"The only thing more expensive than hiring a professional is hiring an amateur." – Unknown
"I do my own stunts, but never my own electrical work." – Unknown Actor
Ok - we admit it. We are a bit biased. We believe you absolutely do need a lawyer to incorporate; do not use your accountant – do not use your local Registry Agent – and for heaven’s sake don’t use one of those website offerings that offer cheap online incorporations. Here’s why . . .
NUMBER 1: Minute Book Documentation and Proper Organization: Proper Minute Book documentation is crucial. Without a lawyer, the incorporation process might not include the all-important organizational documents (Corporate Records), leading to potential legal, operational, and taxation problems in the future.
Generally, after the initial step of incorporating (i.e. registering the company with Corporate Registries by filing Articles of Incorporation and Notice of Directors) the most important step is to then make the corporation ‘active’ and capable of carrying on business as required by the Alberta Business Corporations Act (or the Canada Business Corporations Act as the case may be). Many Registry Agencies and online services do NOT do this step at all - or they only do part of it - or they do some paperwork but never finalize it.
This second organizational step involves preparing following:
General and Borrowing By-Law
Resolutions of Shareholders (approving incorporation and appointing Directors;
Resolutions of Directors (approving the incorporation, adopting bylaws, appointing officers, issuing shares to the Shareholders, etc);
Shareholder Ledgers
Shareholder Register
Director and Officer Register
Bylaws
Share Certificates
Share Subscriptions
Minute Book (containing all of the above Records)
NUMBER 2: Advice and Direction: Registry services and others don’t (actually can’t) provide legal advice. That would be illegal (only lawyers can provide legal advice). So you won’t get any legal advice or assistance to figure out things like who should be shareholders, what class of shares you should issue to each shareholder, and what kind of ‘authorized shares’ your Articles should allow (and other exciting and fun stuff like that).
So why is it so important to have proper Minute Book documentation and Legal Advice so you’re set up correctly? Here are just a few reasons:
Tax and Future Planning: Our firm has seen dozens and dozens of examples where companies have been incorporated with only one class of authorized share capital, or where they were organized with only one issued (1) share at incorporation; neither of which is optimal for future tax planning nor ongoing management of the corporation, including dividends, shareholder changes, and decision-making. Imagine wanting to sell 15% of your shares to employees or a friend and you only have one share issued. How do you do that? Or imagine you want to issue shares to employees or family members but you can only issue one class (or type) of share? You wouldn’t be able to declare unequal dividends in that instance – and wouldn’t have the flexibility to manage voting control either.
Bank Financing: we see this all the time. Someone tries to save $300 by incorporating with an online service or on their own using a registry agent. They don’t get any organizational documents and sometimes don’t even have any shares issued all (again - no legal advice was provided)! And then when they apply for commercial financing to expand their business or buy that warehouse space - Bam! They hit a wall . . . banks are banks – they don’t just take your word for things. Who are the Directors? If you don’t have shares and Shareholders, you can’t have directors (since shareholders appoint directors). Who are the shareholders? There are no records to show any. Banks also require Solicitor (aka Lawyer) Opinions confirming the company has been ‘duly incorporated and organized’ and ‘active and capable of carrying on its business’ (among other things). Guess what - the lawyer can’t give that opinion unless you actually are those things! So you’ll be spending $600 - $1000 (or more) to get all those corporate records done on a rush to accommodate your bank financing.
CRA Audits: tax risk is real. And CRA takes the position that if you want all the (tax) benefits of a corporation, you better act like a corporation. If you take shortcuts and don’t have proper organizational corporate records, it could get ugly. For example, if the corporation declares and pays dividends to shareholders but there is no evidence or documentation that shares have been properly issued, there are lots of nasty implications for the corporation, its directors, and the individuals receiving the dividends:
For the Corporation
Disallowed Deductions: The CRA may disallow the deduction of dividends if there is no evidence of shares being issued. This can result in higher taxable income for the corporation.
Penalties and Interest: The corporation may face penalties and interest for underreporting income or failing to comply with tax regulations.
Reassessment of Dividends: If the CRA reassesses the dividends, it could reclassify these payments as other forms of income, such as shareholder benefits. This reclassification can lead to additional taxes, penalties, and interest.
Increased Scrutiny: The corporation may be subject to increased scrutiny and audits by the CRA, leading to further investigations into its financial practices.
For the Directors
Personal Liability: Directors can be held personally liable for the corporation's tax debts if they fail to exercise due diligence in ensuring the corporation's compliance with tax laws.
Increased Scrutiny: Directors may face increased scrutiny from the CRA, leading to audits and further investigations into the corporation's financial practices.
For the Individuals Receiving Dividends
Tax Reassessment: Individuals who received dividends without proper evidence of share ownership may be subject to tax reassessment. The CRA could reclassify these payments as other forms of income, potentially leading to higher tax liabilities.
Penalties for False Reporting: If individuals knowingly received dividends without proper share issuance, they could face penalties for false reporting or omissions on their tax returns.
Have we scared you enough yet? If you want to incorporate, please reach out to us – we can help you set up a corporation the proper way and guide you through the entire process. Honestly - it will probably save you money in the long run. Plus you can sleep at night knowing everything is in good order.
This is not meant to be, and should not be construed as, legal advice for your specific situation. You should contact one of our lawyers here at Richards + Company for further information and to discuss your particular facts and situation.
Darren L. Richards practices real estate and corporate/commercial law with Richards + Company in Edmonton, Alberta; depending on who you ask he is either ranked #1 or one of the ‘three best real estate lawyers’ in Edmonton.
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