What a Mess: Incorporation Horror Stories to Scare You Straight
After ten years working with self-declared hot messes, I’ve seen some things that could render you sleepless. I know it kept them up at night! I’m going to share with you some of the nightmare situations that I’ve been part of.
PRINTOUT PARTY
Did you know that after too many years, you can’t get digital copies of your bank statements? This is what happened to a client of mine. They had over 7 years of books to recreate so they could get their taxes filed. The bank accounts were closed, they had no sales or expense records, there was nothing.
They had to go to their bank and get printouts of their bank transactions - 7 years worth - and we had to recreate their books based on this. I can’t imagine how many deductions they missed out on cause there was no way we could go through their credit card statements to find what was business vs personal (yeah, that wasn’t separated either). RESULT: Big tax bill - BOOOO.
WHY-O, WHY-O, WHY-O
So many times I have clients reach out to me cause they’ve incorporated and didn’t realize what they got themselves into. They created their corporation because some google search told them that to start a business, you should incorporate. But in Canada, we’ve got another way for people to run a business - as a sole proprietorship. It's a little bit easier and WAYYY less expensive to run a sole prop. There are good reasons to incorporate…doing so b/c google said so, isn’t one of them. Check out Time to Incorporate to figure out if it makes sense for your business.
DISSOLVED BUT NOT FORGOTTEN
Over the past 2 years I’ve revived no less than 5 corporations. Am I a CPR expert? No. I’m a paperwork expert. What most people don’t realize about having a corporation is that in addition to filing your taxes to CRA, you also have to file a totally separate, completely unrelated to taxes, “annual return”. If you don’t file this every year, after a few years, they'll assume you’re not in business and just DISSOLVE your corporation. Of course, it's not permanent - all it takes is time, money, and paperwork to get your corporation legit again.
MIX IT UP
Scratch that…Don’t! The biggest thing you can do to make running a corporation VERY difficult is to treat your business accounts as your personal piggy-bank. When I’m doing a big clean up job, going through months or years of transactions, if I sense a medley of business and personal spending, you can bet that if there’s questionable expenses, I’m going to err on the side of “personal”. That means higher profits (aka taxes), and a bigger shareholder dividend (aka personal taxes). If you keep it separate this won’t be a problem.
KNOW YOUR ROLE
Now many of you are wearing all the hats on your own - shareholder, director, President & CEO, and everything else on the org chart. BUT sometimes we have partners, and if we do, it's important to take the time to clearly spell out what roles everyone will play (or won’t play) in the business. I’ve seen many a situation where the owners each had their own versions of what their role was and I can promise you - they didn’t align, and it created nothing but frustration and resentment.
I’m sure there's more…nothing that a bottle or two of wine couldn’t help me remember ;) but that's enough to get your mind spinning! Incorporation is no joke, but if you know what to expect you can ride the wave and come out on top.