Two Experts: Structuring Your Small Business

Category: Accounting Legal issues

Do you ever wish your two best friends were a lawyer and an accountant so you could get free advice for your small business? We can help you with a lot of things at Business Link, but we're not magic. Or are we? Through the magic of relationships, we've asked two of our expert volunteers, Crystal Lucier, an accountant, and Jordan Mertz, a lawyer, to answer some of the most pressing questions we get about structuring your business in Alberta.

How can I change business structures (i.e. from sole proprietor to corporation)?

Lawyer: From a high-level and purely legal standpoint, it is not difficult to change business structures. What exactly is required will depend on the type of assets held by the business. To answer the question simply, your lawyer would prepare either a rollover agreement or a purchase agreement between the sole proprietor and the corporation to create the arrangement by which the assets and business operations are transferred from one to the other (this would include the price, date, conditions, terms, etc. associated with that transfer). An agreement to record the transaction may be important to prove to others, including the Canada Revenue Agency (CRA), what happened.

Accountant: Incorporating can be completed by a lawyer or with the help of an accountant and requires a bit of pre-planning, so it is important that you receive some professional help and advice. In some cases, you may have assets or inventory to transfer over. There are special documents that must be completed and filed with CRA, if that is the case. These Sec 85 documents have deadlines, so don’t wait!

What considerations and steps do I need to take?

Accountant: When incorporating, you must first discuss tax planning and business goals. Once we have considered the structure of the business, we can file documents to incorporate and set up shares for the owners. It is important to discuss this process as it can be much more complex than it seems, and if you incorrectly set up your share classes, you may be limiting your tax planning benefit of the corporation. Also required are share certificates and a minute book. Many first-time incorporators are not aware of this step—they often omit the lawyer side of the transaction.

Lawyer: As with many such transactions, there are a number of ways to transfer assets between entities. However, the determination as to which method to use, and the exact details of how it should be done, should be determined by your accountant because one method may be vastly more tax efficient than another. The steps will depend entirely on what is being transferred and how the professionals recommend the transactions to occur. An example of normal considerations would be:

  • Are the assets even transferable? Some businesses require permits to be obtained and sometimes these permits cannot be transferred.
  • What is being given by the purchaser entity in exchange for the assets and business operations? This has profound tax implications.
  • Should all of the assets be transferred? Sometimes it makes sense to have certain business assets retained and held in a non-operating entity. For example, intellectual property (such as a patent or copyright) might be held by an individual or corporation which is not actively conducting business activities in order to compartmentalize the liability. The operating entity would license the use of the intellectual property from the holding entity so that if the operating entity suffers a large loss, the intellectual property is protected. This strategy is often used in the construction industry, whereby all of the construction equipment and assets are held in a separate company and leased to the operating company.

What are the processes for newly incorporating?

Lawyer: This is relatively straightforward. The process, regardless of whether undertaken by the business owner or the lawyer, is generally as follows:

  1. Pick a name (which isn’t already taken and is not similarly confusing with an existing business name, trade name, or trademark) or default to a numbered company.
  2. Determine the required share structure based on the needs of the business. For example, how many share classes should be authorized and what should be the rights and restrictions on each such share class? This will largely depend on how many shareholders are intended and whether there should be differences in the types of shares they hold. This step is critical and where a lawyer or accountant can provide significant value. If you handle this yourself by incorporating at a registry office, there is a risk this will not be done properly and you’ll end up spending more money to fix it than you would have paid to simply do it correctly the first time (as noted in a previous blog).
  3. Prepare and file articles of incorporation (which includes a description of the share structure). This requires that at least one director be appointed, so an address of that director is required to be submitted to Alberta Corporate Registry.
  4. Apply for business number and CRA accounts.
  5. Issue shares and organize your minute book. This needs to be done within one year following incorporation (which occurs in step 3 above).

Accountant: The steps from an accounting perspective are as follows:

  1. Consult with an accountant.
  2. Consult with a lawyer.
  3. Determine share structure with professionals.
  4. Incorporate (please utilize the services of a professional!).
  5. Ensure you have your minute book compiled and share certificates are issued.
  6. Register a business number and GST program account (where applicable) with CRA.
  7. Ensure you understand your commitments and the regulations per Alberta Business Corporations Act (a professional can advise you of what is required of you annually).

How do I find a professional that will work for me?

Accountant: Meet with someone that is trusted (for more on trusted advisors, read this blog post). You can find this person through events, word of mouth referrals, or simply by asking around. Sit down for a consult and get a feel for whether you and your professional would be a good fit. It is important that you feel comfortable and supported.

Lawyer: Word of mouth is usually a good start, followed by some online investigation. As with many other professions, lawyers and accountants have different specialties, so you want to consider your specific needs and ensure that the professionals you retain have sufficient experience in those areas. A lawyer who practices in wills and estates or immigration may not be the best choice to handle contact drafting or business acquisitions (regardless of how long they have been practicing). Most lawyers will have a description of their areas of expertise on their website. If not, you should ask them about their practice areas before you tell them what you need.

For more tips on finding a lawyer or accountant, visit our website.

What is one question everyone seems to ask you?

Lawyer: “Do I need a unanimous shareholder agreement?” The answer is: no, not necessarily. However, without an agreement to deal with certain corporate governance and disposition matters, you can find yourself in a very difficult situation for which there may not be an adequate remedy in law. To put this more simply, a unanimous shareholder agreement is like a prenuptial agreement for shareholders of a corporation. Without an agreement to allow for a fair divorce or to tell you what to do in a dispute or to create a mechanism to determine a fair price to pay someone if they want to leave, you’re stuck with negotiation or litigation, which can be extremely expensive and ineffective. You do not necessarily need to spend money to have a unanimous shareholder agreement drafted when you first start your business; however, it is worth considering when you feel that you have something to lose and before your relationship with the other shareholders starts to break down.

Accountant: “How do I know if I should incorporate or have a proprietorship?” The answer to this is simply: have a discussion with a seasoned professional about your specific business to determine what makes the best sense for you. Circumstances regarding liability and tax savings are very different for every business. There have been some changes recently to tax rates and dividends. It is important you know the pros and cons before making a decision.

 

Ready to take your next step towards starting your business?

If you are looking for one-on-one support for your small business, give the Business Link Business Advisors a call at 1-800-272-9675 or email askus@businesslink.ca. You can also visit the events and webinars pages for upcoming activities!

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About the Author

Crystal Lucier is an accountant and entrepreneur. She owns Preferred Tax Solutions, and has been working in the finance industry for 18 years. Jordan Mertz is a lawyer with Bryan & Company. He practises corporate/commercial law and has experience in a wide range of corporate matters. Both Crystal and Jordan are frequent collaborators with Business Link.