6 Common Mistakes
People make when Incorporating
Mistake #1:
Including Your Spouse as a Director
A lot of business owners think it is a great idea to include your spouse as a director of your corporation.
However, this step comes with several implications. Including your spouse as a director when it is not necessary, can create a fiduciary responsibility and unnecessary risk for your spouse. Therefore, it is important to appoint directors based on their qualifications and the strategic needs of your company, to avoid unnecessary risks and responsibilities. Your spouse can still be involved in the business and benefit from income splitting as a shareholder (talk to your accountant about how to do this) without being exposed to the liabilities of a director.
Mistake #2:
Not Preparing Initial Minutes and Corporate Minutes
Many business owners overlook the importance of preparing and maintaining a corporate minute book, which is a legal requirement.
It involves documenting and keeping a record of all important decisions, resolutions, and transactions that occur within your company. It should contain the certificate of incorporation, articles of incorporation, and initial documents appointing shareholders, directors, and officers. By not preparing your initial minutes and failing to maintain an up-to-date corporate minute book, you risk non-compliance with legal and regulatory obligations. This can result in penalties, fines, and potential legal disputes. Additionally, a properly maintained minute book is essential for demonstrating the legitimacy and credibility of your corporation, especially in the eyes of potential investors, lenders, or government authorities. True North Start Up can take care of all of this for you.
Mistake #3:
Selecting The Wrong Business Structure
One of the most crucial decisions you need to make after starting your business is choosing the correct business structure.
A lot of individuals choose the incorrect business structure without considering its long-term consequences. In Canada, your business can operate as a sole proprietorship, a partnership, or a corporation. Each option has its pros and cons, with important differences in terms of startup costs, liability, tax rates, and tax planning. A sole proprietorship is relatively cheap to set up. However, it comes with unlimited liability, and all income is subject to personal tax rates. A partnership is similar to a sole proprietorship, but with the added disadvantage that either partner can bind the other, which can be a significant risk. A corporation can be a bit more costly to set up and maintain, but offers significant tax advantages, such as the ability to leave money in the corporation at a lower tax rate, limited liability, and no EI premiums if you choose not to contribute. Despite the upfront costs, a corporation can save you a lot of money in the long term. True North Start Up will assist you with this.
Mistake #4:
DIY Incorporation Without Professional Advice
Too often business owners take the advice of a friend and go online to incorporate.
If you decide to incorporate on your own, you will need to make several important about directors, shareholders, share structure, minute-books, effective year-end dates etc. These decisions have significant legal and tax implications both in the short and long term. The DIY incorporation approach might seem cost-effective initially, but it can result in costly mistakes that could have been avoided with professional guidance. Therefore, it is crucial to consult a professional who can help you avoid these costly mistakes so you can save a lot of money in the long run. True North Start Up always uses a lawyer when incorporating for our clients.
Mistake #5:
Impatience With the Incorporation Process
One common mistake that individuals make while incorporating their business is getting impatient with the timeline of the entire process.
They expect the process to be completed immediately. When this doesn’t happen, they tend to get frustrated and make mistakes such as providing incomplete documentation. If you are in a rush, you can clearly communicate this to your service provider. Here at True North Start Up, we provide expedited incorporation services to our clients, and we can complete the entire incorporation process within 2 hours if needed – provided all information is provided to us in time.
Mistake #6: Neglecting Ongoing Corporate Maintenance
Now that you have incorporated your business – it is extremely crucial to maintain your corporation and ensure that you’re complying with all the legal and tax requirements.
Many business owners neglect corporate maintenance which leads to compliance issues, missed opportunities, and potential penalties. After incorporating your business, it is important to file your annual returns, maintain your corporate records, and file your corporate tax returns along with other tax-related filings such as GST/HST returns. It is also important to understand the difference between a Corporate Tax Return vs an Annual Return. This can help you avoid penalties, interest charges, and it confirms that your company is still active and doing business.