C HAPTER 3: A NGEL T RANSACTIONS : I N S EARCH O F T HE I DEAL S TRUCTURE
CONS: However, the CPC is not for every company.
• Being a public company is onerous on management and financial resources and requires a good board of directors, management team and professional advisors. • The cost of listing and maintaining the public company are not insignificant. • Public companies are open to public scrutiny. • Creating a CPC is not a liquidity event for founders or seed investors. • CPCs must deal with the liquidity challenges inherent in the small-cap marketplace and will have to work to obtain a following from the financial community in the early years. OTHER STRUCTURES Limited Liability Company (LLC) Limited Liability Companies (LLCs) are similar to limited partnerships from a taxation perspective. However, unlike a limited partnership, LLCs allow the members to participate in the management of the business without losing their limited liability status. As is the case with a limited partnership, investor liability is capped at the amount of the investment. LLCs are currently available only in the United States. However, the LLC is an investment vehicle that would likely be attractive to Canadian angels who want to consolidate their investment activities. Consideration should be given to lobbying for LLCs to be available under Canadian income tax legislation. Community Small Business Investment Fund (CSBIF) The CSBIF is not particularly relevant to angels in its current form, but may be a model to consider adapting for angel investments. It’s worth noting that in early 2003, Ontario’s provincial budget proposed changes making angel-driven CSBIFs possible. However, at time of publication, these proposals were yet to be approved. CSBIFs are currently available in Ontario and are often established by labour sponsored funds (LSFs) to assist them in meeting their investment pacing requirements. If an LSF invests in a CSBIF, it receives two credits (i.e. one dollar invested in a CSBIF equals one credit and the second credit is issued to the LSF when the CSBIF invests that dollar in a company). CSBIFs require sponsorship by a local non-profit organization. Typically, one LSF and one sponsor invest together in a local venture. There are restrictions on what the CSBIF can invest in. Investments are usually made only in small start-ups. The maximum CSBIF investment in a single business is $1 million. Investors other than LSFs are entitled to receive a modest 7.5 per cent tax credit for investing up to $500,000 in a CSBIF, resulting in a maximum tax credit of $37,500. CONCLUSION When selecting the right structure, it is important to consider the specific deal and circumstances. Realize that each of these mechanisms is just one step in building a successful business. A long-term strategy should be developed to take advantage of opportunities in the present and the future.
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