Many tenacious clients grimace when they debate hiring a lawyer to help them incorporate.
As a DIYer myself, I get it. In this article, I walk you through my recommendations for incorporating to help you decide if you should hire a lawyer.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
I am a DIYer.
From butter to bread I take pride in my own work, have any ‘anything is possible attitude’, enjoy learning new things and appreciate saving some money.
This DIY attitude was how I tackled my own incorporation.
I dove into legal research online and thought back to the structures of the many clients I had helped as a staff accountant.
Now, as a Chartered Professional Accountant who reads taxation law, I was confident in my abilities to overcome this challenge.
Instead, I became very frustrated and overwhelmed with the information available online.
Nothing I read seemed to answer my specific questions and kept leading me down rabbit holes.
After a few wasted hours, I considered that incorporation setups are something that can cause a lot of headaches down the road if done improperly… So, I retreated to my own area of expertise, taxation, and reached out to a corporate lawyer who provided me with the assistance I needed.
My lawyer’s basic template had all of the aspects I had been looking for and provided me with the confidence I needed in my business structure.
Yes, It's Expensive
Hiring a lawyer is an important first step to properly setting up a corporation.
A lawyer can be expensive with fees often ranging from $1,500 - $2,500. Despite the extra expense, I think a lawyer is well worth the cost.
When clients DIY their corporation, our tax planning options often go down the drain.
But... It Can Save You Taxes
One client, a husband and wife team experienced this drawback after they self-incorporating.
They ended up with a single share class split between the two of them.
I see this all the time with self-incorporation. Both the husband and wife owned 100 Common shares.
This gave my clients identical ownership of their corporation but gave us, as their accountant, no dividend allocation options.
If the same class of shares are held, dividends have to be split 50/50 between both spouses regardless of the work effort and tax bracket.
A better plan for this client would have been to own the same number of shares, with the same rights and restrictions, but holding different share classes.
An example of this is one spouse holding 100 Class A shares with the other spouse holding 100 Class B shares.
This allows us to allocate dividends to each spouse individually and provides significantly more tax planning options.
Setting up proper share classes is where a lawyer really comes in handy and can save you thousands on taxes down the road by allowing more flexibility.
And... It Can Save You Frustration
Another client of mine experienced even more frustrations after self-incorporating.
As an independent subcontractor with no employees and no spouse, my client didn’t see the harm in self-incorporating.
After reviewing countless government websites, my client ended up with no shares of their corporation – meaning no one owned their business… And a PST # or provincial sales tax number they didn’t need and had to de-register with the Ministry of Finance.
This was a headache and ended up costing them even more in legal fees to fix things.
These client experiences are results I see all the time with those who choose to self-incorporate.
Because of the long-term tax planning implications, I would highly recommend a lawyer be hired to help you incorporate.
"This was a headache and, ended up costing them even more in legal fees to fix things." – Jillian Battaglio, CPA, CA
Don't Forget Your Minute Book
Hiring a lawyer is also recommended for the ‘minute book’ of the corporation or the annual maintenance filings that a corporation requires.
This filing is called an Annual Report and is done with your provincial government. It is an additional filing on top of a corporate tax return and not something your accountant should be helping with.
If the annual report isn’t filed, a business can experience some very serious consequences.
Consequence # 1
After 3 years of non-filings, a provincial government might automatically deregister a corporation.
This means that any assets held, like a company vehicle, can revert to the government (yikes!!).
Consequence # 2
Additional corporate disclosures and mandatory filings can come with big penalties if missed.
Many clients are often unaware of these types of disclosures.
One example is the Transparency Registry in British Columbia which can have fines of up to $100,000 if not filed.
Consequence # 3
Not filing shareholder declarations can cause dividends or other tax planning to be contested by the Canada Revenue Agency.
This can cause HUGE headaches and significant CRA penalties.
Now if you currently manage your own corporate minute book, the above consequences aren’t something I see very often; but, they are risks that you are going to want to manage.
Please, Just Hire A Lawyer
Hiring a lawyer can absolutely be expensive; however, the risks of not using legal services may be even worse.
This is why I always recommend clients use a corporate lawyer to help them set up and then maintain their corporation.
I myself use a corporate lawyer and am very thankful for their services.
Now if you’d like a few recommendations on business structures so you can be well informed when you visit your lawyer, check out our handout available on our website.
All right, I hope this article has helped you decide if you should hire a lawyer.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.