Often when speaking to clients with new corporations, or those thinking about setting up a corporation, a discussion I have is along the lines of “I’m just going to incorporate the business myself. The lawyer I spoke to told me it would be one or two thousand dollars for them to do it, but I looked online and it only costs $300.”
A lawyer brings much more to the process than simply going to the Ministry on your behalf, and missing the steps they provide can be problematic.
The Incorporation Process
When a company is first incorporated, the articles of incorporation bring the company into existence. These documents will indicate what types of shares the company can issue, and restrictions on what the company is allowed to do.
A company that is newly incorporated doesn’t yet have any owners. The articles of incorporation will identify who the initial directors are, but don’t say anything about issued shares – the actual ownership of the company. At this stage, no one owns the company and the company does not have a president or management team.
The minute book is a set of documents, usually prepared by a lawyer, which outline more details about the company. They spell out who owns the company, how many shares those people have, who the directors and management team are, as well as many other relevant rules and regulations for the corporation.
These documents are relatively standard in nature but are tailored for each company. The specific structure of a company’s ownership should be guided based on your personal goals around who makes the decisions for the company, as well as motivated by your long-term tax and succession planning goals and decisions. These documents should be reviewed by your accountant and lawyer to ensure they achieve those goals, as fixing errors can be costly.
The articles of incorporation are required to be submitted to the relevant government authority to bring the company into existence, while the minute book is an internal document that is kept by the company. For this reason, these critical documents are often overlooked when a company is being set up in favour of saving a little money.
When bringing in future investors, selling a business, or even paying yourself, not having these documents prepared can have serious ramifications. If you are thinking about incorporating, or have, and aren’t sure you’ve done it right, ensure you speak to a corporate lawyer to make sure it’s done right.
Ian Edmonds is a CPA, CA and CPA (NC) working in Toronto with small and medium-sized businesses, individuals, and not-for-profit organizations in Canada and the US to provide personalized, approachable tax and accounting advice and services and help people avoid expensive tax situations. Contact us now to set up an appointment.