RV Park/Campground Operator s Manual

Transcription

1 RV Park/Campground Operator s Manual Chapter 11 Organising Your Company Forms Of Organisation / sole proprietorship, partnership, corporation Developing A Tax Plan / arrange your affairs to minimize taxes Overview Previous chapters have discussed getting into the RV park/campground industry, whether by purchasing an existing park or developing your own from the ground up. You have completed the feasibility study, obtained licensing approvals, and before you go any further you must decide on which type of business organisation is best for you. The term organisation, as it is used here, refers to the legal relationship you have with your business and with any associates. You should seek the advice of a lawyer for legalities, contracts, and liabilities and an accountant for income tax implications before you sign any agreements. General Forms of Organisation There are three general forms of organisation sole proprietorship, partnership and incorporation. Sole Proprietorship means you are the only owner. Partnership implies that there are two or more owners. Each type of business organisation has its own legal and tax implications. An incorporated company is the most complex and expensive form of organisation. It can be either private or public. Most RV parks/campgrounds are owner-operated and usually privately held. The definition of private varies from province to province. In most cases, a private corporation is created with stringent restrictions on rights of share transfer (who can own the stock), limitations on the number of shareholders and regulations preventing share offerings to the general public. As a result, control remains in the hands of a few designated individuals and stays that way. RV Park/Campground Operator s Manual 11-1

2 The different forms of organisation and their relative advantages and disadvantages are outlined below. a. Sole Proprietorship Individuals who go into business for themselves and plan to operate the RV park/campground, or hire management personnel to carry out the tasks. There is no legal distinction between the sole proprietor as an individual and as a business owner. All assets, earnings and debts are those of the owner. total control Advantages Disadvantages unlimited liability, no distinction between personal and business assets full financial rewards can make decisions without seeking approval very flexible if the buyer s spouse is to be involved in running the property, the spouse may lose a tax advantage if it is owned alone reduced opportunities in obtaining financing free from many of the regulations which corporations must comply with may be able to create a tax loss by claiming depreciation expense and thereby reducing any other taxable income b. Partnership Partnerships may be a company but not a corporation in name. While there are no hard-and-fast rules regarding the signing of an agreement for partnerships, it is wise to have a contract that sets out certain obligations for each party. An agreement should set out the nature of the business, amount of capital contributions by each partner, division of profits and losses, certain rights and obligations of each partner and procedures for the termination of the partnership, or the form that any reorganisation should take. RV Park/Campground Operator s Manual 11-2

3 It is prudent to consult a lawyer when establishing the partnership to cover off the legal ramifications in the event that a partner wants to divorce him/herself from the business. If no contract exists provincial legislation for partnerships is used to handle problems or disputes. Such legislation is usually too general to handle severe situations. There are two basic forms of partnerships general partnership and limited partnership. General partnership A general partnership makes all parties equally liable and one partner can bind other partners irrespective of their consent. Limited partnership A limited partnership may include a number of partners who actually conduct the business, plus any person or persons who have contributed money. These are known as special or limited partners. A declaration must be signed for limited partnerships. A person designated as a limited partner cannot take part in the running of the business or they automatically become a general partner. Limited partners have less liability as well. Namely, they are liable for only the amount of cash they have invested in the partnership. The declaration may state any profit or share of profits such a partner receives. Advantages additional capital resources debt financing more accessible tax advantages over sole proprietorship Disadvantages difficult to dismiss partner lacking skills or integrity more difficult to make quick decisions problems arising in dissolving partnership or on death of a partner if working partner, then more people involved in decision-making and job requirements Other considerations to explore before entering into a partnership are: Clearly define control and management of each partner in the contract. RV Park/Campground Operator s Manual 11-3

4 One specific partner can have a larger share. In this way, if there is a disagreement, one person has the final say. Usually, the partner who is the greatest driving force behind the idea for the business has this control. Buyout procedures should be carefully set out. A so-called shot-gun clause should be avoided where one partner can manoeuvre another into a forced sale at either an unreasonable price or during tough financial times. Building in a third party arbitrator to set the sale price can avoid future grief and acrimony. Above all, trust between partners is paramount in this form of business. c. Corporation (Limited Company) Corporations are formed either under federal or provincial law. Most RV park/campground operations are formed under provincial law and are privately held. This is the most complex form of organisation but it does have advantages, as discussed below. A lawyer should be retained to set up and register a corporation although it is not legally required. The advantages of incorporation far outweigh any minor inconveniences such as the payment of lawyer s fees or registration fees. Foremost, corporations have limited liability. This means any assets not directly held by the corporation are untouchable in case of business failure, unless of course, personal guarantees were given for a loan. Corporations have a life of their own and can continue and be sold, while sole proprietorships do not have the same benefit. The wages of a spouse working in the business may be deducted from corporate earnings before taxes. This is also an advantage. Advantages ease of raising capital faster growth limits liability, owner s equity in not liable for debts beyond their investment or share in the business stock facilitates ownership transfer Disadvantages higher cost of incorporation, disbursements and legal fees if there are several shareholders control of profit can be diluted organisation more complex, therefore decision-making process is lengthened. RV Park/Campground Operator s Manual 11-4

5 Advantages can also pay spouse s salary that is tax deductible to company lower tax rate than proprietorship or partnership may be available more administration Disadvantages potential for double taxation borrowed money can be repaid with money that has been taxed at a lower rate than if the buyer owned property individually can have separate ownership and management continued existence Developing a Tax Plan Taxes can play a key role in determining which business structure is right for you. Contact an accountant for advice on tax implications. The purpose of a tax plan is to arrange your affairs so that you minimize the taxes that the federal, provincial and municipal governments levy on your business and personal incomes, on the assessed value of your land and other fixed assets, on your capital gains, etc. The only way to minimize your municipal taxes is to compare your assessment notice with those of your colleagues in properties similar to yours, and appeal your assessed value if you feel that the assessment is unreasonably high. Municipal taxes are derived from mill rates set by the municipality and applied to the assessed value. If your assessed value increases it doesn t necessarily mean that your taxes will be increased correspondingly. In other areas, however, you can take steps to arrange your affairs so that your taxes are minimized, especially in the area of income taxes. The amount of income tax you pay depends on the type of taxpayer you are and the type of income you earn. RV Park/Campground Operator s Manual 11-5

6 There are two types of taxpayer: business individual There are three types of income: business income investment income income from employment Things to consider when developing your tax plan Contributions (up to a specified maximum) that you make to a registered retirement savings plan (RRSP) are tax deductible. Dividends may be taxed less harshly than most other sources of income because of the dividend tax credit, and depends on the situation between the individual and the company. A number of tax breaks can be doubled in value if you split income with your spouse. If you operate your business as a corporation, and if your net income is less than $400,000 per year, you are classified as a small business and as such receive a small business deduction. The combined federal/provincial tax rate for a Canadian Corporation (Small Business Income) for 2008 is 15.5% and for %. Case Study of Income Tax Considerations for Campground C Assumptions 1. Man and wife are owners/operators of the business (a 200-site RV park/campground). 2. The family unit needs a disposable income of approximately $55,000 per year. 3. Business income after deductions (except income taxes and loan repayment) and before any distribution to the owner is as follows: Year 1 $ 70,000 Year 2 113,750 Total $ 183,750 RV Park/Campground Operator s Manual 11-6

7 4. There is no other income and no Registered Retirement Savings Plan (RRSP) contributions have been made. 5. Salaries paid are reasonable for the work performed. 6. Income earned by the company is to remain within the company for future dividend payments. The chart below shows the tax consequences for Campground C if it were operated as follows: a. Limited company b. Proprietorship husband only (wife has no earnings) c. Partnership husband and wife, 60/40 ratio The final decision on the type of organisation you choose must be made on the basis of a multitude of factors, such as size, growth potential and income from your business, the availability of financing and, of course, tax considerations. Different Tax Consequences for Campground C a. Limited Company Year 1 Year 2 Business Income $ 70,000 (a) $113, 750 Less Expenses: Salary to husband $ 52,500 (b) $ 52,500 Salary to wife $ 35,000 (c) $ 35,000 Net loss/profit from previous year $ 0 (d) $ 17,500 Net (loss) profit (a [b+c+d]) $(17,500) (e) $ 8,750 Income Taxes (e*15.5%) [2008 Small Business combined $ 0 (f) $ 1,356 federal/ provincial Corporate Rate] Available distribution to shareholders (e-f) $ 0 (g) $ 7,394 Total salary received (b+c) $ 87,500 (h) $ 87,500 Less Income Taxes: Total income taxes paid by husband and wife (h*2008 $ 10,596 (i) $ 10,596 personal tax rates after basic deduction of 15% on first $37,885, 22% on next $37,884, 26% on balance) Total disposable income (h-i) $ 76,904 (j) $ 76,904 b. Proprietorship Year 1 Year 2 Business income $ 70,000 (a) $113,750 Less Expenses: Total income taxes husband only (a*2008 personal tax $ 10,636 (b) $ 21,396 rates after basic deduction of 15% on first $37,885, 22% on next $37,884, 26% on balance) Total disposable income (a-b) $ 59,364 (c) $ 92,354 RV Park/Campground Operator s Manual 11-7

8 c. Partnership Year 1 Year 2 Business income $ 70,000 (a) $113,750 Less Expenses: Total taxes paid by partners 60/40 split (a*2008 personal $ 7,620 (b) $ 15,636 tax rates after basic deduction of 15% on first $37,885, 22% on next $37,884, 26% on balance) Total disposable income (a-b) $ 62,380 (c) $ 98,114 Total tax over two years a. Limited Company Corporate tax + personal taxes = 0 + $1,356 + $10,596 + $10,596 = $22,548 b. Proprietorship Income tax = $10,636 + $21,396 = $32,032 c. Partnership Partners income tax = $7,620 + $15,636 = $23,256 Obtain advice from a qualified professional, i.e. lawyer, accountant and/or hospitality consultant before making any decisions. To summarize Before you make any decisions on the type of company that is best for your business, get professional advice from a lawyer and accountant. It is far easier to make the right decision in the first place than to change down the road. Review Question 1: Question 2: What is the difference between a general and a limited partnership? What is the difference between a corporation and sole proprietorship? RV Park/Campground Operator s Manual 11-8