Family Trusts and CorporationsOctober 24, 2007
Matt is a 25-year old roofer who has his own roofing company. Living and working in Medicine Hat, times are good. The housing business is booming and as a result, there is more work available than Matt’s small business can do. Matt has two other employees working for him, and could probably hire a few more. Matt’s objective is to earn as much money as possible while this boom lasts.
Matt wonders if there is anything else he could do for his business. I suggest he visit with his accountant and me to talk about running his business through a corporation.
A corporation in law is a legal person separate from the shareholders who own the corporation. Corporations are taxed differently from individuals and have their own responsibilities separate from the shareholders.
There may be many advantages for Matt to incorporate his business. A discussion with his accountant will reveal the potential tax advantages to incorporating his business. His accountant may discuss things such as write-offs, dividends, active business income and estate freezing.
I will discuss the principle of limited liability. This means the corporation’s responsibilities for its actions are generally separate and apart from the responsibilities of the individual shareholders and directors. As a result, generally the individual shareholders are not personally responsible for anything the corporation does.
Example No. 1: If a corporation defaults on a loan, the individual shareholders are not responsible for that loan unless they have co-signed or guaranteed the loan.
Example No. 2: If a leak occurred through a roof after shingling a house that caused water damage to the house, unless Matt’s business was incorporated, Matt would be personally responsible for the cost of repairs. If Matt’s business was incorporated, then generally only his corporation would be responsible for the damage.
Matt has now met with his accountant and me and has decided to run his business through a corporation. He instructs me to set up the corporation for him. In doing so, Matt needs to decide a few things.
First, does Matt want to use a name for his corporation? If he does, I check to see if that name is available, and if it is, Matt may use it.
Matt may decide he does not want the extra cost of getting a name, and so decides to use a numbered company, such as 123456 Alberta Ltd.
Second, Matt needs to decide who the shareholders are and what types of shares will the shareholders own. For example, shareholders who have a say in what the company does have voting rights. Other shareholders may be silent partners and they will not have any voting rights.
Once everything is in order, Matt meets with me, signs the necessary documents and voila! – his business is now a corporation.
The boom continues in Medicine Hat and Matt’s business, now incorporated, does extremely well.
The setting up of the company seems simple enough, however, the actual procedure and considerations made by the lawyer and accountant are a bit more complicated. If you are interested in setting up a corporation for your business, I suggest you do meet with your accountant and lawyer to see if it is appropriate for you to run your business through a corporation and if so, what is the best way to set that corporation up.