Seven Mistakes Businesses Make When Incorporating
Posted: 2013-10-09 14:34:41
Incorporating is a great way to organize your business, protect your assets, and save money on taxes as you grow. A lot of mistakes are made when incorporating as well, here are seven of the most common errors people make when incorporating a small business.
1. Incorporating before choosing your name.
A corporation can be identified by a number or by a name. Many businesses envision their corporation having a name rather than a number but have not selected a name by the time they are ready to incorporate. Those who incorporate a numbered corporation intending to change its name in the future should be wary that to do so costs almost the same amount of money as incorporating in the first place. Whats more is by that time, your desired name may not be available.
2. Incorporating in the wrong jurisdiction.
Corporations in Canada can be incorporated provincially or federally. Businesses that intend on operating in more than one province at some point should strongly consider incorporating federally. Incorporating federally will give your corporation the right to carry on business in any province and will ensure that you can use your corporations name in that province. If you incorporate provincially and would like to expand to a new province, you will need to incorporate again and risk not being able to acquire your desired name.
3. Being too specific.
Your articles of incorporation set up the structure of your business. Amending your articles can be a difficult, time-consuming, and expensive process. As such, you will want to leave yourself as much flexibility as possible when drafting your articles of incorporation. Creating a large range of share classes, allowing for unlimited authorized share capital, and allowing for a range of directors are all examples of ways you can leave yourself flexibility to set up your corporate structure in the future without amending your articles.
4. Not doing your corporate records.
Many businesses will file their articles of incorporation and then leave it at that. However, corporations are required to keep certain records detailing things like who their directors are, what the status of its share capital is, and any resolutions or by-laws that are passed. If you ever want to borrow money for your business, sell shares, or sell your business, you will likely need to present detailed corporate records. It is better to being doing this from the beginning than to try and remedy deficiencies retroactively when the records are required.
5. Believing that the corporate veil equals unlimited liability protection.
Incorporating your business will shield you from personal liability in most instances. However, there are certain times when you may be held personally responsible for something that your business does. Corporate directors have a fiduciary duty to the corporation and its shareholders, meaning they must act in the companys best interests or risk being held personally responsible. Additionally, there are a number of specific instances where directors can be held personally liable such as for unpaid wages or for issuing shares at less than fair market value.
6. Not doing a shareholders agreement.
Many businesses will have only a small number of participants. These businesses should strongly consider signing a unanimous shareholders agreement that will set out the parameters of their business relationship, including how each person will exit the business and how to resolve conflicts that arise. While you may work well with your partner now, issues will inevitably arise in the future. These issues will be much easier to resolve if you have agreed ahead of time how you will reach a resolution in these circumstances.
7. Not incorporating at all.
Many businesses wait as long as possible before they incorporate. Often, people are spurred to incorporate their business because a problem has arisen or because there is an immediate need for the company to be incorporated. However, oftentimes this is too late. If you are operating a business where there is potential for liability, it is best to be proactive and incorporate so you can avoid being held personally liable for anything that goes wrong with your business. Many a sole proprietor has lost a chunk of their own personal finances because they put off incorporating their business.
Disclaimer: Content on this website is provided for informational purposes only and does not constitute a legal advice.