Scott Park, CPA, CA
For many new entrepreneurs and start-ups, the decision to incorporate a business is an exciting yet potentially daunting step to take. The goal of every business owner is to hopefully make a profit, but let’s face it, the start-up capital or money needed to fund the operations of the business when things get started may be a little tight. This typically forces the business owner to do things on their own to get things done even when they are out of their comfort zone or area of expertise. As a business owner, having a strong work ethic and do-it-yourself mentality is certainly a good thing; however, when it comes to something as important as properly incorporating your business it is best to avoid the pitfalls of doing it yourself. The problems can be fixed, of course, but not without time, effort and money.
Here are some of the common mistakes to avoid when incorporating.
Lack of Tax Planning Prior to Incorporation
Let’s say that a husband and wife decide to operate a business together. They plan to both be equally active in the business. This type of scenario is perfect for the husband and wife to split the income and profits of the business and to utilize tax planning opportunities such as their lifetime capital gains exemption. However, many times these topics are not even discussed with a professional accountant prior to incorporation, which could lead to missed tax opportunities for the business owner.
Inadequate Incorporation Documents
When you incorporate a company, it is very important to decide on how structure the business. The articles of incorporation will clarify the types of shares that the company can issue to its shareholders, how shareholders will be paid, and the voting rights that the shareholders will have.
Unless the share capital of the company is properly structured from the start, it will be necessary to perform various modifications, amendments, and re-structuring that will take time and potentially cost hundreds or even thousands to have it fixed down the road. It is best practice to create multiple classes of shares with different voting rights, in order to provide as much flexibility as possible. Another consideration is to provide for unlimited authorized share capital and allow for a range of directors in anticipation of future growth of the business.
Neglecting Your Corporate Records
The Business Corporations Act of BC is the law that governs various matters pertaining to corporations in B.C. This Act is lengthy and unless a new business owner is either an accountant or lawyer, it is likely they are not aware of all the things that must be followed to keep a corporation in good standing.
Each corporation is required to keep a records book. For example, the records book should contain documents like the certificate of incorporation, notice of articles, articles of incorporation, share register, register of Directors’ and Officers’, and signed Directors’ resolutions etc. If a records book has not been created or there are corporate documents missing this can certainly lead to problems. For example, let’s say that the company ends up in court. If a document that is required to be kept in the records books is missing, lost or was never created then a court of law could make a declaration and impose a ruling as to what was or should have been contained in the record. This could lead to unintended negative consequences for a business owner.
Filing Annual Reports
A company must file an annual report with the corporate registry. If it fails to do so for two consecutive years, the company will no longer be in good standing, it will be struck off the corporate registrars’ list and will be considered to be dissolved. Reactivating your corporation will set you back a few hundred dollars on top of the regular annual filing fee. This filing requirement is something often over looked by business owners especially when they do not have a lawyer to handle this simple filing.
Registered and Records Office & Inspection of Records
A company is required to have a records office. The records office is also required to be open during statutory business hours to allow for the inspection of records. If a business owner decides to use his personal home address as the registered and records office then, although it is unlikely, they do run the risk of having people show up at their door requesting access to the corporate records. Once the business is incorporated, it is best to establish a relationship with a law office and for an annual cost of say $300 to $400 they can file the annual reports and handle the duties of being the registered and records office for your company.
Not Giving Your Corporation a Name
If you are ready to incorporate but unsure about a company name, that’s OK. The corporation will be given a number that serves as the corporation’s legal identifier (e.g. 1234567 B.C. Ltd). You would still be able to operate under a trade name or a “doing business as” dba name; however, any legal contracts, bank accounts, cheque signings, leases, employment agreements etc. will need to be done under the corporation’s legal identifier.
A corporation’s name can be a valuable asset in establishing your brand and growing your business, so it is an important consideration from the start. There will also be a cost associated with changing the name of your corporation, so this is something to be aware of.
When it’s time to incorporate your business it’s best to discuss the financial and tax matters with a Chartered Professional Accountant prior to incorporation. The next step is to choose a business lawyer to handle the incorporation process. The potential costs and pitfalls associated with the do-it-yourself incorporation approach will probably exceed what it would have cost to have a lawyer handle it from the start. This is one area of your business that should be left to the professionals.
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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