Should I incorporate? – Post 2

Posted: February 16, 2013 in Business startup
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I went over some advantages to incorporating in my last post. This post I will focus on some of the downsides of incorporation. A corporation is a separate legal entity. The corporation can outlive the shareholders. Take these thoughts into consideration before incorporating:

  1. Should you die suddenly, who will be your estate representative? A corporation cannot be wound up overnight. You need to appoint an experienced executor/executrix who can either wind up the business or sell the business.
  2. Do you have a succession plan in the event of your death and if you have family members working in the business?
  3. The previous posts seguays nicely into this item: make certain your equity in your business is insured. The value of your shareholder loans and the computed market value of your equity can be a large dollar amount. You need to insure your interest in your corporation.
  4. You must carefully plan how your equity will be set up in a corporation. Several classes of shares is preferable to only common shares. You also should consider preferred shares as well. This will entail consulting with lawyers and accountants and this is not inexpensive.
  5. Understand that the preparation of year end T2 tax returns and financial statements is not inexpensive either. A Notice to Reader statement could be $1,000 to $2,500 and a Review Engagement financial statement could be $3,000 and up.
  6. Just because you own all (or a majority of) the common stock doesn’t mean that you don’t have obligations under both the federal and provincial corporations acts. The declaration of dividends, the approval of financial statements and other company matters should be included in the corporate minute book. A lawyer usually does this – for a fee of course.
  7. Your capital in your corporation cannot be extracted easily. There may be bank loans covenants preventing the payment of dividends or extraction of shareholder loans for a period of time.

There are two creditors for whom the “limited liability” doesn’t apply.

  • Your commercial lender. If your company has a line of credit and/or a term loan, they will require that the shareholder and his/her spouse guarantee the loans personally. You will have to file a Statement of Net Worth to support the guarantee and it will form a part of the loan covenant.
  • The Canada Revenue Agency for payroll remittances, HST remittances and corporation tax installments. The Directors of companies are personally liable for CRA obligations.

In addition, the litigious nature of our society is such that even in civil lawsuits, both the company and the owner/shareholder can be named as co-defendants in lawsuits. Of course, if there is corporate malfeasance, both the company and directors can be liable.

So, consider all the pros and cons before incorporating

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