How To Avoid Top 10 Common Mistakes While Incorporating Your Business?

Incorporation is the legal process that transforms a business into a distinct legal entity, separate from its owners. This transformation grants your business its own rights, separate from your personal affairs. While many may consider this an advantageous step for asset protection and tax planning, it’s important to understand the top 10 mistakes associated with incorporating your business – and how to avoid them. 

How can we help you?

Incorporating a business for the first time can be a daunting task, but it doesn’t have to be. At CPA4IT, we’ve been helping small business owners register their businesses since 1984. Our team of experts is here to provide you with strategies on how to make incorporation work for you. Book a FREE consultation with our team today and let us guide you through the process of incorporating your business. With our help, you can be confident that your business is set up for success.

Our webinar on Avoiding Top 10 Common Mistakes individuals make while incorporating your business.

Mistake 1: 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, allows for expense claims and income splitting with your spouse. 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. 

Mistake 2: Incorporating Federally Vs Provincially

Most individuals don’t understand the implications of incorporating federally vs. incorporating provincial. Therefore, they make this decision without considering all the factors impacting their business. For example, incorporating federally may be cheaper in the short term but can be more expensive in the long term. It’s important to choose the appropriate jurisdiction based on your business’s geographic location to optimize cost and regulatory compliance.

Here are some points to consider when deciding between federal and provincial incorporation

  • Federal incorporations require extra-provincial registration in the province of operation.
  • The name approval process for federal incorporation may take longer.
  • Both federal and provincial corporations require annual returns, but the process and fees may differ.

Therefore, it is crucial to stay informed about any changes in regulations that may impact your choice of jurisdiction.

Mistake 3: Opting For a Numbered Company Over a Named Corporation

Opting for a numbered company might seem like shortcut which will help you save a lot of time while incorporating your business. However, it overlooks the importance of a creating a unique identity for your business. More importantly, making changes to a numbered company in the future can be more costly and complex. It is generally advisable to register your corporation with a name that aligns with your business identity, making it easier for customers to identify and connect with your brand. Protecting your company’s name through trademark registration is also important to prevent any potential legal issues in the future.

Mistake 4: Choosing The Wrong Share Structure

Accepting the default share structure while incorporating your business can lead to missing out on a lot of tax strategies available to a properly structured company. A poorly structured corporation doesn’t have access to tax advantages. This can hinder future growth, such as the ability to create a holding corporation or issue different types of shares. To circumvent this pitfall, it is advisable to opt for a share structure customized to your business’s long-term financial and operational objectives. This proactive approach allows for greater strategic planning, particularly in taxation and shareholder agreements. If you would like to learn how we can help you avoid these mistakes while incorporating your business, make sure to book a FREE consultation with our experts to discuss this further. 

Mistake 5: 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 without being exposed to the liabilities of a director.

Mistake 6: 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.

Mistake 7: Selecting Incorrect Fiscal Year End

The fiscal year-end refers to the specific date on which a company’s financial year ends. It marks the end of the company’s accounting period and is used as a reference point for financial reporting and tax purposes. The fiscal year-end is typically chosen by the company and may not necessarily align with the calendar year-end. Selecting the appropriate fiscal year end is vital as it can have several implications for your tax planning and reporting like tax deferral challenges, higher tax bracket, and inaccurate financial reporting. While choosing a fiscal year-end for your corporation, it is important to evaluate your business’s income cycles, seasonality, and industry norms. Moreover, it is also important to understand the tax implications of choosing a specific fiscal year-end. 

Mistake 8: 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 decisions 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. Book a FREE consultation with our experts to discuss strategies on how to make incorporation work for you. 

Mistake 9: 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 CPA4IT, we provide expedited incorporation services to our clients, and we can complete the entire incorporation process within 1 day – provided all the documents with the correct information are provided to us in time. 

Mistake 10: 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. 

We are here to help!

Incorporating your business may feel overwhelming. But fear not because we have got you covered! Our experienced advisors guide our clients to choose the best corporate structure and ensure all the relevant forms and filings are completed. Book a FREE consultation with our team of experts to learn how we can help you incorporate your business quickly and efficiently. 

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Pay Less Tax

A great small business tax accountant does more than just measure value, they create it. At CPA4IT our goal is to save you substantially more than it costs you for our services. Over the last 30 years we have developed tax strategies designed to help you keep more of your hard earned money. If you would like to learn how we can help you pay less tax, simply download our FREE Guide to Pay Less Tax.