Welcome back to the business of blogging, an unlimited series posted on weekends which discusses the business and legal aspects of operating a blog. If you are a new reader to this series, the entire series can be found in my resources subcategory. Today’s post is a follow-up from last week’s post about factors to consider when deciding to incorporate. As usual, the normal disclaimers apply: the information provided is for informational purposes only written without reference to specific jurisdictions, unless otherwise indicated, and should not be considered advice. Please seek qualified professional advice at all times.
I wanted to mention one point not addressed in last week’s post. Since corporations are separate legal entities from its incorporators, directors and shareholders, any profits or losses of a corporation cannot be transferred to its shareholders and vice versa. In other words, if a corporation reports a tax loss in any particular year, it cannot be used to off-set income made by the shareholder individually. This is something to keep in mind when one considers when to incorporate. In certain circumstances, it may be more beneficial to incur any losses from starting a blog as a sole proprietor if the entrepreneur is in a high tax bracket in order to reduce taxes paid. As usual, please speak to your accountant about this matter.
….After consulting advisors, a bloggers decides that it is worthwhile incorporating. Now what?
STEP ONE- INCORPORATE
A common misconception about incorporation is that all one has to do is obtain articles of incorporation from the government and one has a fully formed corporation. In fact, this is not the case. All the articles of incorporation do is recognize that the government has allowed the creation of a corporation. How the corporation is organized is typically a task for the directors/officers and shareholders to undertake (having said that, in certain jurisdictions, the government will demand that you name the shareholders when applying for articles of incorporation so there are certain differences from jurisdiction to jurisdiction).
The questions that typically have to be answered are:
- Who owns the corporation? If there is more than one shareholder, in what % is the ownership interest?
- Who are the officers and directors?
- What is the year end of the corporation, who are its accountants and where are its corporate minutes kept?
The question that is typically raised is how important is organizing a corporation anyway? Quite important- when a corporation files taxes, in most jurisdictions, it reports who the shareholder and directors are. If one has no supporting documentation to support this (which is done when the corporation is organized), one has a bit of explaining to do if the corporation is ever audited. I also wrote last week about maintaining a separate existence between the corporation and its incorporators/directors and shareholders as a means to not attract personal liability. One of the methods of doing this is to organize the corporation properly. Finally, some banks will want evidence of who the officers and directors are before the corporation’s bank account can be opened.
I wanted to highlight one liability issue most people overlook. The title “director” sounds grandiose but, unless you are operating the corporation from a day to day basis in a small business context, one is attracting a certain degree of personal liability by acting as director. Mainly, in some jurisdictions, unpaid corporate taxes, VAT/GST/Retail Sales tax and certain employee liabilities are the personal responsibility of the directors if the corporation is unable to meet these obligations. If one is operating the corporation then these factors are controllable. But, if one is merely a passive director, one is putting their lives in the hands of the officers of the corporation. This is why most shrewd entrepreneurs do not list both spouses as directors- it puts the entire household at risk.
The question I get asked a lot is “do I have to hire a lawyer to do this?” The answer comes down to context. I have met some people who operated so many corporations in the course of their lives that they know how to incorporate and organize the corporation. Others, who have no experience in this realm, try the DIY approach with varying degrees of success. My general suggestion comes down to this factor- how well do you understand the ins and outs of corporations? The less likely you do, the more one should seek professional help. I always stray to the side of caution on these mattes and retain professionals.
STEP TWO -BOOK KEEP
No one ever tells you the amount of sheer paperwork one has to maintain in order to operate a corporation properly. But get ready for a lot of paper pushing, paper cuts and record-keeping.
One of the reasons for the sheer amount of paper is that business income is self-assessed. At the end of each tax year, the directors report on the taxable income of the corporation based on (revenue) – (legitimate business deductions). One doesn’t submit all the invoices and receipts. Those should be kept. Instead, the corporation reports its taxable income to the government. But there is a fair amount of work tabulating the expenses and claiming them (since certain expenses, such as meals and entertainment, have special rules on deductibility).
Now some of you may be thinking- if I am self-assessing a corporation’s taxes, what’s stopping me from under-reporting income? Most tax authorities have a pretty good database of what the taxable income for each industry is depending on the life cycle of the business. If you under-report, you show up as a blip on their radar screen because you may be outside the industry norm. Don’t be stupid. Report your taxable income accurately. Remember paying tax means you made money.
What becomes more problematic is if the corporation is domiciled in a jurisdiction where businesses have to collect VAT/GST/Retail Sales tax. In some instances, these have to be remitted in monthly or quarterly intervals. This is obviously a lot of paperwork to do on a frequent basis.
This naturally brings up the point that one should invest in good book-keeping software in order to maintain the corporation properly and, to the extent the corporation is of a certain revenue threshold, hire a good book-keeper to maintain the books.
ASIDE- HOW DO I PAY MYSELF?
This question is posed often by entrepreneurs- how does someone get money out of the corporation? There are several ways to do this. For corporations making a certain amount of revenue, the owner(s) or officers become employees of the corporation and taxes are deducted from source (remember that the corporation and owner are separate legal entities so they are two different individuals in the eyes of the legal and tax authorities even if the owner owns 100% of the corporation). For corporations making nominal amounts of money, the owners sometimes take periodic draws and the taxes paid at end of year when the owner files its individual tax return. A third option is to have a cash-rich corporation declare dividends to the owners (dividends paid by private corporations may have different tax treatments than those paid by publicly traded corporations so do not assume the tax consequences are the same- please speak to your accountant). Or, finally, some owners never pay themselves. They may have full-time employment and keep all the money in the corporations as a rainy day fund.
I am presenting some options- as usual, your accountant will know your personal tax situation the best so please speak with them about this topic at length.
STEP THREE- MAINTAIN THE CORPORATION ANNUALLY
After a corporation is incorporated, it needs have annual shareholders’ and directors’ meetings. The meetings are held typically after taxes are prepared to pass, among other things, the approval of last year’s financial statements, the election (or re-election) of directors and officers and any tax planning items (such as payment of dividend to shareholders from surplus cash).
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These are some of the issues surrounding the corporation from a procedural/book-keeping perspective. As usual, please sit down with your accountants and lawyers for more information.
In two weeks time, I tackle the topic of selling a blog and then give specific examples of bad blogging practices from a legal perspective. Thanks for reading.