing plans, management

guidance, financing assistance, site location, training, etc.) that otherwise would

not be available to the franchisee. The franchisees bring to the franchise

operation the entrepreneurial spirit and drive necessary to make the franchise a

success.

There are primarily two forms of franchising:


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http://sbinfocanada.about.com/library/glossary/bldef-franchise.htm

1. Product/trade name franchising and

2. Business format franchising.

In the simplest form, a franchisor owns the right to the name or trademark and

sells that right to a franchisee. This is known as "product/trade name

franchising." The more complex form, "business format franchising," involves a

broader ongoing relationship between the two parties. Business format

franchises often provide a full range of services, including site selection, training,

product supply, marketing plans, and even assistance in obtaining financing.

PROBLEMS OF THE FRANCHISORSFranchisors must convince themselves, purchasers of any shares and their

financial institutions, that their products or services can be franchised. They

must produce a detailed business plan to secure financing and to attract anyone

interested in buying their franchising their name.

Questions that the bank will want answered prior to providing financing to franchisors Are others successfully offering the product or service to be franchised

already?

How much of its own capital has the franchisor already committed to the

enterprise?

Are premises already owned or secured on long-term leases?

What length and quality of experience do the franchisor and its key persons

possess?

Can the franchisor show a background of entrepreneurial achievement?

Will the franchisees make substantial money commitments? Will the

franchisees be required to give personal guarantees to the franchisor? Will

franchisees be required to possess at least one-third of their start up costs?


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Will the franchisor commit itself to the point of providing buy-back guarantees

to its franchisees?

After the franchisor passes the scrutiny of the above questions, they will

usually provide loans to finance the purchase of land, construction of

buildings, acquisition of inventory, machinery and equipment, as well as any

other capital expenditures.

A bank will want from the franchisee Personal guarantees from shareholders and their spouses.

General insurance coverage on all physical assets, with benefits assigned to

the Bank.

Assignments as required under the General Security Agreements, chattel

mortgages or perhaps debentures secured by the assets of the corporation.

Agreements from the franchisor to buy-back inventory on a formula basis.

Commitments from the franchisor that the franchisor will make every effort to

replace a failed franchisee with another in the same premises.

Life insurance on the franchisee (s) at least sufficient to cover term and

operating loans, with policies assigned as collateral to the Bank.

At least a minimum percentage of all costs provided from the franchisee’s

own pocket.

Profit and loss statements on a regular monthly or quarterly basis

Audited financial statements, annually

An agreed upon loan ceiling and a maximum debt / equity ratio.

ESTATE PROBLEMS IN FRANCHISINGFranchisor Repayment of debt, last expenses, capital gains and income taxes on death.

Franchisors will usually execute estate freezes in order to split income, capital

gains and capital losses with family members.

Provide for buy-sell agreements between themselves and employees,

competitors, family members, partners and fellow shareholders.


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FranchiseesEven though the business operation is usually incorporated, the franchise

arrangement is essentially dependent on the commitment of individuals to the

franchisor. Not all agreements will allow the sale of the operation to others.

Some may even define would be purchasers as well as a detailed formulae for

determining the price at which a business may be sold.

Questions to be answered when setting up an estate plan Does the franchise agreement specify buy-back procedures on a franchise’s

insolvency, disability or death?

Will the franchisor buy back inventory, machinery and equipment, etc.; at their

full wholesale values? If not, what discount formula will be applied?

May the franchisee transfer the franchise to heirs? Under what conditions?

Are termination fees payable on bankruptcy, disability, death or other

disposition of the business by a franchisee?

This type of business arrangement may not be suitable for everyone, but it will

certainly appeal to some business individuals.

Caution should be exercised as to what franchises an individual wishes to

consider. Your prospects and clients should always be advised to seek legal

advice when entering into a franchise contract.

HERE ARE DEFINITIONS OF SOME KEY FRANCHISE TERMS: Acknowledgement of ReceiptThis document states that you received the legal franchise documents on a

certain date.

Advertising Fee/Fund


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A fee or fund paid by franchisees for advertising expenditures. The fee usually is

less than 3 percent of the franchisee's annual sales and is in addition to royalty

fees.

ArbitrationAn alternative to a lawsuit in which a neutral third party hears both sides to a

dispute and renders a decision.

Area Development RightsOptional right to develop multiple individual franchises in a specific geographic

area.

AssetsOwned property that can be used for payment of debt.

Balloon PaymentA final payment due at the end of a loan.

Business PlanA detailed document that defines a business's development goals and plots how

and where the resources needed to accomplish the objectives will be obtained

and used.

CollateralAssets used as security for a loan in the event of default.

Company-ownedAn outlet owned directly by the corporation.

DBADBA stands for "doing business as." For example, if the name of your corporation

is XYZ Co. but is known to the public as ABC Co., your business would be

classified as XYZ Co. d/b/a ABC Co.

DefaultBusiness Insurance Principles – SSC #6


Failure to meet terms of an agreement.

Designated SupplierExclusive suppliers of products and/or services used in the franchisee business.

Distributorship: A business authorized to sell the products or services of a parent

company. This is usually a manufacturer/reseller relationship, not necessarily a

franchise.

Earnings ClaimsStatements of sales, profit or other financial information made by the franchisor

regarding their franchisees.

Exclusive TerritoryA specifically defined geographic area in which franchisees retain the sole right

to operate.

FranchiseA legal and commercial relationship between the owner of a trademark, service

mark, trade name, or advertising symbol and an individual or group wishing to

use that identification in a business.

Franchise AgreementThe franchise contract.

FranchiseeA franchise owner.

Franchise FeeThe amount of money you need to pay the franchisor to purchase a franchise

concept.


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Buying a franchise can be a quick way to set up your own business without

starting from scratch. But there are also a number of drawbacks.

ADVANTAGES OF BUYING A FRANCHISE1. Lower Failure Rate - When you buy a franchise, you are buying an

established concept that has been successful. Statistics show that

franchisees stand a much better chance of success than people who start

independent businesses; independent businesses stand a 70 to 80 percent

chance of NOT surviving the first few critical years while franchisees have an

80 percent chance of surviving

2. Help with Start Up and Beyond - You get a lot of help starting your business

and running it afterwards. Many franchises are, in fact, turnkey operations.

When you buy a franchise, you get all the equipment, supplies and instruction

or training needed to start the business. In many cases, you also get ongoing

training, and help with management and marketing. Your franchise will reap

the benefit of the parent company’s national marketing campaigns, for

instance.

3. Buying Power - Your franchise will benefit from the collective buying power

of the parent company as the franchisor can afford to buy in bulk and pass

the savings along to franchisees. Inventory and supplies will cost less than if

you were running an independent company.

4. Star Power – Many well-known franchises have national brand-name

recognition. Buying a franchise can be like buying a business with built-in

customers.

5. Profits - A franchise business can be immensely profitable. (Think of

MacDonald’s and Tim Horton’s, for instance.)

DISADVANTAGES OF BUYING A FRANCHISE1. Their Way or The Highway - The main disadvantage of buying a franchise is

that you have to do it their way - sometimes right down to the way the napkin

holders are filled. As a franchisee, you are not the one actually running the


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show, and some franchisors exert a degree of control that you may find

excruciating.

2. Ongoing Costs – Besides the original franchise fee, royalties, a percentage

of your franchise’s business revenue, will need to be paid to the franchisor

each month. The franchisor may also charge additional fees for services

provided, such as the cost of advertising.

3. Ongoing Support? - Not all franchisors offer the same degree of assistance

in starting a business and operating it successfully. Some are just start-up

operations – and everything after start-up is up to you. Others make promises

of ongoing training and support that they don’t follow up on.

4. Cost - Buying into well-known franchises is very expensive. If this is your

choice, you will have to have extremely deep pockets or the ability to arrange

the necessary financing.

5. Shark-Infested Waters - Buying a little-known, perhaps inexpensive

franchise can be a real gamble. Just because a business is offering

franchises is no guarantee that the franchise you buy will be successful. In

some cases, franchising is the business; all the franchisor is interested in is

selling more franchises. Whether or not the individual franchises are

successful is irrelevant to them. This is not to say that no little known,

inexpensive franchises are worthwhile, but just a reminder that any franchise

you're thinking of buying needs to be investigated carefully.

TO BE OR NOT TO BE – A REVIEW OF INCORPORATION Some sole proprietorships and partnerships are larger than some incorporated

Canadian businesses. There are both tax and non-tax reasons for considering

the corporate form of business organization.

Many factors influence the decision of whether to incorporate or not, but the

following are some of the many advantages.

There are some potential significant tax benefits of incorporation for an active Canadian business:


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A tax deferral is possible by retaining earnings in the corporation.

The $750,000 capital gains exemption (effective March 19, 2007)

available for sale of a small business can only be claimed on the sale

of shares of a qualifying corporation and not for the sale of a sole

proprietorship or a partnership.

However, a corporation is a separate taxpayer with its’ own tax rates. A

corporation which is incorporated in Canada and is controlled by private

corporations or individuals who are Canadian residents will normally qualify as a

"Canadian-controlled private corporation".

This status allows it to claim the small business deduction, a reduction of the

normal corporate income tax rate on the first $500,000 of a corporation's annual

taxable income earned from carrying on an active business in Canada.

The tax advantage which the shareholder of such a corporation with active

business income will enjoy is the ability to defer the payment of some income tax.

A corporation eligible for the small business deduction pays federal tax of 11%

on its first $500,000 of taxable income. The remaining tax, which is paid by the

shareholders upon receipt of dividends from the corporation, is deferred until

dividends are paid. When dividends are paid the balance of the tax is levied on

the Shareholder.

The deferral is significant, especially for a taxpayer in the top marginal tax

bracket, and means that approximately twice the funds are available for

investment, since in effect tax money is being retained in the corporation and

invested.

Investment IncomeThe Canadian tax system is designed, in certain instances, to be neutral between

incomes earned personally or through a corporation. As a result, after the

shareholder pays tax on his dividends, the total tax burden will be approximately

the same amount he would have paid if the income was received directly.


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This neutrality means that for non-active income of a corporation such as

investment income or capital gains, the corporation effectively pays tax at the

same rate as an individual. Accordingly there is no material tax deferral possible

on passive income.

Capital Gains ExemptionThe other main tax advantage to incorporation of a small business is the ability to

claim the $750,000 capital gains exemption on a sale of the business.

The complex rules provide, in effect, that to claim the exemption the shares must

be of a Canadian-controlled private corporation, at least 90% of the assets of

which are used in an active business carried on in Canada, or a holding company

which owns such shares.

Where the shares qualify, the owner can sell them and the first $750,000 of

capital gains are exempt from tax. Note that the exemption applies to the

individual and not the corporation. Once an owner has claimed $750,000 of

capital gains exemption, the exemption is no longer available on a sale of other

qualifying shares.

Limited LiabilityLiability protection is generally the main non-tax reason to incorporate, and is the

main motivation for most incorporations to take place.

While a sole proprietor or partner in a general partnership has unlimited liability to

creditors of the business, shareholders of a corporation have no such risk.

Without the protection of limited liability most entrepreneurs would not take the

risks of going into business.

Director's LiabilityWhile shareholders have limited liability, directors of a corporation are subject to

various liabilities. These include liabilities for unremitted source deductions,

unremitted P.S.T and G.S.T. and certain environmental liabilities.


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Furthermore, passive directors who may not be involved in running the business

may still be subject to certain of these liabilities. Passive directors should be

aware of what the corporation is doing and should ensure that director's liability

insurance is in place to protect them.

DISADVANTAGES OF INCORPORATIONLosses TrappedAny business which is not operating at the break even point should not

incorporate from a tax point of view, although it may be sensible to incorporate

when considering limiting liability. A loss earned in a corporation cannot be

transferred to its shareholders. Conversely, owners of an unincorporated

business would be able to utilize losses which they incurred against other

sources of income or against future earnings. Losses which arise in a corporation

can only be offset against earnings in that corporation.

Double TaxationA potential double taxation trap exists if an active business earns too much profit.

Corporate profits from active business income in excess of $500,000 per year

are taxed at full corporate rates. Integration of the personal and corporate tax

systems does not work at that rate, resulting in an element of double taxation.

Therefore all income in excess of $500,000 should usually be paid out of the

corporation by way of salary or bonus to avoid this double taxation trap.

If the corporation requires the funds for operations, the income can be paid to the

shareholder and then loaned back to the corporation. The salary receipt is,

however, taxable to the shareholder.

Other Disadvantages


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A corporation is also subject to strict rules governing the taxation of shareholder

benefits, such as shareholder loans or the use of a company car.

Finally, the transfer of the unincorporated business or partnership to a

corporation will be a taxable transaction unless a rollover agreement is made and

the appropriate election is filed with Canada Revenue Agency. Provided such an

election is made, however, the transaction can be free of any immediate adverse

tax implications.

Life InsuranceWhen a proprietorship or a partnership incorporates, it is generally a good idea to

consider any life insurance needs. Upon the incorporation of a partnership, a

shareholders agreement will normally be entered into, often requiring funding

through life insurance. An incorporated sole proprietorship may not have any

additional life insurance requirements, but in certain circumstances, such as the

entrepreneur being a single parent, additional life insurance to pay for any

deemed capital gains incurred on the death of the shareholder might be

appropriate.

BUSINESS FINANCIAL STATEMENTSAll business operates using financial statements. Not only do these statements

tell us the Company’s current position, but to some extent they also reveal the

financial history as well as forecast the future.

As important as this information is, just as important these documents give us,

besides the obvious ones such as Buy-Sell Agreements and Key Personnel

Insurance, Corporate needs we might have missed had we not examined them.

Lastly they often provide us with key information that will help locate the

additional premiums that will be required.


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There are many types of financial statements, but we will only examine three of

them. All other statements seek to interpret the date revealed by them.

The Main Financial Statements are:1. The Balance Sheet

2. The Income Statement

3. The Statement of Retained Earnings

1. THE BALANCE SHEETA balance sheet is a snapshot of a business’ financial condition at a specific

moment in time, usually at the close of an accounting period. A balance sheet

comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and

liabilities are divided into short- and long-term obligations including cash

accounts such as checking, money market, or government securities. At any

given time, assets must equal liabilities plus owners’ equity. An asset is anything

the business owns that has monetary value. Liabilities are the claims of creditors

against the assets of the business.

What is a balance sheet used for? A balance sheet helps a small business owner quickly get a handle on the

financial strength and capabilities of the business. Is the business in a position to

expand? Can the business easily handle the normal financial ebbs and flows of

revenues and expenses? Or should the business take immediate steps to bolster

cash reserves?

Balance sheets can identify and analyze trends, particularly in the area of

receivables and payables. Is the receivables cycle lengthening? Can receivables

be collected more aggressively? Is some debt uncollectible? Has the business

been slowing down payables to forestall an inevitable cash shortage?


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Balance sheets, along with income statements, are the most basic elements in

providing financial reporting to potential lenders such as banks, investors, and

vendors who are considering how much credit to grant the firm.

The Basic Formula for a Balance Sheet is:ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

ASSETS Assets are subdivided into current and long-term assets to reflect the ease of

liquidating each asset. Cash, for obvious reasons, is considered the most liquid

of all assets.

Long-term assets, such as real estate or machinery, are less likely to sell

overnight or have the capability of being quickly converted into a current asset

such as cash.

Assets are listed in order of their liquidity:

1. Current

2. Fixed

3. Other

1. Current assets Current assets are any assets that can be easily converted into cash within

one calendar year. Examples of current assets would be chequing or money

market accounts, accounts receivable, and notes receivable that are due within

one year’s time.

Cash

Money available immediately, such as in chequing accounts, is the most liquid of

all short-term assets.

Accounts receivables

This is money owed to the business for purchases made by customers,

suppliers, and other vendors.


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Notes receivables

Notes receivables that are due within one year are current assets. Notes that

cannot be collected on within one year should be considered long-term assets.

2. Fixed assets Fixed assets include land, buildings, machinery, and vehicles that are used in

connection with the business.

Land

Land is considered a fixed asset but, unlike other fixed assets, is not depreciated,

because land is considered an asset that never wears out.

Buildings

Buildings are categorized as fixed assets and are depreciated over time.

Office equipment

This includes office equipment such as copiers, fax machines, printers, and

computers used in your business.

Machinery

This figure represents machines and equipment used in your plant to produce

your product. Examples of machinery might include lathes, conveyor belts, or a

printing press.

Vehicles

This would include any vehicles used in your business.

Total fixed assets

This is the total dollar value of all fixed assets in your business, less any

accumulated depreciation.

3. Total assets


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This figure represents the total dollar value of both the short-term and long-term

assets of your business.

Other Assets

Other assets cover a wide variety of items not expected to be converted into

cash within one year, and are not used actively to produce the company’s

products.

Other assets can include items such as:

Cash value of life insurance policies.

Prepaid expenses or deferred charges in excess of one year.

Investments in other companies.

Mortgages receivables.

Intangible assets including leases, patents, copyrights, franchises,

trademarks and goodwill.

LIABILITIES AND OWNERS’ EQUITY This includes all debts and obligations owed by the business to outside creditors,

vendors, or banks that are payable within one year, plus the owners’ equity.

Often, this side of the balance sheet is simply referred to as “Liabilities.”

1. Accounts payable This is comprised of all short-term obligations owed by your business to

creditors, suppliers, and other vendors. Accounts payable can include supplies

and materials acquired on credit.

Notes payable

This represents money owed on a short-term collection cycle of one year or less.

It may include bank notes, mortgage obligations, or vehicle payments.


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Accrued payroll and withholding

This includes any earned wages or withholdings that are owed to or for

employees but have not yet been paid.

2. Total current liabilities This is the sum total of all current liabilities owed to creditors that must be paid

within a one-year time frame.

Long-term liabilities

These are any debts or obligations owed by the business that are due more than

one year out from the current date.

Mortgage note payable

This is the balance of a mortgage that extends out beyond the current year. For

example, you may have paid off three years of a fifteen-year mortgage note, of

which the remaining eleven years, not counting the current year, are considered

long-term.

3. Owners’ equity Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up

of the initial investment in the business as well as any retained earnings that are

reinvested in the business.

The investment is represented by Capital Stock and is evidenced by share

certificates issued by the Company.

The Company may be authorized to issue more than one class of shares. The

shares may have a par or stated value, but current practice and Corporate Law

may dictate that no par value or fixed value is shown. The Directors acting in the

best interest of the Company then will set Price.


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The Canada Business Corporation Act (CBCA) provides that all proceeds from

the sale of “without par value shares” must be credited to the Company’s capital

stock account.

Common stock

This is stock issued as part of the initial or later-stage investment in the business.

4. Retained earnings These are earnings reinvested in the business after the deduction of any

distributions to shareholders, such as dividend payments.

The amount listed is derived from the statement of retained earnings and

represents the accumulation of all earnings retained since the Company’s

incorporation.

Shareholders equity cannot be considered to be the true new worth of a

Company, due to several accounting functions.

Depreciation reduces the income for the year and in turn reduces the retained

earnings. As a result, any under valuation of fixed assets is compensated for an

under valuation of retained earnings.

5. Total liabilities and owners’ equityThis comprises all debts and monies that are owed to outside creditors, vendors,

or banks and the remaining monies that are owed to shareholders, including

retained earnings reinvested in the business.

Liabilities are a firm’s obligation to outsiders and represent debt, which must be

paid at some time in the future. They represent creditor’s claims on the asset

values of the business and with the exception of the mortgage obligation, are not

attached to any one’s individual assets, but to the company’s assets as a whole.

The assets supplied by the creditor may already have been sold and converted

into cash or accounts receivable.


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Liabilities are listed on the balance sheet at the current value owed, not due, plus

accumulated interest. Liabilities can be categorized as either current or long

term. The more liquid the liability, the higher it is placed in the liability section.

Other current liabilities can include:

Next 12 month mortgage payments, Income and corporate taxes,

CPP, EI, WCB payments as well as employees contributions to registered,

pension plans owing but not yet forwarded,

Dividends owing but not paid.

Note on DepreciationDepreciation is an accounting technique that spreads the cost of an item over its

expected usual life.

This annual cost of the items is deducted as an expense on the income

statement and deducted on the balance sheet. At the end of each accounting

period, the asset value is reduced by the annual depreciation cost.

Depreciation can be calculated as a straight line or declining balance method.

Class of assets shows the accumulative depreciation and the dollar amount

shown on the balance sheet represents the remaining un-depreciated part of the

cost, not the fair market value.

In some classes of assets, such as a building, the depreciation listed for a current

period, may in fact be offset by a current increase in the fair market value due to

inflation.

2. THE INCOME STATEMENTThe Income Statement may also be known as:

The profit and loss statement

The operating statement

The statement of earnings

The statement of revenue and expense


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Where as the balance sheet targets the financial condition of a business at a

given date the income statement indicates the financial performance during the

same period.

An income statement, otherwise known as a profit and loss statement, is a

summary of a company’s profit or loss during any one given period of time, such

as a month, three months, or one year. The income statement records all

revenues for a business during this given period, as well as the operating

expenses for the business.

What are income statements used for? You use an income statement to track revenues and expenses so that you can

determine the operating performance of your business over a period of time.

Small business owners use these statements to find out what areas of their

business are over budget or under budget. Specific items that are causing

unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply

expenses. Income statements can also track dramatic increases in product

returns or cost of goods sold as a percentage of sales. They also can be used to

determine income tax liability.

It is very important to format an income statement so that it is appropriate to the

business being conducted.

Income statements, along with balance sheets, are the most basic elements

required by potential lenders, such as banks, investors, and vendors. They will

use the financial reporting contained therein to determine credit limits.

1. Sales The sales figure represents the amount of revenue generated by the business.

The amount recorded here is the total sales, less any product returns or sales

discounts.


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2. Cost of goods sold This number represents the costs directly associated with making or acquiring

your products. Costs include materials purchased from outside suppliers used in

the manufacture of your product, as well as any internal expenses directly

expended in the manufacturing process.

Gross profit

Gross profit is derived by subtracting the cost of goods sold from net sales. It

does not include any operating expenses or income taxes.

3. Operating expenses These are the daily expenses incurred in the operation of your business. In this

sample, they are divided into two categories: selling, and general and

administrative expenses.

Sales salaries

These are the salaries plus bonuses and commissions paid to your sales staff.

Collateral and promotions

Collateral fees are expenses incurred in the creation or purchase of printed sales

materials used by your sales staff in marketing and selling your product.

Promotion fees include any product samples and giveaways used to promote or

sell your product.

Advertising

These represent all costs involved in creating and placing print or multi-media

advertising.

Other sales costs

These include any other costs associated with selling your product. They may

include travel, client meals, sales meetings, equipment rental for presentations,

copying, or miscellaneous printing costs.


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Office salaries

These are the salaries of full- and part-time office personnel.

Rent

These are the fees incurred to rent or lease office or industrial space.

Utilities

These include costs for heating, air conditioning, electricity, phone equipment

rental, and phone usage used in connection with your business.

Depreciation

Depreciation is an annual expense that takes into account the loss in value of

equipment used in your business. Examples of equipment that may be subject to

depreciation includes copiers, computers, printers, and fax machines.

Other overhead costs

Expense items that do not fall into other categories or cannot be clearly

associated with a particular product or function are considered to be other

overhead costs. These types of expenses may include insurance, office supplies,

or cleaning services.

4. Total expenses This is a tabulation of all expenses incurred in running your business, exclusive

of taxes or interest expense on interest income, if any.

5. Net income before taxes This number represents the amount of income earned by a business prior to

paying income taxes. This figure is arrived at by subtracting total operating

expenses from gross profit.

6. Taxes This is the amount of income taxes you owe to the federal government and, if

applicable, provincial government taxes.


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7. Net income This is the amount of money the business has earned after paying income taxes.

Income Statements Made Easy Although these mnemonics may not account for every line on an income

statement, these two will help you remember the major parts, and the order in

which they appear. The word "SONAR" identifies the major sales and earnings.

The word "EDIT" summarizes major expenditures.

As you look vertically down the first row of letters, you should discover the

spelling of "SONAR." The vertical set of letters in the second column spells out

"EDIT."

S = Sales (gross)

O = Operating income (before interest and taxes)

N = Net earnings

A = Available earnings for common stock

R = Retained earnings

E = Less expenses (general operating expenses and cost of goods sold)

D = Less depreciation

I = Less interest

T = Less taxes

The Importance of the Income Statement to InvestorsThe income statement provides the investor with much insight to the company's

revenues and expenses. You can identify where the company spends much of its

income and compare that to similar companies. You can also compare a

company's performance with previous years. Most importantly, the income

statement tells an investor if the business is profitable. If the company continually

makes substantial profits, it indicates to bondholders that it is a stable company.

The savvy investor will compare income statements of similar companies.


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3. STATEMENT OF RETAINED EARNINGSRetained earnings statement shows the accumulation of that portion of the

shareholders equity derived from profitable operation since the corporation

commenced business.

What are Retained Earnings?Retained earnings are the amount of money that a company keeps for future use

or investment. Another way to look at it is as the earnings left over after dividends

are paid out.

Generally, a company has a set policy regarding the amount of dividends it will

pay out every year. In this case, 70% of net earnings become retained earnings.

Calculation of retained earnings:

Retained Earnings = Net Earnings – Dividends

To better understand retained earnings, we need to explain the nature of

dividends. Dividends are cash payments made to the owners or stockholders of

the company. A profitable year allows them to make such payments, although

there generally are no obligations to make dividend payments. When a company

has both common and preferred stockholders, the company has two different

types of dividends to pay.

Every publicly traded company has common stockholders. Dividend payments to

common stockholders are optional and up to each company to decide how (or if)

it will make such payments. A firm may decide to plow all of its earnings into new

investments to promote future growth. Preferred stockholders are in line before

common stockholders if a dividend is declared. However, not all companies have

preferred stockholders.

As an investor, it is important to know what a company does with its net earnings.

An investor needs to know the company's dividend and retained earnings policies

to decide whether the company's objectives are in line with the investor's.


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If the company pays dividends it is income-oriented. If it retains earnings for

future expansion, it is growth-oriented.

Knowing the sources of income and expenses is necessary when reading an

income statement. Two helpful mnemonic devices have been created out of the

major components of the income statement.

Cash Flow StatementsCash flow statements report a company’s inflows and outflows of cash. This is

important because a company needs to have enough cash on hand to pay its

expenses and purchase assets. While an income statement can tell you whether

a company made a profit, a cash flow statement can tell you whether the

company generated cash.

A cash flow statement shows changes over time rather than absolute dollar

amounts at a point in time. It uses and reorders the information from a company’s

balance sheet and income statement.

The bottom line of the cash flow statement shows the net increase or decrease in

cash for the period. Generally, cash flow statements are divided into three main

parts.

Each part reviews the cash flow from one of three types of activities:

1. Operating activities

2. Investing activities; and

3. Financing activities.

1. Operating ActivitiesThe first part of a cash flow statement analyzes a company’s cash flow from net

income or losses. For most companies, this section of the cash flow statement


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reconciles the net income (as shown on the income statement) to the actual cash

the company received from or used in its operating activities.

To do this, it deducts from net income any non-cash items (such as depreciation

expenses) and any cash that was used or provided by other operating assets

and liabilities.

2. Investing ActivitiesThe second part of a cash flow statement shows the cash flow from all investing

activities, which generally include purchases or sales of long-term assets, such

as property, plant and equipment, as well as investment securities. If a company

buys a piece of machinery, the cash flow statement would reflect this activity as a

cash outflow from investing activities because it used cash. If the company

decided to sell off some investments from an investment portfolio, the proceeds

from the sales would show up as a cash inflow from investing activities because

it provided cash.

3. Financing ActivitiesThe third part of a cash flow statement shows the cash flow from all financing

activities. Typical sources of cash flow include cash raised by selling stocks and

bonds or borrowing from banks. Likewise, paying back a bank loan would show

up as a use of cash flow.

A Corporation will usually issue their statement showing two successive periods

for comparison, and may show the dividends as a dollar value per share.

The total accumulated retained earnings do not normally reflect a cash position,

but reflects the value of equipment, machinery or inventory and other assets.

Instead of paying out all revenue each year as received in salaries or bonuses,


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the portion is retained to replace equipment and inventory and to finance

expansion.

A Financial Statement can be expressed as in the following example:Any Company Inc.

Statement of Retained Earnings for year ending April 1, 2012a) Retained earnings beginning of the year $30,250

Income for the year $60,250Sub total $90,500

Less Dividends ($15,400)Retained earnings end of year $75,100

b) Income for the year $60,250Less Dividends ($15,400)

Earnings retained during the year $44,850Add previous year balance $30,250Year-end retained earnings $75,100

Financial RatiosFinancial reports by themselves provide only a part of the financial picture of a

corporation. From these reports are drawn a series of financial ratios which

when viewed several years in succession and compared, if possible, with similar

companies’ ratios will clarify the company’s position and point out weaknesses

and financial strengths.


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The list of ratios is long and detailed, but the most important ones and their debt

paying ability are as follows:

Working Capital = Current Assets Divided by Current LiabilityCurrent Ratio = Current Assets are $39,500

Current Liabilities are $15,200

Therefore $39,300 / $15,200 = 2.6

This can be expressed as 2.6 to 1 or simply 2.6.

Generally, a 2 to 1 ratio is considered to be a minimum safety requirement.

Quick Ratio

If we eliminate the long-term assets and liabilities, we obtain the figures for a

quick ratio, which indicates the company’s ability to pay immediate debts.

Quick Ratio = Quick Assets = 31.500 = 2.1 or just 2.1 Quick Liabilities 15,200 1

Cash Ratio

If a truly immediate picture is required, only assets that could be taken to the

bank and converted to cash are considered.

Cash Ratio = Cash + Marketable Securities =.60 Current Liabilities 1

Cash Flow

Another method of analyzing a company’s ability to pay debt is cash flow. Cash

flow is best-expressed and understood in terms of inflow and outflow. Inflow is

increased by additional sales, new investments and borrowing. The timing of

payments, replacing of equipment or postponing expansions, can control outflow.

Performance Ratios


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Profit originates from new business obtained. Since any decline is vital to the

survival of the company and any increase is indicative of future growth, the

tracking of successive years of cash flow and the ratios obtained from this type of

record keeping is vital to the company manager and investors.

Profit exists as the result of spending less than the revenues taken, and therefore

prudent managers are constantly examining, managing and forecasting what

these figures will be.

Ratio of Operating Cost to RevenueSince the profitability of a Company depends on it spending less than it earns,

both of these figures are of key importance, if they are examined in subsequent

years, the company’s direction can be determined.

2011 2012 ChangeRevenue 275,000 275,000 .00%

Operating Costs 135,000 145,000 +7.00%

Gross Profit 140,000 130,000 -7.14%

Ratio of Gross Profit to Revenue

This measures the ratio of operating costs to revenue. The sum total must

always equal 100%.

Amount RatioNet Revenue 525,000 100.00%

Operating Costs 402,000 76.57%

Gross Profits 123,000 23.43%

Net Profit Ratio


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Net Profit Ratio = Income for the Year

Net Revenue = 525,000

32,500 = . 0619 or 6.19%

Return on Investment

The ratio of Net Profit to equity shows the shareholders the percentage of return

they are receiving on this investment.

Return on Investment is Income for the year = 32,500 Equity 75,000 = .433 or 43.3%

Since some of these figures may not truly reflect the actual company worth,

(using Book Value rather than Market Value) the results may appear misleading

until they are tracked several years. All of these ratios are yardsticks (measuring

devices) as against clear-cut illustrations of performance.

Trading on EquityOne of the benefits in being a majority shareholder is the advantage on trading

on equity. That term means borrowing money on the strength of the company

performance and profitability, so as to invest more money in the business and

obtain a larger percentage of these profits. This technique works well when the

additional return is higher than the interest charged but can mean substantial

losses in down cycles.

Notes to Financial StatementsFinancial statements are kept clean and uncluttered as to extraneous

statements. Giving a more detailed explanation of some entries, will follow most

financial statements.

These notes often give more information on:


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Details of assets, revenues, expenses etc.

Statements to explain as to the methods of depreciation, valuation, dividend.

Remuneration of key company offices and directors.

Explanations of any Long Term Debt.

Any Capital Stock Issues.

Any extraordinary items such as the sale or purchase of capital equipment.

Any Contingent Liabilities such as pending lawsuits, long-term loans arranged

and any special salary agreements.

FAIR MARKET VALUE (FMV)There are several variations of the description of FMV that have been found

acceptable to the Canadian Judiciary and the following is for illustrative purposes

only.

Fair Market Value is defined as the highest price a willing buyer will pay, on an

open unrestricted market, to a willing seller, both being fully informed as to the

qualities of the property concerned and neither party is under pressure to

conclude the transaction.

In contrast the price is the amount asked by the seller and this amount may not

reflect the true fair market value if the buyer is not aware of some aspect of the

business or if the seller is under pressure to sell, then the price could very well

differ. For property that was owned prior to December 31, 1971 (Evaluation Day

for establishing the adjusted cost base for capital gains) proper documentation

needs to be retained to be able to establish the fair market value.

The owner can access the government database that contains specimen real

estate values in Canada, but these are estimates only and should not be viewed

as an effective alternative to the actual property value at that date. Another

instance where the FMV is pertinent is in the evaluation found in a buy-sell

agreement. There will likely be some hesitation between the parties involved to

establish a value that will undoubtedly change over the years.


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A preferred method, although there are others, is to agree on a present day value

to start and to have it adjusted to reflect the changing nature of the business at

agreed upon intervals. Canada Revenue Agency (CRA) is not bound by terms of

the agreement and may arrive at a different price evaluation.

One method to obtain a present day value would be to obtain the services of a

professional evaluator. As a result of their investigation and experience a value

could be established that would, amongst other considerations, include the

following criteria:

The Business assets

Past performance obtained from the financial statements

Future potential

Human resources

Value of comparative companies

The industry in particular and the company in general

A large number of other variable such as – interest rates, competition,

financing, available markets, government regulations

Value DeterminedBefore an evaluation can be determined on which a business valuator can base

their proposals, a careful analysis of the company and their financial statements

will need to be conducted.

The valuator can use one of or a combination of one of these evaluation

methods:

A. Assets: A comparison of Book Value, Adjusted Book Value (CMV) and

Forced Sale (Liquidation) Value

B. A Combination of assets and earnings : A going concern evaluation combined

with assets and an estimate of the goodwill value.

C. Earnings capitalization : Earnings multiplied by a number of years,

e.g. $320.00 X 5 years = $1,600,000


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Notes to EvaluationBook Value

The value of an individual asset as recorded in the Financial Statements. Book Value = Assets – Liabilities

Adjusted Book Value

Allows for a host of variables such as Bad Debts, Inventory, Patents, Copyrights

and Goodwill to arrive at the Current Market Value, which is reflected in the

Adjusted Book Value.

Earnings Capitalization

Varies from industry to industry and needs to comply with what are common

accounting practices for their particular industry.

Liquidation Value

Is the break-up value or forced sale value of the business assets in whole or

piecemeal?

Goodwill

Goodwill is the excess profits earned over and above, which would be normal or

reasonably expected. This is sometimes referred to as Super Profits.

Goodwill = Super Profits X Capitalization (number of years)

Going Concerns Evaluation

The Going Concern Value is the sum of the adjusted book value, plus any

intangible assets at the date of valuation.

Capitalization


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Capitalization is the multiplier (number of years) used to determine both the value

of goodwill and the value of earnings. This multiplier is always open to

discussion but must be reasonable to the industry concerned.

Estimating Future Earnings

Capitalization rests on a reasonable estimated of future earnings after tax. This

in turn is based on many factors such as past performance, normal business

income, future plans, market share, products and research and general

economic factors. Five years is a traditional multiplying factor.

Liabilities

In the evaluation process the funding of long-term debt is factored in because the

interest payments have been deducted as a business expense.

Only Net Earnings are capitalized. Current Liabilities will show up in the

business evaluation and in the current ratio figures.

Prices versus Values

In a public corporation the “bid and asked” price is found daily in the financial

papers. Since our emphasis is primarily involved with businesses that are sole

proprietors, partnerships and closely held corporations the evaluation of these

companies are open to variation and negotiation.

Some of the factors that will affect the price are as follows:

Controlling interest usually commands a premium on evaluation.

Value in use takes into consideration special rights or uses that will

place the value above FMV. It can work the other way also if the building or

plant is worn out, due for replacement or about to be expropriated for an

expansion of an expressway.

Book value by itself can be very misleading and of diminished value in

determining price. It should be well defined and adjusted book value would

be a more recommendable term.

Technical Application to Sales


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The ultimate purpose of examining financial statements, determining ratios and

establishing valuation is to obtain raw data. This will establish the business

needs on which to base our proposals and many times helps to find a source for

the premium dollars required to fund the purchase. Legal agreements form the

basis for many of the documents that sales are based on.

TIPS FOR BUILDING YOUR BUSINESS INSURANCE MARKETSMost people have their first contact with an insurance company through an

insurance Advisor / Broker / Agent. These workers help individuals, families, and

businesses select insurance policies that provide the best protection for their

lives, health, and property.

Many times we have a tendency to walk past Business Insurance opportunities,

because we either aren’t interested, or we figure that we do not know enough

about that aspect of the industry. When this happens, there is a chance to work

with some other person who specializes in the Business Insurance markets.

It is much better to receive a percentage of something instead of nothing.

Here are nine tips to help you increase your block of Business Insurance and get the most of your time and money…

1. Do not act desperate for business. You're at a social event. People want to talk to upbeat confident people. You

won't attract any business if you act desperate.

2. Stay focused on building your business.

Enjoy yourself, but remember why you are there. Pay attention to the people you

meet and what they say.

3. Mingle – don't sell.


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This is a time to start some relationships and learn information that can be

followed up on. Keep it light. Don't try to do major business deals – save that for

later.

4. Know that you are being scanned.People like to know who they are doing business with. Treat everyone with

respect and a positive attitude. This is not a time to air dirty laundry.

5. Set goals for each event. Decide before you arrive at an event how many people you will talk to and what

information you hope to learn. You'll be amazed at how much more information

you'll learn with prior planning.

6. Be prepared to follow up. Send a "Nice to Meet You" note to everyone that you talk to. It can be an e-mail

or handwritten note. Find a way to personalize it to take away the feeling of a

form letter. It takes most people 6-8 exposures to remember and trust you. This

speeds up the process.

7. Be an interesting person to talk to. Do your homework. Plan some casual topics for you to bring up that you like to

talk about. Being prepared will also help to build your confidence. 8. Have some good leading questions to ask others.People love to talk about themselves. A great conversation starter is to ask what

they like to do when they're not at work. Many deals are done on a golf course!

9. Listen with both of your ears for opportunities. Pay attention to conversations for problems that you can solve. Follow up with

the solution during business hours.


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With these tips in mind, you can make any event a valuable networking

experience!

Questions for - BUSINESS INSURANCE PRINCIPLES SSC #6

1. Which of the following is one of the common approaches to determining the buyout price in a partnership?

A. Multiple book value.

B. Multiple earnings.

C. Variable price capitalization.

D. None of the above.

2. All of the following are classifications of Partnerships in Quebec, EXCEPT:

A. Commercial Partnerships.

B. Anonymous Partnerships

C. Quebec Partnerships

D. Limited Partnerships

3. The purchase price of a partnership interest would depend on all of the following EXCEPT:


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A. Any Tangible assets.

B. The value of work in progress.

C. Any share of accounts payable related to the deceased partner.

D. Any goodwill that might be evident.

4. Before an evaluation can be determined on which a business valuator can base their proposals, a careful analysis of the company and their financial statements will need to be conducted. Which of the following would not be considered criteria for evaluation according to the text?

A. Looking at the assets of the company.

B. Considering a combination of assets and earnings.

C. Looking at any earnings capitalization.

D. Looking at the pure book value only.

5. Which of the following would not be found on a Corporate FinancialStatement:

A. Fair Market Value.

B. Long Term Liabilities.

C. Inventory.

D. Shareholders equity.

6. Which of the following is one of the five key traits of a successful entrepreneur?

A. Pragmatism

B. Passion

C. Being profit focused

D. Doing what it takes to get the sale

7. A Balance Sheet is defined as:A. Assets = Liabilities + Shareholders Equity.

B. Assets + Shareholders Equity = Liabilities.

C. Liability – Shareholders Equity = Assets.


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8. In a Public Corporation, the shareholder losses all rights to the cash or assets they invested, but they do acquire some new rights. Which of the following is not one of those rights?

A. The shareholder has voting rights

B. The shareholder has the right to issue the stock at a discount.

C. The shareholder can elect new directors.

D. The shareholder has the right to examine the corporate book.

9. The Bylaws pertaining to the Articles of Incorporation would include many of the details pertaining to the code of regulations and the instructions for operation etc. Which of the following would not be included in the Bylaws?A. Rules on stock transfer.

B. Corporate policy on dividends and debt repayment.

C. The business purpose of the company

D. Authority and duties of officers.

10. The following statement, “Varies from industry to industry and needs to comply with what are common accounting practices for their particular industry,” is the definition for which of the following?

A. Adjusted Book Value

B. Earning Capitalization Value

C. Liquidation Value

D. Goodwill Value

11.The cash value asset of a Life Insurance policy is found in which of the


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following?A. Buy-Sell Agreement.

B. Income Statement.

C. Balance Sheet.

D. Financial Statement.

12. Prospects for business insurance can come from:A. Group insurance clients.

B. Referred leads.

C. Community organizations.

D. All of the above.

13. A disadvantage of being a Sole Proprietor is:A. Start-up and continuation is uncomplicated.

B. You are responsible for all liabilities and losses.

C. A proprietor keeps all the profits.

D. The owner has complete control.

14. An Income Statement is known by all the following EXCEPT:A. The Balance Sheet.

B. The Statement of Revenue and Expenses.

C. The Statement of Earnings.

D. The Profit and Loss Statement.

15. A “Going Concern” value of a business is determined by:A. The book value plus assets-liabilities.

B. The sum of the goodwill times capitalization.

C. The estimated value of future earnings, plus goodwill.

D. The sum of the adjusted Book Value, plus any intangible assets.

16. Which of the following is one of the “Four D’s” of a business exit?Business Insurance Principles – SSC #6


A. Devastation.

B. Delinquency.

C. Dissolution.

D. Divorce.

17. The purpose of Business Insurance is:A. To help the agent / broker increase his block of business.

B. To help the Insurance Company increase their block of business.

C. To protect the viability of the business.


18. Referrals should be asked for:A. After the close.

B. Three to six months after the initial sale.

C. After the client has experienced your service or product.

D. On a systematic schedule.

19. If the executor or executrix decide to carry on the business after death, which of the following is NOT true?

A. The executor / executrix would be personally accountable to the estate and

business creditors.

B. The executor / executrix would not be liable for any business losses.

C. The executor / executrix would be liable to the heirs of the estate for any

losses.

D. The executor / executrix cannot receive any of the profits.

20. Human Life values in business rest on two abilities. They are:A. Manual and Mental.

B. Money and Manual.

C. Arrogant and Analytical.


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D. Physical and Psychotic

21. All the following are considered classes of partners in a partnershiparrangement EXCEPT:

A. A non-denominational partner

B. A general partner

C. An active partner

D. An ostensible partner

22. Quick Ratio is a financial ratio that:A. Shows the actual performance of the company.

B. Shows how much the retained earnings have grown year by year.

C. Is determined by whether you pass or fail this exam.

D. Indicates the company’s ability to pay immediate debts.

23. Which of the following is incorrect as it pertains to a Sole Proprietorship:

A. All business income is treated as personal earnings for income tax purposes.

B. Starting the business requires no special status.

C. After death, the family members cannot legally carry on the business.

D. Set up and administration is relatively easy.

24. The formula for Working Capital is:A. Working Capital = Current Assets minus Current Liabilities.

B. Working Capital = Assets divided by Liabilities.

C. Working Capital = Current Ratio plus Cash Ratio.

D. Working Capital = Marketable Securities – Accounts Payable.

25. Most small businesses started out as the dreams and concepts of one


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person. This best describes what type of business arrangement. A. Partnership.

B. Corporation.

C. Sole Proprietorship.

D. A combination of the above.

26. Business Insurance falls into certain categories. Which of the following is NOT one of those categories?

A. The funding of business arrangements to enable the survivors to carry on

after the death of the owner

B. The funding of business insurance to look after any depreciation on the

corporate vehicles that are in multiple accidents.

C. Insurance to provide for recovery of loss of income in the event of business

interruption due to the death of one of the owners.

D. Insurance to provide for the protection of the employees and their dependants

from financial hardships.

27. If the partnership is a Canadian controlled private corporation it is eligible for a tax reduction known as the:

A. CCA.

B. SBD

C. CCPC

D. PRO

28. All of the following additions are adjustments to a partners ACB (after 1971) EXCEPT:

A. Share of charitable gifts.


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B. Contribution of capital.

C. Share of income.

D. Any share of capital dividends received.

29. The events that can trigger a buy out of a partner's interest under a buy- sell agreement would be all of the following EXCEPT:

A. An attractive offer from an outsider to purchase a partner's interest in the

company.

B. The repayment of a debt secured by an ownership interest.

C. A divorce settlement in which a partner's ex-spouse stands to receive an

ownership interest in the company.

D. The disability, death, or incapacity of a partner.

30. Which of the following is a problem at the death of a Sole Proprietor whose business is a going concern:

A. Finding a buyer.

B. How long it may take to settle the estate.

C. Getting a fair price for his business.


31. When franchisors exercise estate freezes what are they trying to achieve?

A. A way of paying no income taxes today, so that they can pay them later.

B. A form of buy-sell agreement.


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C. A legal procedure to split income, capital gains and capital losses with family

members.


32. The sale of a business after death of a Sole Proprietor is limited to:A. Family successor or buy-out.

B. Employee buy-out.

C. Outsider buy-out.


33. All of the following are causes for Dissolution of a Partnership EXCEPT:A. When a partner dies.

B. When a partner goes bankrupt.

C. When there is a termination or undertaking.

D. When a partner takes extra time off.

34. Which of the following is one of the “seven habits” of a successful business owner?

A. Humble honesty

B. Focusing exclusively on the business

C. Effective “Cold Call” prospecting

D. Sticking to the plan

35. Income for the year divided by equity is the formula for:A. Net Profit Rationalization.

B. Quick Ratio.

C. Return on Investment.

D. Cash Ratio.


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Answer Sheet – BUSINESS INSURANCE PRINCIPLES # 6

Please mark your answer in the corresponding question number

1. 19.2. 20.3. 21.4. 22.5. 23.6. 24.7. 25.8. 26.9. 27.

10. 28.11. 29.12. 30.13. 31.14. 32.15. 33.16. 34.17. 35.


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18. XXXXX XXXXXNAME -

PHONE #

Fax this answer sheet toll free to 866-277- 4511 for marking


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