Should You Incorporate

By: Elaine Rosenberg

The New Year is a good time to review your business from all angles, including your ownership structure. Should you take the big leap this year and incorporate your sole proprietorship or partnership? Here are some things to consider to help you with the decision. (NOTE: these are general rules and guidelines. Provincial laws governing corporations may vary.)

What are the PROS:

Owner Protection From Legal Liability

Once a new business's owner(s) successfully complete the incorporation process, the owner(s) have a limited amount of legal liability for the corporation's business activities and debts. In the eyes of the law, the corporation is a separate entity from the owners. In order to maintain this limited liability, the corporation's owners must follow a number of legally required corporate formalities.

Ability To Attract Investors

The corporation's ability to issue shares is a strong selling point to those willing to invest capital in a business venture.

Power Structure

The corporate business form has an established power and management structure: directors, officers, and shareholders. Each group has its own set of clearly-defined responsibilities within the corporate framework.

Shares and Share Options For Employees

Especially for larger businesses, the corporate business structure offers an appealing opportunity to potential employees — share benefits and share options (the employee's right to buy shares at a locked-in price).

What are the CONS:

Time And Cost Of Incorporation.

The incorporation process can be expensive and time-consuming.

Following Corporate Formalities

All corporations are required by law to observe a number of corporate formalities to ensure the corporation is operating as a separate entity, independent of the business's owners. These steps include holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation's ongoing financial independence.

Potential Tax Liability.

The profits from traditional corporations may be "double taxed".

That is, the corporation itself is taxed for any profits earned, and any individual shareholder who earned profits from the corporation (in the form of paid "dividends") is also taxed. This occurs most often in larger corporations, and may not be an issue for shareholders and owners of smaller corporations, who often work for the business itself and are paid salaries (which are tax-deductible for the corporation) rather than dividends.

If you do decide to incorporate, to protect corporate representatives and shareholders, directors and officers should be aware of the following obligations:

DO'S:

Hold Scheduled Meetings

• The date for your annual shareholders' meeting should be in the bylaws
• Bylaws typically call for an annual board of directors meeting to be held immediately after the annual shareholders' meeting

Hold Special Meetings of the board when matters of importance come up:

• Entering into a new lease
• Entering into a substantial funding commitment
• Opening a new bank account
• Entering into any other significant contractual agreement
• Changing an officer's salary
• Filling a vacancy on the board or appointing a new officer
• Entering into a significant new venture
• Considering the sale, in whole or in part, of the assets or the dissolution of the business

Keep Good Records

• Take minutes of meetings and maintain a corporate record book
• Keep good financial records

Keep Things Close To The Vest

• Directors and officers owe a fiduciary duty to the corporation, meaning that they must at all times do what is in the best interest of the corporate entity and its shareholders
• Keep corporate matters confidential to the extent possible

Develop a Planning Routine

• Review each year's activities during the final month of the fiscal year
• Budget ahead for the longest period reasonably possible and review and analyze results at least semi-annually
• Review operations with your attorney and CPA to ensure tax planning is properly emphasized
• Develop formal long-range planning capacities beyond the budgeting process

Sign all contracts in the name of the corporation with a signature block using the following format:
--[Name of corporation]--
By:__________________________
--[Title of individual]--

Corporation representatives should also:

• Adopt a corporate resolution that authorizes an officer to sign a contract
• Make all corporate purchases in the name of the corporation
• Maintain corporate funds in a corporate account or accounts separate from any other account
• Carry reasonable insurance on the corporation, considering the risks inherent in the corporation's business
• Fund the corporation at the time of incorporation with enough money to keep it going during an initial phase of operations
• Set up a review mechanism for decisionmaking, so that all aspects of a proposed course of action will be considered
• Comply with the articles of incorporation, the bylaws, and other organization documents or contractual restrictions

Dont's:

• Don't commingle corporate and personal funds
• Don't use corporate accounts for personal loans or other personal purposes
• Don't do insider deals on loans, leases, etc., between the corporation and a principal other than on an "arm's length" basis (just as you would with someone not associated with the corporation)
• Don't use corporate assets for personal use

Not a Biz Chick? Register Now!