Have you ever tinkered with the idea of incorporating your business? I’ve been having quite a few discussions with clients about incorporating lately and it’s dawning on me there are quite a lot of myths floating around out there.
So, before you start filling out your incorporation application, I thought you may be interested in knowing what those myths were, so that you can figure out if a corporation is actually the best business structure for your goals.
**Real quick, if you already know incorporating is right for you, head on over to my Youtube channel for a tutorial on how to incorporate. And don’t forget to pocket your free checklist on incorporating your business in Canada so you can breeze through filling out those government forms.**
Myth #1: Every business should incorporate
When trying to figure out when to move from a sole proprietorship or partnership into a corporation, any advisor worth their salt will give you one answer:
(I know I know, how much more of a lawyer answer can I give)
But, really, the best time to incorporate depends on your present AND your future plans.
Because incorporating allows you to create a legacy brand, something that outlives you, it’s important to consider factors such as who would you like to have control of the company? And by how much?
Getting clear on how much control you’re willing to give up is important because, when you do decide to incorporate you’re also accepting a bunch of duties. One of the most important of these duties is the duty of a corporation’s directors to act in the company’s best interests.
Now, usually, you don’t have to worry about running afoul of this duty because, well, acting in the best interests of your company comes as second nature to you as a sole proprietor or as a partner in your business. After all, you’re always thinking about what would be good for the company’s growth.
But, despite this, one thing I find entrepreneurs within corporations don’t necessarily think about is… within their duty to act in their company’s best interests is their duty to avoid conflicts of interests should they also want to be a director of the company, that is, steering their company’s day-to-day operations.
Let’s say, for example, you find a potential supplier overseas. And this supplier, to woo you over, jetsets you off to France. Not for anything ulterior, but simply because they believe that there are some really, really good quality fabrics there and this trip will allow you to vet their manufacturing company. But then, they also offer (and actually do!) pay for your five-star hotel and other vacation expenses. So your trip’s purpose is effectively business-slash-leisure. Had you agreed to this whole deal, while being a director of the corporation, you just put yourself in a conflict of interest by accepting some benefits from a third-party.
And what happens then? It’ll be a post for another time.
But, for now, if you project your future income streams to include situations that could you put you at odds with your duty to your company (for example, signing up as an affiliate to get commissions), then you will want to consider when to incorporate your business very carefully so that you can maintain as much control over its direction.
Myth #2: Corporations = tax savings = more money in your pocket
Some people talk up incorporations as business structures because allegedly, there are more financing opportunities for corporations. They suggest that incorporating gives businesses an air of legitimacy that makes banks and angel investors more willing to provide the company with capital.
And while that may be true, incorporating a business carries with it some additional costs.
For example, because a corporation is technically a separate legal person, your start-up costs and business expenses which you could have applied against your personal income–and therefore, potentially create some tax savings–is not going to be available to you in the same way as if you’re a sole proprietor or partner in a business.
As a separate legal person, your corporation will also have to file its own taxes, so you will likely need to budget for a professional tax preparer in your annual revenue plan.
Then, there are the administrative costs. i.e. all the paperwork.
Aside from having to fill in your corporation application, you’ll also have to create something called a “corporate minute book.” What this is basically a binder, digital or analog, that lets the need-to-know people (i.e. your shareholders, present and future, and the government) know about what the directors have decided as the direction of the company.
There will also be yearly filings.
And, of course, you have to make sure that you’re running your business keeping the relevant corporations act in mind. That is, the Canadian Business Corporations Act, if you’re a federal corporation, and your province’s corporation act if you are a provincial corporation. For us in BC, that’s the Business Corporations Act.
Myth # 3: Incorporating your business protects your personal assets from creditors or if you get sued
Most of my business set-up clients come into my office because someone told them at one point that incorporating their business protects their personal assets from liability. Full stop.
And then I get to be damper in their excitement because I have to tell them “we-ell…. not quite.” (le sigh, not fun)
See, while it’s true that, for the most part, courts want to maintain the “separate legal person” that is the corporation, there will be times when they will be willing to “pierce the corporate veil”… that is, for the purposes of a lawsuit, in order to provide some kind of redress to the person who is hurt or suffers other losses because of a business, the court will be willing to hold the directors or shareholders liable.
If you’ve read this far, you’re probably still keen on incorporating.
Or at the very least, knowing what the process looks like.
Got you, friend!
Click on the image below to watch or listen in on my video tutorial for incorporating in Canada.