CUSTOMIZE YOUR INCORPORATION FOR BETTER RESULTS
Business incorporation lawyer assisting Calgary entrepreneurs and start-ups incorporate the appropriate corporate entity to advance their commercial ventures.
Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com
You cannot overlook the importance of customizing one's business incorporation to meet the distinctive aspects of your business arrangements and structuring it for financial optimization. Far too often individuals incorporate their new business without any serious consideration or professional consultation, such that they have an inadequate corporate structure that ultimately creates business problems and/or fails to optimize available financial and tax opportunities.
Given how consequential a specifically tailored business incorporation can be to properly taking advantage of structural, legal, financial and tax opportunities, the long-term value of customizing one's incorporation cannot be overstated. Instead of proceeding with a "generic" or "off-the-shelf" business incorporation, which doesn't account for the unique needs, goals, and complexities of your business and its ownership, serious consideration needs to be given to customization. Frequent problems arising from a generic business incorporation include:
A. Inadequate Share Structure and Shareholder Rights
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Problem: Generic Articles of Incorporation often come with a very basic share structure (e.g., one class of common shares with full voting rights). This "one-size-fits-all" approach is rarely suitable for businesses with multiple founders, investors, or plans for future growth.
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Consequences:
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Disputes: Without clearly defined rights for different classes of shares (e.g., voting vs. non-voting, preferred vs. common, dividend rights, liquidation preferences), disagreements can easily arise among shareholders.
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Difficulty in Raising Capital: Investors will demand specific share classes that protect their interests (e.g., preferred shares with liquidation preferences, anti-dilution rights). A generic structure makes it difficult to accommodate these needs without complex and costly amendments later.
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Estate Planning Issues: If a founder passes away, a generic structure may not facilitate a smooth transfer of shares or determine valuation fairly, leading to family disputes or business instability.
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Tax Inefficiencies: An optimal share structure can be crucial for tax planning strategies like income splitting or the Lifetime Capital Gains Exemption. A generic structure might miss these opportunities.
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B. Lack of a Comprehensive Shareholders' Agreement
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Problem: While technically a separate document from the Articles, a "generic incorporation" often implies skipping or underestimating the need for a tailored Shareholders' Agreement. This agreement governs the relationship between shareholders and the corporation.
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Consequences:
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No Dispute Resolution: Without clear mechanisms for resolving deadlocks or disagreements, disputes can paralyze the company or force its dissolution.
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No Exit Strategy: What happens if a shareholder wants to leave, is fired, or dies? A generic setup won't address buy-sell clauses, valuation methods, or rights of first refusal, creating uncertainty and potential forced sales.
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Lack of Control Provisions: How are major decisions made? Who has veto power? Without these defined, power struggles or operational paralysis can occur.
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Unclear Funding Obligations: If the company needs more capital, who contributes and on what terms?
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"Shotgun" Clauses: Without proper agreements, default legal provisions (like "shotgun clauses" in some provinces) can force a shareholder to sell or buy shares at an undesirable price.
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C. Default Bylaws That Don't Fit the Business
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Problem: Most incorporations come with a standard set of general bylaws. While functional, they might not be tailored to the specific operational needs, meeting requirements, or internal governance preferences of a particular company.
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Consequences: Inefficient decision-making, unclear director/officer roles, or a failure to properly document corporate actions.
D. Failure to Address Industry-Specific Needs or Regulatory Compliance
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Problem: A generic incorporation won't consider the unique regulatory environment of specific industries (e.g., healthcare, finance, cannabis, real estate).
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Consequences: Non-compliance with industry-specific laws, licensing requirements, professional body regulations, or environmental standards, leading to fines, legal action, or loss of operating licenses.
E. Inadequate Protection Against Personal Service Business Rules
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Problem: For independent contractors, a "generic" incorporation done without understanding Personal Service Business rules can negate the tax benefits. If the contractor primarily serves one client and operates like an employee, the Canada Revenue Agency can reclassify them as a Personal Service Business, leading to higher tax rates and limited deductions.
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Consequences: Unexpectedly high tax bills, penalties, and a loss of the very tax advantages that made incorporation attractive.
F. Unoptimized Tax Structure
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Problem: While incorporation offers tax benefits, a generic setup might not fully leverage them. Proper tax planning involves more than just incorporating; it requires careful consideration of salary vs. dividends, holding companies, family trusts, and other strategies.
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Consequences: Missing out on significant tax savings, paying more tax than necessary, or creating unforeseen tax liabilities.
G. Overlooking Ongoing Compliance Requirements
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Problem: A "generic" incorporation might give a false sense of completion. Many entrepreneurs aren't fully aware of the ongoing legal and accounting obligations.
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Consequences: Failure to maintain a corporate minute book, neglecting annual corporate filings, not keeping corporate records updated, or missing tax deadlines. This can lead to the corporation falling out of "good standing," potential dissolution, and loss of limited liability protection.
H. Choosing the Wrong Jurisdiction (Federal vs. Provincial)
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Problem: A generic approach might default to a federal incorporation, or the perceived cost savings might motivate one to select a federal corporation, which all too often are illusory.
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Consequences: With increased disadvantages associated with federal incorporation, as compared to further advantages being availabel through provincial incorporation and other legal arrangements to provincially incorporated companies, as well as long term cost and administrative demands.
If you are interested in maximizing the long-term success of business incorporation and optimizing available legal opportunities through customization, as opposed to simply accepting the basic minimums of a generic incorporation, you should be working with an experienced corporate lawyer to achieve its objective goals. To incorporate your business, contact our law firm at 403-400-4092 or via email at Chris@NeufeldLegal.com, in addition to other incorporation-related legal work.
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