Basics for
Engineers
by
Mike Volker
|
Business Basics for Engineers by Mike Volker |
When you incorporate a company, remember that all you are really doing is creating a new legal entity - i.e. a new, taxpaying corporate body with its own "soul" and presence. Incorporating a company offers you many advantages, even if you are a one-person business. Some of these advantages are:
Protecting Your Personal Assets
This is the number one reason why many people incorporate. In case of a lawsuit or judgment against your business, no one can seize your personal assets, e.g. your house, car, boat, bank accounts, etc. unless you have pledged these as collateral. Incorporation is the best protection for personal assets that you can get in business. However, there are other liabilities which you may not be able to avoid by incorporating. For example, if you do not remit certain taxes, you could be held liable as a director of the company. Note that shareholders are not necessarily held liable - only the director(s) and they are not necessarily the same person although in startup companies usually the shareholder(s) and director(s) are one and the same.
A Possible Tax Shelter
There are many more tax options available to corporations than there are to proprietorships or partnerships. You can establish various pension, profit-sharing and stock option plans which are favorable to the owners of the corporation. For example, in most cases, a corporation can deduct your life and health insurance premiums whereas you could not do this personally. You can also pay salaries to family members thereby reducing your family's overall tax burden. Furthermore, family members can be shareholders (even through off-shore trusts or tax shelters) and thereby benefit from lower capital gains taxes when they sell their shares. In Canada, owners of a Canadian privately controlled company (CCPC), can sell their shares and enjoy the benefit of zero taxes on the first $500,000 of capital gains!
Small companies are taxed at lower rates. For example, a CCPC pays less than 22% in corporate income tax on the first $200,000 of net profit which is about half the "big" company or personal rate. Therefore, if a profit is made in a CCPC and if the CCPC's owners do not need this profit to be paid out to them, it can be re-invested by the CCPC.
When for-profit companies are incorporated, at least in Canada, they are incorporated as Canadian Controlled Private Companies (CCPC). (Of course there are also other legal entities such as non-profit charities and societies which may be formed.) Companies, as they grow and expand, may become "public" companies, i.e. have their shares listed on a stock exchange to be traded by members of the general public. The possibility of becoming a public company is not something which one needs to be too concerned about when incorporating initially except that care should be taken to ensure strict compliance with the Act to avoid great legal expenses and headaches later on. Again, good legal counsel is recommended. I know of one case where a company was incorporated by the founders to save a few dollars in legal costs but when it was ready to go public, its records and share structure where a mess which first had to be cleaned up (at great expense and time) before the company could be cleared for going public!
Companies, especially the financial aspects such as share issuances and ownership, fall under the scrutiny of legislation which exists in whichever jurisdiction they are incorporated. The provinces as well as the federal government each have passed "Acts" of legislation for this purpose. In B.C., the "Company Act" sets forth many details relating to the operation and governance of incorporated companies. These constitute a set of rules by which one must abide. Additionally, when you incorporate a company, you will adopt a set of "Articles", or rules, by which you must abide. This entails several pages of documentation and covers matters relating to the issuance, transfer, purchase and sale of shares, rules pertaining to the calling of meetings, definitions of decision making powers, and many other aspects of corporate governance. These rules are useful insofar as they clearly set out what companies may or may not do. Often, the shareholders of a company will enter into a "shareholders' agreement" among themselves and this may further define certain details about how a business will be run and how ownership issues will be handled. However, such agreements are optional whereas the articles of incorporation are mandatory. It is a good idea to fully understand these articles and to become knowledgeable about corporate governance matters.
In a B.C., for example, you need to register with the provincial Registrar of Companies.A registration package may be obtained from any government office. (It may take a week for the name search and registration.) Contact information:
Registrar of Companies
2nd Floor, 940 Blanshard Street, Victoria, BC
PO Box 9431 Stn Prov Gov
Victoria BC, Canada V8W 3E6
Tel: (250) 387-7848 Fax: (250)356-0206
From Vancouver call: (604)775-1041
Web Site: http://www.fin.gov.bc.ca/corppg/default.htm
In Canada, you can incorporate under the Canada Business Corporations Act (the "CBCA") just about as easily as incorporating provincially. Federal incorporations are handled by Industry Canada. What is best? The quick answer is: "Federal". Why? Because it costs only a little bit more (around $100), you get your company's name protected across Canada (not just in one province), there is more flexibility (although it may be harder to get clearance) in choosing a name, and perhaps most importantly, the CBCA statutes are more closely aligned with those in American jurisdictions and hence it may be easier to conduct business with U.S. entities (e.g. investors, partners, etc). Also, insofar as British Columbia in particular is concerned, there are many variations among companies with respect to the "articles of incorporation", meaning that greater care must given to understanding these. Federal companies are governed by statutes and need not have extensive articles. In B.C., for example, it is always necessary to obtain shareholder approvals on certain matters which could cause logistical delays. It really only makes sense to restrict oneself to a provincial incorporation if you plan to keep the company small, closely held (e.g. you plan to be the sole shareholder), do business only in B.C., do not need cross Canada name protection. If you are a federal corporation, you could then use your name in the Canadian internet domain name system, e.g. yourname.ca. If you are a B.C. company, you'd have to use yourname.bc.ca. A company such as a personal holding company (for purposes of making investments in other firms) would be a good example of a company that you might incorporate provincially. If you're not sure, go with the CBCA. Note - you will still need to get provincial registrations in those provinces where you intend to do business (so that they can get you to collect sales and other taxes), but that's not a big deal.
In Canada and the USA, companies are generally incorporated in a province or state. In many countries, incorporations are handled at a national level. If you are a Canadian company and you intend to conduct a substantial amount of business in other countries, you may be advised to incorporate in other jurisdictions. There may even be some corporate tax advantages in so doing because of international tax treaties which exist among trading nations. Obviously, this is an area in which some competent legal and accounting advice will serve you well.
If you are considering the USA, you could check with a USA incorporation specialist in conjunction with your own legal advisor. Some information on incorporating in the USA can be found at http://www.incorporate.com.
With respect to Canadian (Federal or Ontario) incorporations, a useful website offering information and incorporation services is offered by CECOR Business Centres Inc at http://www.incorporate-it.ca.
How should you choose a name for your company? You are going to have to live with a name for a long time - especially if you advertise and promote the name heavily in which case it will take on value. For example, look at the value in a name such as "Kleenex". A corporate name should be carefully chosen. In some legal jurisdictions, you may be constrained with a choice in names. In B.C., the rules are rather specific: The first part of your name must start with a distinctive non-descriptive word or phrase, for example a geographical location, your name, a made up word or phrase, or initials. The second part of the name must describe the type of business, e.g., shoe store, investments, technology. A third component is called the corporate designation, for example Limited, Ltd., Corporation, Corp., Incorporated, Inc. (If you are registering a sole proprietorship or partnership, a corporate designation is not used.) A name that would meet the criteria would be Bowen Technology Corp. The rules under the CBCA are different. You could, for example, incorporate under a name like RDM Corp. Exxon Corp. would, interestingly, not be approved in B.C. (But, it could be registered in B.C. if incorporated federally!).
As for the choice of name, here are a few suggestions: Choose a unique name - one that is not likely to be "accidentally" copied elsewhere (note - having a corporate name does not automatically give you trade mark rights. You could incorporate a company called Easytote Luggage Corp. but if another entity has trademarked the name "Easytote" in the USA, you may have a problem. Avoid generic sounding names like Microtek Computers Inc - they are too easily confused with others and too easily copied. I have seen many examples of technology companies in different parts of North Amercia with exactly the same name - by coincidence! You wouldn't want to spend a lot of money promoting a name only to have to change it or find out that another party is deriving the benefit of your promotions. Faddish names are also not a good idea. What's "in" today may be "out" tomorrow. Recently, Internet names with "dot-com" in them are fashionable. But will this popularity last long? Names that endure the test of time are good. Names that are easy to remember are also good. Names with some techy-sounding words may appear to be easy to remember but are often confused with other names or forgotten...e.g. now was that Microcomputers or Microsystems Corp? Short, simple names are also better than long names. Completely fabricated names like Xillix, Xerox, Exxon are good because they are very unique, simple, and can be remembered (hopefully!). Proper names also lend a ring of credibility and respectability, e.g. Hewlett-Packard Corp. Finally, don't restrict yourself too much. If you call yourself the Pinnacle Pager Corp., you may find that the name is no longer appropriate once pagers have become obsolete. If you do feel strongly about using a word like "pager", then at least select a very distinctive first name. Then, if you do need to change the name, it would now be something like Pinnacle Wireless Corp, and not too much of your investment in the name would be lost. As for getting ideas - think "out of the box". Ask some kids. Look up some latin words (caution: when you are picking a name give some thought to international use. Avoid picking an English name that may sound offensive in Japan). Eat some alphabet soup for lunch and good luck!
One of the details of incorporation, covered in the afore-mentioned articles, relates to classes of shares. A company has the right to define its "capital structure" in many different ways, i.e. it can define various classes and types of shares which it will issue. For example, companies usually issue one class of shares, namely "common" shares. These shares are precisely that: "shares" of ownership. Each share entitles shareholders to one vote at shareholder meetings and each share entitles its holder to one share (i.e. 1 divided by the number of shares issued in total) of the corporate profits. You may have heard of "Preferred" shares. Such shares have certain "preferred" rights. For example, they might entitle the holder to a fixed dividend rate. They may also entitle the holder to a conversion into common shares (at a given ratio or formula). They can be used to give investors special rights or additional security in order to attract their investment dollars. Sometimes different types of shares, common or preferred as described as Class A or Class B (or Class C...etc) shares. There are no universal definitions relating to Class A vs Class B. For example, one company's Class A shares might be quite different from another company's Class A shares. The different classes permit companies to assign different rights to the shareholders of these securities, e.g. different classes may have different voting or liquidation rights.
Copyright 1997-2003 Michael C. Volker
Email:mike@volker.org - Comments and suggestions will
be appreciated!
Updated: 030515
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