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Self Sabotage: When You Incorporate Without A Lawyer

So you looked up a few websites on incorporating, stumbled upon the government sites for filing articles of incorporation and decided to fill in the forms and submit.  You pay the same filing fee your lawyer would and think you just did “their job” for nothing.  Well, what you did was a disservice to yourself and your partners/shareholders.  Most startups need to save money, but the last place you need to skim is when setting up your business structure.  Most startups who incorporate themselves stop with the articles of incorporation, never providing for the basic necessary resolutions and by-laws commonly found when first incorporating, not to mention maintaining a proper record of your shareholders, directors, officers, shares issued and redeemed, as well as the capital invested.

Why is this important?  Well, you may be thinking that because you haven’t even started any type of business operation or completed whatever it is you are building that focusing on anything other than the “name” is a waste of time.  Did you know that technically without issuing any shares by receiving whatever notional amount on startup in exchange for actual shares issued evidenced by a share certificate, the company does not yet exist?  That’s right, a for-profit company cannot exist without shareholders and a non for profit company cannot exist without members.  Although a company is a separate legal entity the shareholders or members first breath life into it by voting and electing the controlling mind of the company.  Its this board of directors that then appoint the officers who manage the company. Even if its simply one shareholder, director and officer this still needs to be evidenced in writing and recorded in a minute book.  In Ontario a From 1 must be filed within 60 days of incorporating with the officer information and confirmation of the first directors and registered office address.  Even to open a bank account, the account managers should be asking not only for a copy of the articles of incorporation but a copy of the Form 1 and shareholder, director and officer registers to confirm signing authority and ownership.  Not to mention a copy of By-Law 1 where you would commonly find the company’s requirement for what combination of directors and officers can bind the company to contracts and signing bank cheques for example.  Yes you can purchase packages online from third party non-lawyer service providers of incorporation resolutions, by-laws, registers and ledgers but the important information is left blank for you to hand write in.   But now you already spent probably over $600 in filing fees, ordering blank documents and an empty minute book. What use is that without any proper guidance and advice?  Remember once you file this information, or provide it to your accountant, other potential investors, your bank, the Ministry of Finance, the Canada Revenue Agency (CRA) etc…its almost impossible to make up an excuse as to why you needed to back date changes to reflect what you truly wanted.

Even worse, your business is a success!  Yes it took off and now you have a large order to fill and in order to do so you need financing to expand operations.  Even better, every bank wants to lend you the money because the order is from a large company like Walmart, which means good things for years to come.  Unfortunately you need the money now, because Walmart requires delivery in 30 days.  The bank cannot complete their underwriting because they need to know who are all the shareholders, directors and officers, not to mention they need to review your By-Law 1 for signing authority and By-Law 2 to make sure the company is authorized to borrower money.  You scatter to get some documents together and realize you forgot to include all the investors who should be listed as shareholders, and all the managers who should be listed as officers.  Worse, you put things together as they are just to get the underwriting done and commitment issued.  What you fail to realize is that the bank will use their lawyers, who will go through everything.  They pull all the information filed with the ministries and realize huge inconsistencies.  They send you and your lawyer a letter of requisitions asking to reconcile the inconsistencies and provide the accurate info only once you correctly prepare the back dated resolutions and by-laws, while also filing the information with the ministries to make sure the info is properly recorded.  This now puts everything on hold.  The bank’s lawyers cannot prepare any security documents until they know exactly who are the owners (shareholders), directors and officers.  You tell your lawyer how it should be, failing to realize that all the shareholders, directors and officers will have to come in and sign these minute book documents.  Once you hear this from your lawyer you begin to sweat.  You approach the other shareholders and they now argue that their invested interests are much higher, especially knowing your company is taking off and that you need the money urgently.  Now is not the time to argue with them as too much is at steak.  You concede and get their signatures.  Your lawyer at the same time probably spent countless hours speaking with the other shareholders, officers and directors rectifying their concerns and questions.  If you are lucky you get the missing info to the bank’s lawyer in time to close and expand your operations to fulfill Walmart’s order.  However, your legal bill is in the thousands if not tens of thousands, the company you thought you owned has you now severely diluted and you probably no longer control it.  Your lawyer advised you at the end of it to negotiate a shareholders agreement immediately.  However, now its a concerted effort, all the shareholders will want to negotiate what is best for them. Whereas had you done this at the time of incorporation and before they invested you could have presented them with your form of shareholders agreement before accepting their money, giving you more time to carefully consider if they are the right fit for you and your company.

Now you are probably scratching your head thinking this is too remote and not a common scenario.  When in fact it is very common; maybe not exactly the way its illustrated above.  But whether it has to do with issues with your shareholders who may also be family, or simply considering ways to organize your affairs in a tax advantageous way, the planning and recording should be carefully executed at the very beginning.  At Levy Zavet Lawyers we charge a flat fee for provincial or federal incorporations, which will include your name searches, filing fees, minute book, resolutions and by-laws on incorporation, completed shareholder, director and officer registers and ledgers, as well as some guidance on an appropriate share and capital structure.  Not to mention we also have low cost solutions for basic shareholder agreements to package together with your incorporation.  Call us today!

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