Many tech startup operators are aware that incorporating their business provides many advantages. However, very few are aware of the incorporating missteps and misconceptions that could cause them headaches down the road. Here are seven mistakes that entrepreneurs need to avoid.
1. Not choosing a corporate name
In Canada, a corporation can either be identified by a number or by a name. It is not uncommon for businesses to choose to be identified by a numbered name, especially if they are in the early stages of their business. If you choose to form a numbered company, it is not necessarily an easy process to switch to a name. You will need to file amended articles of incorporation and pay a fee to do so. Furthermore, by the time you have decided to give your corporation a name, the name that you had desired may no longer be available. If you have a name in mind when you are incorporating, it is best to take the extra steps and incorporate with that name rather than a number to save yourself the time and hassle of doing it later and most importantly to ensure that you get the name you want.
2. Not choosing the right jurisdiction
Businesses often assume that because they operate in a certain province that they should incorporate in that province. However, there are tremendous benefits to incorporating federally that should be considered prior to incorporating. If you incorporate a named company federally, then you will have the right to use this name throughout Canada. A federal corporation also has the right to carry on business in any Canadian province, so long as they register themselves in that province. As most tech businesses will intend to expand beyond one province, it is likely a good idea to incorporate federally.
3. Being too specific
There are a number of parameters that you can choose when incorporating your business. The number and type of shares, the conditions that attach to those shares, and the number of directors you will have are all examples of the parameters you can customize when incorporating your business. These parameters will be included in your articles of incorporation, which are essentially the governing rules of your corporation. Changing these articles can be extremely difficult and time consuming. As such, it is best to give yourself as much flexibility as possible when drafting your articles.
4. Not maintaining proper corporate records
Many tech companies have a business plan that calls for some kind of investment. Anyone seeking to invest in your company will want to inspect your corporate records prior to doing so to ensure that everything is in order with the corporation. Many businesses make the mistake of ignoring their corporate records requirements, only to have to update their records retroactively when seeking investment. This is an extremely difficult and time-consuming process that many investors will not want to wait for.
5. Thinking that being incorporated means you have no liability
Many tech companies incorporate their business in part because they want to avoid any personal liability for the debts of the business. While this is a good strategy, you should be aware that incorporating does not protect you from liability entirely. Corporate directors have a fiduciary duty to the corporation not to put their own interests ahead of the corporation’s. If they breach this duty, they can be held liable for any damages their actions cause. Furthermore, there are a number of specific instances where directors can be held personally liable such as for unpaid wages or for issuing shares at less than fair market value. In the rapidly shifting world of tech, one must be aware that becoming involved in other ventures that may be perceived as creating a conflict of interest with your responsibilities to your corporation could mean that you may be liable for damages this causes to your corporation (i.e. loss of business, trade secrets, etc.).
6. Assuming that you will never have a dispute with your business partners
Tech companies often incorporate their business with the assumption that the relationship between the founding partners will be smooth and without conflict. This is almost never the case. As such, it is important to have a shareholders’ agreement that deals with events like disagreement, death, and the sale of shares so that when conflicts inevitably do arise, a resolution has already been decided upon.
7. Not incorporating at all
Many tech companies are nimble and built on lean principles. Because of this, legal expenses often seem to lose priority. However, it is important to incorporate your business before you need to, because by that time, it is often too late. For instance, if your business becomes liable for a large debt, if you are not incorporated, you will be personally liable for this debt. Because of this, it is highly recommended that you incorporate before running into any problems.
October is small business month and to celebrate, writers from Aluvion Law will be making daily posts on one of the most common forms of Small Businesses: Corporations! Corporations are particularly popular among the high-tech and IT crowd because of the tax advantages they provide to rapidly growing companies, as well as the assistance they can provide in unlocking capital. The other great benefit recognized by the ‘serial entrepreneurs’ that flock to the IT sector is that they limit the liability of the owners in the event of the business failing.