Often the entrepreneur's dealings with his law firm have to do with tax problems.
This brings me to Mr. & Mrs. Hooper who returned from Florida for a brief visit to their hometown. While at the local cemetery for the burial of a relative, they decided to look for Karl's tombstone, Mr. Hooper's former partner. After an hour-long search, Mr. Hooper quipped to his wife, “We better give up. If I know Karl he probably put the headstone in his wife's name.”
This would be carrying a tax dodge too far. However, there are many reasons why one would shift assets, liabilities, or potential profits, to another entity. If you wish to protect your personal assets against a potential liability you should incorporate. Otherwise there is no reason for you to rush out and pay for a charter before you have even opened the door. There isn't much to be gained at this point. Chances are that in order to get a loan your bank manager will ask for collateral, a co-signer, or personal guarantees. You will not get a large amount of merchandise nor open credit when just starting out. Incorporated or not.
You may encounter minor difficulties in nailing down a corporate name. The one you choose may have been pre-empted by another firm. You may still decide to use it if for instance, you are in the contracting business and the other firm with the similar name is a fruit market. On the other hand, you may decide not to use a name at all but avail yourself of a corporate number, and then list your company as 123456789 Ontario Limited, operating as Rainbow Contracting. This is perfectly acceptable as long as your suppliers aren't misled into believing that yours is a private company.
Your accountant and lawyer will advise you on how to structure your corporation, what common shares to issue, preferred shares, and the like. Common shares would normally increase in value as the company grows while preferred shares have a nominal dollar value attached. You may want to distribute a number of common shares to your spouse or children. Certainly this is worth looking into, as any dividends paid on common shares are not considered income splitting. One can also reduce the overall tax by taking salaries and management fees to reduce corporate profit. There are tax advantages for the small to medium corporation.
Your accountant may advise you to lend money to your new company rather than inject capital. This procedure will enable you to retrieve the loan at any time without tax consequences. However, should your firm lose money you cannot use the losses against your personal income unless you set it up a certain way, for example, if you incorporate a company in trust, in your favor, taking the losses or profits against your personal income. A profitable corporation can borrow money, pay the interest and then loan the money to a sister company at no interest, within certain limits. An incorporated company theoretically may adjust its year-end to advantage such as when inventory is at its highest. But, once a year-end has been established it cannot be altered without good reason. You needn't study all this stuff in detail until you start making some real money.
Since nothing is sure in this world of ours, it is sensible to keep a token amount of money, say $50,000 to $250,000, on deposit outside your jurisdiction, (just in case you need to be judgement proof).
Knowing you have it is a comfort, but don't go crazy grabbing every cent you can to stuff the account. Your insecurity would show and be unpleasant to face.
Manny Drukier has been in business, from manufacturing to publishing, retail to real estate, stocks to stockpots for the past 60 years. He is the author of two books and resides in Toronto, Canada.
