Creating Entrepreneurships

CREATING ENTREPRENEURSHIPSilvana Alzetta-Reali, Esq. - ModeratorCoca-Cola Ltd.Toronto, ONGail LilleyBlake, Cassels & Graydon LLPToronto, ONMichael Wager, Esq.Squire Sanders & Dempsey L.L.P.Cleveland, OHNew York, NY: 

CREATING ENTREPRENEURSHIP Silvana Alzetta-Reali, Esq. - Moderator Coca-Cola Ltd. Toronto, ON Gail Lilley Blake, Cassels & Graydon LLP Toronto, ON Michael Wager, Esq. Squire Sanders & Dempsey L.L.P. Cleveland, OH New York, NY Canada-United States Law Institute Annual Conference Comparative Aspects of Entrepreneurship in Canada and the United States April 13, 2006

CREATING ENTREPRENEURSHIP: 

CREATING ENTREPRENEURSHIP U.S. and Canadian Perspectives on Policy and Law Michael Wager, Esq. Squire, Sanders & Dempsey L.L.P. Cleveland, Ohio New York, New York Gail Lilley Blake, Cassels & Graydon LLP Toronto, ON

I. U.S. Public Policy and Entrepreneurships: “Chickens, Eggs & Causality”1: 

I. U.S. Public Policy and Entrepreneurships: “Chickens, Eggs & Causality”1 American business and popular culture embraces and celebrates the “entrepreneur” In history and geopolitical calculus, American capitalism is the counterpoint to centralized economies Widely accepted wisdom – entrepreneurial activity = economic growth Causality – Does U.S. public policy and law drive (or even support) entrepreneurship? 1 Quote from Walter N. Thurman and Mark E. Fisher, “Chicken, Eggs, and Causality, or Which Came First”, Amer. J. Agr. Econ, May 1988, pp. 237-238

II. U.S. Public Policy and Legislative Initiatives (and Detriments): 

II. U.S. Public Policy and Legislative Initiatives (and Detriments) Definitions – What is an “entrepreneur”? Develop/commercialize innovate products and services Inspire/initiate new industries or industry clusters Create new catalysts for capital formation Create new employment Create new wealth Differentiation from “small business” Are there cross-border differences in characteristics of entrepreneurs? Factors Driving Entrepreneurial Activity Cultural/Demographic Aspects Policy – Cause and Effect

II. U.S. Public Policy and Legislative Initiatives (and Detriments) [cont’d]: 

II. U.S. Public Policy and Legislative Initiatives (and Detriments) [cont’d] Policy Overview Political Statements v. Policy Tech transfer program New capital program R&D programs Workforce development program Broad-based Policy/Law v. Directed Action

Canadian Public Policy and Entrepreneurships: 

Canadian Public Policy and Entrepreneurships One of the keys to prosperity for all Canadians is entrepreneurship That is why governments at all levels need to nurture entrepreneurs, not punish them with job killing taxes and burdensome red tape September 2006 – The Honourable Maxine Bernier, Minister of Industry Canada

Canadian Public Policy on Legislative Initiatives (and Detriments): 

Canadian Public Policy on Legislative Initiatives (and Detriments) Definitions – What is an “entrepreneur”? “Entrepreneurship is an outlook on life. It is the ability to see new opportunities in your environment and exploit them to create something new or make something better”1 “The root of the word can be traced as far back as 800 years to the French verb entreprendre or “to do something” 2 1 September 2006 – The Honourable Maxine Bernier, Ministry of Industry Canada 2 The Notion of Entrepreneurship: Historical and Emerging Issues – Charles Outcalt

Canadian Public Policy and Legislative Initiatives (and Detriments) [cont’d]: 

Canadian Public Policy and Legislative Initiatives (and Detriments) [cont’d] How does our Government help entrepreneurs “to do something”? Competition Policy Tax Policy Red Tape Reduction Financial Support

III. U.S. Public Policy – Capital Formation: 

III. U.S. Public Policy – Capital Formation New Business – limited access to capital Role of angels and smaller capital providers (local seed capital) Increasing intervention of “public” venture capital – does this ease constraint? Venture capital pools (direct equity; indirect equity) Micro-enterprise loans Loan guarantees Existing capital markets – more capital, but is this more access? Private equity Hedge funds

IV. U.S. Public Policy – Tax: 

IV. U.S. Public Policy – Tax Tax incentives/disincentives Tax credits (R&D, capital investment, targeted industry, targeted areas) Sales tax exemption Income tax (ordinary rates; capital gains rates) Death/Inheritance Taxes – tax on capital accumulation U.S. federal estate tax State estate taxes

V. U.S. Public Policy – Regulatory : 

V. U.S. Public Policy – Regulatory Economic “freedom” drives economic activity Entrepreneurs – market disruptive forces or free market risk-takers? Labor law policy – effects of minimum wages; workers’ compensation; unemployment insurance Immigration policy – attracting and retaining entrepreneurs and skilled personnel for entrepreneurial businesses Regulatory reform – unified reporting; paperwork reduction Utilities deregulation Securities regulation

How Does Canada Compare?: 

How Does Canada Compare? On October 18, 2005 the Conference Board described Canada as an underperforming but potentially gifted child…productivity achievements were declared to be our most significant weakness with 2004 increases less than one-third of those in the US (1.1% versus 3.6%)1 Canada is the most cost effective location in the G-7 to conduct such sophisticated ICT (Information & Computer Technologies) R&D2 tax incentives investments in R&D infrastructure the lowest labour costs in the G-7 1 April 5, 2006 – Sheridan Scott, Commissioner of Competition, Competition Bureau 2 Industry Canada website – Information & Communications Technologies, updated 2006-12-05

Canadian Competition Policy: 

Canadian Competition Policy My mission is to maintain and encourage competition in Canada – to ensure that small and medium sized enterprises have an equitable opportunity to participate in the Canadian economy Innovation is the crucial ingredient for economic success April 5, 2006 – Sheridan Scott, Commissioner of Competition, Competition Bureau

Canadian Tax Policy: 

Canadian Tax Policy Reduce tax burden on small businesses Create incentives for research and development Create incentives for investment in small business

Canada – Reducing the Tax Burden: 

Canada – Reducing the Tax Burden Entrepreneurs and small businesses are a key source of jobs and economic growth in Canada. The Government is strengthening support for this sector by reducing taxes on small business income and capital gains1 Examples from March 19, 2007 Federal Budget: Triple the taxable supplies threshold to CAD$1,500,000 from CAD$500,000 for annual goods and services tax filers Permit Eligible Canadian Controlled Private Corporations (CCPs) that meet certain criteria to make quarterly tax instalments instead of monthly tax instalments 1 August 2003 – Department of Finance Canada

Canada – An Opposing View on Reducing the Tax Burden: 

Canada – An Opposing View on Reducing the Tax Burden The combined federal and provincial preferential small business income – tax rates, while designed with good intentions, have resulted in steep increases in statutory business income tax rates for successful businesses that grow and expand …such steep increases…create a powerful barrier or disincentive for entrepreneurs to expand their businesses Growing Small Businesses in Canada: Removing the Tax Barrier – Jason Clemens & Niels Vedhuis, Studies in Entrepreneurship Markets, A Publication of The Fraser Institute

Canada – Tax Incentives for Investment in Small Business: 

Canada – Tax Incentives for Investment in Small Business Labour-sponsored investment funds proliferated in the late 1990s Sponsored by a trade union or similar worker organization Tax credits to investors federally and provincially Some estimate that these funds account for up to 40% of all venture capital raised in Canada Generally, returns have been poor LSIF success story is Research in Motion Being phased out June 13, 2005 – CBC News Online

Canada - R&D Tax Incentives and Innovation: 

Canada - R&D Tax Incentives and Innovation “It has been Canada’s innovation policy for the past 30 years to rely extensively on tax incentives to promote R&D” Combination of federal and provincial programs Tax deductions and tax credits Net after-tax cost of R&D expenditures can be less than 0.44 cents for each dollar spent Small Canadian businesses receive the greatest benefit Industry Canada – Information and Communications Technologies, updated 2006-12-05

Canada – Financial Support : 

Canada – Financial Support Numerous programs at various levels of government Canada Small Business Financing Program Qualifying small business has to apply for a loan at a financial institution If loan is granted, the federal government will reimburse 85% of lender’s losses in the event of a default Industry Canada – Canada Small Business Financing Program, updated 2007-03-09

VI. U.S. - Creating Entrepreneurial Businesses: Choice of Entity: 

VI. U.S. - Creating Entrepreneurial Businesses: Choice of Entity Determinants Capital Structure Risk Management (Liability) Management and Control Issues Taxation U.S. Forms of Organization Sole Proprietorship Joint Ventures General Partnership Limited Partnership Corporation – C Corp Corporation – S Corp LLC

Canada – Creating Entrepreneurial Businesses: Choice of Entity: 

Canada – Creating Entrepreneurial Businesses: Choice of Entity Determinants are the same in Canada Forms of Organization are substantially the same in Canada No S Corp or LLC equivalent Unlimited liability company in Nova Scotia and now Alberta Franchising

VII. U.S. - Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of  Founders and Funders: 

VII. U.S. - Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of Founders and Funders Organizational and Capital Formation Issues Capital Needs/Capital Structure Governance Issues Board Operational Issues Management structure Limitations on Authority Reporting; Accountability Strategic Issues – Business combinations

Canada – Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of Founders and Funders: 

Canada – Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of Founders and Funders Canadian considerations are the same Founder = Idea Funder = Capital Common Goals Protect the idea Create a tax efficient structure for both the business and the funder Create a simple operating model

Canada – Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of Founders and Funders: 

Canada – Creating Entrepreneurial Businesses: Allocation of Rights and Obligations of Founders and Funders Key Tensions

VIII. Creating Entrepreneurial Businesses: Allocating Risks and Resolving Disputes: 

VIII. Creating Entrepreneurial Businesses: Allocating Risks and Resolving Disputes Terms and Conditions of Contracts Indemnity Issues Scope of Indemnification Conditions and Limits on Indemnification Dispute Resolution Contractual Arbitration Litigation Termination Issues

IX. Entrepreneurial Enigma: The Effects of Policy and Law: 

IX. Entrepreneurial Enigma: The Effects of Policy and Law Does policy and law encourage entrepreneurial activity? The Enigma: Does capital attract entrepreneurs? or Do entrepreneurs attract capital? or Is this a multi-directional process of resource allocation, opportunity and governmental intervention? Does entrepreneurship change across borders? If so, why?

CREATING ENTREPRENEURSHIPSilvana Alzetta-Reali, Esq. - ModeratorCoca-Cola Ltd.Toronto, ONGail LilleyBlake, Cassels & Graydon LLPToronto, ONMichael Wager, Esq.Squire Sanders & Dempsey L.L.P.Cleveland, OHNew York, NY: 

CREATING ENTREPRENEURSHIP Silvana Alzetta-Reali, Esq. - Moderator Coca-Cola Ltd. Toronto, ON Gail Lilley Blake, Cassels & Graydon LLP Toronto, ON Michael Wager, Esq. Squire Sanders & Dempsey L.L.P. Cleveland, OH New York, NY Canada-United States Law Institute Annual Conference Comparative Aspects of Entrepreneurship in Canada and the United States April 13, 2006