Incorporating your business can be a significant decision that affects your legal liability and corporate structure. We sat down with Kendall Barban to discuss processes and considerations of incorporations that business owners should be aware of.
What does it mean to incorporate your business?
When you incorporate, you are transitioning from a sole practitioner to now operating under a corporation. As a sole practitioner, you are personally responsible for the various aspects of the business, it is tied directly to your name. That shifts slightly when you create a corporation. Technically, the corporation is its own separate legal entity.
What are the benefits of incorporating?
Incorporating adds an additional layer of protection. When you are a sole practitioner, everything is in your name and signed off by you personally. When you incorporate, your liability changes. It puts distance between you as a person, and your corporation as its own legal entity. Before incorporation, you would have business debts in your name, after incorporation it is more likely you will take out debts in the corporation’s name. This is an added layer of protection. For example, if your business loan defaults, the only assets that can be seized are those in the name of the corporation (assuming you have not put up personal collateral). You will not be taking on the same level of personal risk after incorporating.
There is also the advantage of setting up a corporate structure. If there is more than one person in the business, incorporating offers a good opportunity to solidify corporate roles and responsibilities.
What does the actual process of incorporation look like?
While the details will vary by circumstance, there is a general formula we follow when approaching incorporations:
- Addressing general questions: Is there more than one person involved in the corporation? If so, who will hold which position? Who will be shareholders?
- Strategic review: Often, we will go over these answers with the client to ensure they understand the structure of the corporation. We want to ensure we are clear, thorough, and precise.
- Drafting and registering: Once we have all the information, we can draft up incorporating documents and get them registered with the provincial or federal governments.
- Post Incorporation: Following, and often during, the incorporation process it’s important to remember that there are often other steps to take, for example if you have multiple shareholders a shareholder agreement should be drafted.
What important questions do we need to ask when incorporating?
When we go through the incorporation process, we provide clients with a questionnaire about incorporating their business. There are a few questions we ask that I always pay special attention to:
- How many shares are you issuing? What kind of monetary value are you giving to those shares and why have you chosen that monetary value?
- What role are you assigning to each person? What capacity will they have in this company?
Oftentimes people may not thoughtfully consider these questions and their nuances, especially in the early stages of incorporation. Will you have voting shares or non-voting shares? How will you divvy these things up? What comes with the titles you assign? These are big questions that we want to ensure you understand fully and have carefully considered. These answers can change over time, and they often will, but you want to start with a strong foundation. Documents can always be amended, but we have to start somewhere.
3. Where do you want to incorporate?
It’s important to be strategic with whether you incorporate provincially or federally. What works best will vary based on what your business is, and where you are operating out of. Part of how we support our clients is by talking through their options – whether it be incorporating in a single province to start, incorporating in multiple provinces, or incorporating federally. We will help assess which option will function best for your business in the long term.
What happens after incorporation?
Upkeep for incorporation is important. Businesses will need to do annual compliance updates, where they are updating their corporate minute books and filing minutes and resolutions.
In instances where major changes are made, such as bringing on a new shareholder, it is best practice to update these records at that time. While you can wait until year-end to update corporate documents accordingly, I would recommend that you stay on top of these.
When should a business incorporate?
When the business starts to take on higher profit and higher liability, or if you are working with another person(s), you should consider it. Incorporation is a natural step in your business’s success. The additional layer of protection also makes the most sense for your personal long-term success.
Caravel has a team of over 90 qualified and experienced lawyers, including corporate lawyers who can help you navigate the incorporation process. Get in touch with our team today to learn more about incorporating your business.