Record-Keeping 101

In a recent blog, I mentioned how important it is to keep detailed and accurate business records. We lawyers will harp on the importance of having records of certain things as evidence in case someone sues your ass. For myself, a compulsive organizer, I figured I’m pretty much on top of keeping what I need to keep… until I met Lisa Ricciuti. Lisa is a fellow entrepreneur who helps businesses to develop effective information management systems. She sports a couple of Masters degrees in Library & Information Studies, and Archival Studies, plays bassoon like a champ, and has a penchant for craft beer. What follows is a guest blog, penned by her, which will help you to understand why good record-keeping is important, and some tips on how to get yourself started.

Over to you, Lisa!

Record-keeping 101: A Few Basics

With so many things going on as a small business owner it’s easy to let the paperwork pile up.  “I’ll get to it later,” we say, shoving papers into a folder marked “Misc.” or saving documents into a desktop folder named “Important Sh*t.”  Most of the time this “filing system” remains undisturbed until disaster strikes in the form of a lawsuit, deadline, computer crash, virus, or security breach.  Suddenly it’s really important to know what you have, where it’s stored, and how you can access it.

There are laws and regulations setting out minimum recordkeeping requirements – what must be kept, how it must be maintained (e.g. where the data is stored), and for how long. For example, accounting, corporate, and employee records all have different rules. Laws apply to businesses that collect & use personal information of customers, suppliers, and contractors. Limitation periods for lawsuits apply to your business, which will also influence what you keep and for how long you keep it.

A number of options exist, almost all of which can be customized to meet the needs of your business.  For many small business owners, the cost and effort involved to set up a sophisticated recordkeeping system isn’t warranted, but that doesn’t mean that your choices are limited to “save everything” or “do nothing.” Although “doing nothing” may seem tempting at times, it leaves your business open to unnecessary information risks, most of which could be easily avoided by documenting (and implementing) processes & procedures related to your routine business.

The “let’s save everything, just in case!” policy

This type of policy has the potential to be damaging and costly.  On the surface it may seem like an easy and quick way to do what the law requires and your business needs;  however, it is no substitute for managing business records based on sound policies and defined procedures.

First of all, the “Save Everything” policy can never be enforced unless you plan on disabling the delete key.  Unless you’re prepared to do that, you won’t be able to comply with your own policy, let alone enforce it with your staff.

Secondly, saving everything comes with a number of hidden costs that are often not considered, including the price of digital storage.  While the price of digital storage has dropped significantly in the last decade making it seem like an attractive option, there are costs that go along with maintaining and managing it.  The more you keep, the more time and money you’ll spend to back up, restore, and manage the volume you’ve accumulated.  It also makes searching for data more difficult, costing you valuable time.  Additionally, some records must be kept where the business operates, which may limit or prevent off-site or cloud storage.

Thirdly, saving everything makes it really easy to lose track of what’s there.  Just imagine what you would care about in the following scenarios:

  • Hacking or security breach
  • Virus
  • Disaster (physical or digital)
  • Lost/Stolen/Damaged hardware (thumbdrive, laptop, smartphone, tablet, etc.)

If you save everything, how could you know what was compromised?  If you had to do a restore, would you want to restore everything, or just the things that have value for you or your business?

Tips

If you are starting a new business, it may take some time to figure out which types of documents you are creating and how they need to be managed.  Even for established businesses, the influence of mobile work options and new technologies requires many organizations to re-think the best ways to manage documents and information.  Following the tips below will give you a starting point for thinking about your recordkeeping. Even if you decide to call in an information professional, implementing some of these best practices will make it easier (and cheaper) for them to help you.

  • Identify which business records must be made and kept because you need them to operate or they are required by law.  
  • Determine how long each category of business records must be kept in addition to any other recordkeeping requirements such as those related to handling personal information or maintaining data where the business is operated. This is often based on a combination of business need and legal requirements
  • Save strategically. Set rules about when and how you will dispose of records that are no longer useful, even those that only exist electronically.
  • Understand where/how your business is creating records. This includes, but is not limited to: email, social media channels (e.g. Tweets, Facebook/LinkedIn posts, YouTube channels, blogs, etc.) and all paper/electronic documents.
  • Identify core business records, organize them, and know where they are stored. For example documents related to incorporating or registering, contracts, agreements, financial statements & other financial records, professional opinions (e.g. legal/financial), meeting minutes and infrastructure.
  • Develop policies related to records & information management. Enforce them.
  • Standardize naming conventions for documents, folders, and tags (labels). This means everybody names everything the same way.  Communicate this to your staff, or if you work alone, write it down for reference.  Even having everybody record the date the same way can make a big difference.  For example: Vendor – Document Type – Date (MMM/YY) = OfficeMax – Receipt – Mar15. 
  • Define & document core processes & procedures. Records are often created to record a transaction point in a given process.  When processes are streamlined and defined, it makes it easier to identify when a record must be captured to validate/verify the work performed.
  • Devise rules for handling drafts and versioning. Some questions to consider: Will you keep all the drafts and the final version, or just the final version?  How will you track versions as it moves to completion or in collaborative projects?
  • Designate time to deal with the paperwork, even if it’s in an electronic format. This can be a great Friday afternoon project.

Additional resources:

ARMA (Association of Records Managers and Administrators) International

AIIM (Association for Information and Image Management)

Or try searching in your area for an Information Management Professional!

Lisa Ricciuti
Smart Info Management Services
The Deletist Blog
@thedeletistblog
lisa@smartinfomanagement.com

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Legal Aspects of Business Succession Planning

At long last, I’m celebrating the new year by finishing off this series of succession planning articles. I’ve already talked about the big picture, and how to make sure your business can continue to run if something happens to you. Now it’s time to talk about how you can retire. This isn’t something that should be done in a hurry – it’s wise to give yourself a few months to make the plan and expect it to take years to live out the plan.

There are four main ways that business owners hand over control and operation of small businesses to a successor:

  • Passing the business to a family member,
  • Selling the business to management or employees over time,
  • Selling the business in one fell swoop, or
  • Passing the business in your will (if you want to stick it out ‘til the bitter end…)

Despite the different terms I’m using, all of above except the last are selling the business as far as the tax man sees it. Each of these routes allows you to cash out – or extract the value you’ve built up in the business. Even though the end result of each is similar, the legal path you’ll need to walk to get there is different in each case, with some common elements between them. I’ll talk about each option below. What will work for you depends on what you want, the tax costs, and what is realistic for your business, successor, family, and employees.

Before I dig into the guts of succession, I’ll touch on a few issues that will pop up no matter which way you opt to go – both of them have to do with the almighty dollar.

Valuation

No matter what route you choose, valuing the business will be a pain in the behind. Valuing a business for sale, transfer, or estate purposes can be tricky. As you likely know already, “tricky” is usually lawyer-speak for “expensive,” so brace yourself.

There’s no single formula to value a business. The bigger and more diverse the company, the trickier it is to value. “Tangible assets” – like machinery, inventory, and accounts receivable – are pretty easy to put a price on, while “Intangible assets,” – like client lists, intellectual property, social media influence, or a recognized brand – are more difficult. Equally tough is when you, the owner, are a big part of the business’ worth.

Businesses can be valued by a number of different ways, but the two most common are:

  • Agreement between the buyer and seller
  • Valuation by an accountant, auditor, or certified business valuator

Agreement on price is the cheapest, but the price that you agree to with the buyer might not be the amount that tax is assessed on. You report the sale price, but the CRA will deem the sale to have been made at fair market value. Funnily enough, the CRA rarely finds that the sale happened at a lower value than what was reported. You may end up on the hook for more taxes than you calculated, which cuts into your retirement nest egg.

The CRA and tax courts tend to stick to valuations made by certified business valuators (very expensive), and sometimes accountants (moderately expensive) for tax purposes. Hiring one of those dudes to value your business could cost more than you’re willing to spend… but sometimes the up-front cost of paying a valuator is lower than the potential long-term cost of an extra tax bill. It’s worthwhile to at least have the conversation with your accountant.

Tax Efficiency

Speaking of the CRA, most transfers or sales of businesses can be made cheaper by getting sound accounting advice on how to minimize the tax on the transfer. The more the business is worth, the more likely it is that the transfer will be tax-driven. “Tax-driven” means that your accountant is telling your lawyer how to arrange the purchase and sale so that you (and possibly the buyer) pay the minimum tax possible.

A note of caution on accountants – not all of them know tax. Many small business accountants are good at preparing annual income tax returns, and helping to manage cash flow, but aren’t experts on the tax implications of selling a business. Even if you’ve been with your accountant for years, don’t be afraid to shop around. Moral of the story? Get accounting advice early in the succession planning process.

With that out of the way, here’s the rub:

Four Ways to Transfer Your Business to a Successor

Passing to Family

Selling or passing all or part of the business on to a family member can be a sale, gift, or some combination of the two. There are a number of ways to work this, but what’s best for most small businesses is a gradual transfer of operational control and profit share.

On the operations side, a gradual transfer of responsibility gives your successor a chance to get up to speed on how the business works, build relationships with key customers, advisors, and suppliers, and allows you to pass on the lessons and values you’ve picked up along the way.

As far as profit sharing, if the business’ cash flow can stand it, you may want to continue to draw some sort of income from the company. If not, an incremental buy-out by the next generation or the business itself – usually 5-10% of the value of the business per year – might give you 10-20 years of “income” out of the value you built in the business. That incremental buy-out is usually good for the successor as well, as they don’t have to come up with all the money to buy the company right away. It could also be done as an incremental buy-in, where some of the successor’s pay is in shares, which dilutes your ownership of the company over time.

So long as you own shares in the company, you should consider life insurance. The more your stake is worth, the more this makes sense. Insurance policies pay out directly to the beneficiary – your successor or the company itself – to buy back the shares, and keep those shares out of your estate.

The typical legal documents involved in a family succession include:

  • Unanimous Shareholders’ Agreement – which can set out the terms of any buy-out or buy-in, valuation, insurance, and your continued role in the company, if any. Each shareholder signing it should have independent legal advice.
  • Share Freeze – is a fairly complex transaction where the value of the company “freezes” at a certain date, and you’re issued shares that reflect that frozen value. The successor gets new shares which will capture any further growth in value. The company then buys back the freeze shares over time and cancels them. Your freeze shares could have dividend and voting rights that allow you to continue to share in the profits and management of the company.
  • Trusts – where your shares are managed by someone else on behalf of your successor. These are useful when one or more of your successors doesn’t yet have the age or experience to run the company completely. Trusts are also useful if you’re separating ownership and operations of the business between two or more people.
  • Will – if you pass away before the transfer is complete, you can set out how your shares are to be dealt with. Ensure that the terms of your will match with the terms of any shareholders’ agreement, trust documents, and so forth.
  • Powers of Attorney – if you’re incapacitated before the transfer is complete, who will oversee the management of the company, and manage your shares? Any requirements or restrictions on how the attorney is to act should be set out. This must jive with all the other documents.

On the tax side of things, transfers of property to family members are not at “arm’s length”, and are taxed differently than sales to non-family members.

Selling to Management or Employees

Long-term managers and employees can often feel like family, and a transfer to them can be done much in the same way as to a family member. It can also be done in concert with transfer to a family member – perhaps 51% control of the business will stay in the family, while 49% will go to the employees who will continue to run it. If the employees or managers have the funds available to buy right away, it can be a one-and-done sale, or a phased buy-out or buy-in. These transfers are typically done over 3-5 years, and are “arms-length”, meaning that different tax rules apply than to transfers to family.

Assuming that you’re being bought out, rather than simply giving the shares to the employees, this process will be more formal and legalistic. You should insist that the buyer get independent legal and tax advice so they can’t come back later and say that they didn’t get what they bargained for.

Before writing anything up, you should hash out with the buyer the broad strokes of how the transfer will be structured, and how the buyer will finance the purchase. It can be any combination of:

  • Employee stock option plans – where employees are paid shares as part of their pay, and your ownership and control of the company is diluted over time.
  • Purchase and sale agreement – a contract between the buyer and the seller that sets out all of the key terms of sale. It can include employee stock options, or it can be a straight up purchase of the assets or shares of the company.
  • Shareholders’ agreement – as above.
  • Service agreement – especially if it’s a one-and-done purchase, the buyer may want your services and advice as an employee or independent contractor. They may want you to continue to sit on the board, or to serve as an officer of the company.
  • Indemnity and releases – where the company agrees to protect you for the consequences of legitimate actions you took while a shareholder, officer, or director of the company, and release you from any liability for actions taken after you transferred ownership or control. These are often included in the purchase and sale agreement.

The buyer should conduct due diligence before buying, particularly if you’ve been the one to handle the back-end workings of the business such as dealing with lawyers and accountants. It’s important that the buyer knows what they’re buying, the financial history and projections of the company, and that the books and records are in good order.

Lastly, you’ll want to make sure that your will, trust documents, powers of attorney, and domestic contracts jive with the deal you’ve made.

Selling to Third Parties

If you can’t find anyone in your family or business who’s willing or able to take over from you, it may be time to prepare your business for sale. I won’t go in to too much detail, as I’ll cover sale of business in a separate article, but it will require some legal work to prepare for due diligence.

Due diligence is when the buyer digs through the corporate records to make sure that they know what they’re buying. You should be proactive to make sure that the minute book, employee agreements, accounting records, lists of assets and liabilities, leases, real estate ownership and mortgages, intellectual property, debts, shareholder relations, taxes, and licenses are in good order.

Passing the Business in your Will

Many business owners approach is “I’ll just pass everything in my will.” This is a mixed-bag approach that chooses to duck the costs of preparing and implementing a succession plan, while sacrificing certainty and control.

The upside to this approach is that there’s minimal headache and expense for you in the here and now. It can work very well when your successor is clear – perhaps an only child who’s been working in the company for years, and knows what you know.

The downside is that you may handicap the next generation’s ability to run the company. If the business is asset-rich, but cash-poor, the tax bill on the estate might cripple the company. You will have no control over what happens after you’re gone. Your beneficiary will be stuck with making the tough decisions you’ve abdicated from. It also risks infighting between beneficiaries, or with the company controlled by people who don’t know or care about the business.

I’m not saying leaving the company in your will is a bad decision – just know what risks and benefits you’ll be passing on to your successor before you make the choice.

Phew, that was a long one… I promise I’ll write something more entertaining soon…

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Legal Aspects of Business Continuation Planning

This article is the second in my series on what’s involved in planning for the worst. In the last one I gave an overview on who and what is involved in the process. This time I’ll lay out some of the legal work that may need to be done in order to put your plan into effect. The goal here is for your business to continue relatively smoothly if you die or are incapacitated. The most obvious benefit is that you or your beneficiaries will have a chance to receive the value of the business – which could be lost if you’re not there to run the business.

There are a bunch of great resources out there, largely from insurance companies and banks, about business continuation planning. Though it may seem like a lot to wrap your head around, the legal side is fairly simple. The first step is to identify what the essential parts of your business are. What’s the bare minimum that must be done in order to keep the doors open? Who’s capable of doing those things? What’s to become of your control of the business, and your share of the profits? Once you’ve figured that out, your business advisers can help you to get the paperwork done. That paperwork typically includes:

Continuation Plan

While not necessarily a legal document itself, it becomes enforceable when the directors or officers of the corporation resolve to adopt it. The continuation plan should include who is to assume what responsibilities, who is to oversee the transition, what is to happen with loans that are personally guaranteed, key contacts at customers, suppliers, service providers, advisers, and creditors, insurance policy information, where business records are kept, and any other information that someone taking over your role will need to know about the business.

The continuation plan should be kept in the company’s minute book.

Shareholders’ Agreement

A shareholders’ agreement is a contract between the owners of a company as to how they’ll run the corporation. It can also force those who become shareholders in the future – perhaps resulting from your death or incapacity – to do certain things in running the business. I’ve talked about why you should have one for your business in an earlier article. I’ll write another one soon about what should go in to one… but the continuation plan for the death or incapacity of key people should be part of the shareholders’ agreement. If you have one in place already, work with your lawyer to make sure it jives with the continuation plan. If you don’t have one in place, it’s a good idea to make one.

Insurance

Though it’s not a purely legal issue, insurance is an enabler for most continuation plans. It’s common for the company or your co-owners to take out insurance on you, and the other main players in the business. There are a number of different types of insurance, each with strengths and limitations. The goal is to ensure that there’s cash available to tide the business over and find someone to fill in for the person that’s been lost. Each business will be different, and a good insurance agent can give you the full slate of options, and help you to choose one that works for your company.

It’s important that your insurance agent and lawyer get in touch to discuss the policy you’ve selected so that the legal documents mesh with the policy. Your lawyer can also help you to understand what’s covered, and what’s not under the policy. Once you understand where the gaps are, you can come up with ways to minimize the risks that remain.

Corporate Documents

Picking someone to step into your shoes is one thing. Giving them the lawful authority to make decisions in your place can be another one altogether. You should consider appointing the chosen one as an officer of the corporation, and giving them conditional authority to speak and sign to bind the company in legal documents. They should know where the corporate records are kept, and be put in touch with key advisers including the corporation’s lawyer, accountant, and insurance agent.

When the continuation plan is made, you should ensure that your business books and records are up to date and complete, including the minute book, government filings, and accounting records. Your successor will have enough to deal with already, without having to deal with figuring out what state the company is in first. The corporate minute book should also include a resolution approving the contingency plan, which will prove useful in dealing with outside institutions – banks in particular.

Wills & Domestic Contracts

Not only should you have a will in place that deals with your interest in the company, but it should be in harmony with the continuation plan. If the corporation has decided that your control of the business should pass to one person, but your will passes all of your property to your spouse, there’s a huge potential for conflict. Many people use separate wills for their personal and business assets. Domestic contracts – while painful to negotiate – can be used to protect control of the corporation as something that’s not included in the marital assets in the event of separation or divorce.

Powers of Attorney

A Power of Attorney for property is a legal document that authorizes someone to act for you in making decisions in the event that you’re incapacitated. Banks and other creditors will want to see this, possibly along with the resolutions authorizing the contingency plan and granting signing authority before they’ll deal with someone they don’t know. These are usually made or updated at the same time as your will.

Employment Contracts

Many owner-operators work without a written contract of employment in place with their company. It’s generally understood that as an owner-operator, your responsibilities and risks are almost indefinite. It is a good idea to put an employment contract in place with yourself – a description of duties, salary, and benefits at a minimum. This will help to set expectations for what’s expected of and given to your replacement.

A current employee who steps up into your role will be taking on a great deal more responsibility, and assuming more personal risk in the form of director or officer liability than they had before. This type of change to the employer-employee relationship is something that should be down on paper to protect both of you. Salary, responsibilities, and expectations may all change in the new contract. It’s also good practice to give some form of protection, called indemnity, to those who run the company.

If there’s nobody in your company who could step up to run it, a manager may need to be hired from the outside. If you want to have any say over their role, and any limits on their authority, you’ll have to set those out in advance. Again, the starting point could be your employment contract.

Again, insurance can be used to cover some or all of the expense of hiring, training, and paying a new employee.

Practicalities

Training your possible successor is the most important piece of the puzzle. They may show the potential to run the business by having the right skill set, but will probably need time to be brought up to speed on how the business works. It’s never too early to start. The up-sides of having someone who’s capable of running the business are many – you may even be able to take a holiday for once!

It’s also important to be mindful of avoiding trying to run the business from beyond the grave. A properly trained and equipped successor will still have their own ideas, and should have the flexibility to see them to fruition.

Conclusion

When a thorough continuation plan is made, it’s a major step towards peace of mind for you and your dependents. If you’re laid up with an injury or illness and the business founders without you, you may not be able to pay for your own care. If you pass away, and the business you’ve worked so hard to build follows closely behind, your dependents may be left high and dry. If the business goes under, your employees and others who rely on it for their livelihood, could be in dire straits. While it’s an uncomfortable thing to talk about and plan for, it’s the responsible thing to do.

I’m happy to help you start the process, and I’ve got a good team of specialists who can guide you through the finer points of tax, employees, insurance, and financial planning should you want the help. The next article, on how to plan for your retirement, will be on its way soon!

Now, to counter all those gloomy thoughts I’ve put in your head, here are some very cute animals trying to look tough.

See you soon…

 

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Unanimous Shareholder Agreements

This can be a confusing topic. There’s a whole lot of stuff written about it, utilizing an abundance of excessively Brobdingnagian verbiage, but it’s usually a lot of talk about what a unanimous shareholder agreement (or “USA”) is, rather than why you might want one for your corporation. Here I’ll give you the basics of what it is, why you might want one, and what’s in it.

What is it?

A USA is a contract between all the shareholders of a corporation that limits the power of the directors to supervise or manage the business of the company. It could even take all management powers away from the directors. Without one in place, the directors can exercise all of the powers they’re given by the corporate laws, at the director’s discretion. Back in the day, if directors started running the company in a way that the shareholders didn’t like, there wasn’t much that the shareholders could do about it until it was time to vote for the directors again. Nowadays, the USA gives shareholders an out.

The rights, powers, and responsibilities that are taken away from the directors are then assumed by the shareholders. The shareholders will also take on the liabilities that go along with the powers – such as liability for unpaid employee wages, tax remissions, pension, environmental protection, etc. Some liabilities can’t be opted out of, such as the ones in the Occupational Health and Safety Act. Make sure you know the risks before signing on the dotted line!

A USA is a “constating document” of the corporation – like its articles and by-laws – that deals with the inner workings of the company. It is important to make sure that it doesn’t conflict with the articles or by-laws.

Once a USA is in effect, any new shareholders are deemed to be a party to it, and they should be given notice that it’s in place.

Why would I want one?

USA’s are most common in companies with a few shareholders, who own roughly even percentages of the company. They’re typically used to modify or supplement the rules in the Business Corporations Act:

  • Set out a Succession Plan: I’ll blog about succession plans soon, but a USA can be used to hand off the ownership and management of your corporation so that the business can continue after you retire, or if something bad happens to you.
  • Change Default Corporate Law Rules: such as the % of directors required to vote in favour of certain material decisions, such as paying dividends, buying or disposing of major assets, entering into joint ventures, non-arms-length transactions, mortgaging or liening property, or changing the business of the Corporation.
  • Protect Investor Interests:  venture capitalists, angel investors, or banks may want a USA in place to ensure that they can control things that directly affect their investment – such as amending the articles or by-laws, mergers, issuing new shares, or the sale of substantial company assets.

USA’s can also be used to do a few tricky things, which aren’t guaranteed to work out the way the shareholders intended.

  • Foreign-owned Corporations: the law requires at least 25% of directors to be resident Canadians. A USA can take all the powers away from the directors, and let the foreign shareholders do the decision-making. This may work for some purposes, but courts will ignore this sleight of hand in certain situations, particularly to do with tax liabilities.
  • Protecting Directors: where the shareholders own their shares through a holding company. Those holding companies assume the directors’ liabilities, and in theory, the people who own those holding companies are protected. It’s likely that a court would look right through this technicality though, if there wasn’t enough to pay out the creditors.

What’s in it?

Like any contract, the contents are up to the people making it. Typically, a USA may cover many of the following topics:

  • Decision making process
  • Quorum for meetings
  • Restrictions on share transfers, and how to deal with involuntary share transfers on death, bankruptcy, or court order
  • Special rights of minority shareholders, or special restrictions on majority shareholders
  • Process to amend the USA
  • Funding considerations – from existing or new shareholders, or
  • If the directors aren’t stripped of all of their powers – representation on the board, or a right to appoint someone to observe board meetings
  • Dispute resolution
  • Right to dissolve the corporation

There are plenty of templates out there that can get you started, including this useful one from the Law Society – but as I said above, it’s incredibly important to understand the risks before fiddling with the way your corporation is run…. like using a game of Operation to prepare for open-heart surgery.

If you need a lawyer, I happen to know a guy

Mike Hook
Intrepid Lawyer
Email: mike@intrepidlaw.ca
Twitter: @MikeHookLaw

Why does my corporation need a minute book?

In the hustle and bustle of running your business, record keeping often falls by the wayside. Most small business owners put corporate record keeping somewhere below “eating gravel” on their to-do list. The corporation’s minute book is often never even created in the first place, let alone kept up to date, even though the consequences of failing maintain one can be severe, and incredibly expensive.

Why do I have to?

Incorporating brings a lot of benefits – limited liability and tax being the biggest – but also comes with increased responsibility. The government has said, through the laws it has passed, that if you want the good stuff you’ve got to deal with the additional administration that comes with it. Whether you incorporated federally, or in Ontario, you must prepare and maintain corporate records. Trust me, it’s worth a little hassle and expense now to avoid greater hassle and expense later.

So what if I don’t?

Worst case scenario, your corporation could be found guilty of an offence under corporate law, and liable for a fine of up to $25,000.

Aside from the official penalty, there’s a great deal of business risk involved if your books are non-existent or out of date. I’ve often found myself playing CSI: Minute Book, going back several years to piece together the company’s history. It can take a fair bit of time and money to get it all figured out – neither of which small businesses have in spades.

There are a few common situations where your minute book will be in demand:

  • If you’re selling part or all of your company, the buyer will want to see the books as part of their due diligence – so they know exactly what they’re buying. Poor record keeping can drive the purchase price down, and the delay to get your books in order could put the whole sale at risk.
  • Most banks and other lenders will want to see your minute book before lending money to your business. They want to know that its affairs are in order, and the people they’re dealing with are authorized to act for the corporation.
  • Your accountant may want to see the minute book in preparing its tax returns. Without it, she’ll be forced to make assumptions on how to characterize the income, and may end up mis-reporting.
  • The Customs and Revenue Agency is entitled to inspect your books, and may do so as part of an audit of your personal taxes or the corporation’s taxes. This is more common if you’re paying yourself by dividends, or you’ve lent money to the company. The CRA could characterize money coming to you as personal income, tax the hell out of it AND deny the corporation the right to deduct it as an expense. Talk about lose-lose…
  • Shareholders, as owners of the company, have a legal right to inspect the minute book to know what decisions are being made.

OK then, what is it?

A minute book is really just a binder that holds the important documents of your corporation.

If a lawyer incorporated your business, they probably provided you with a minute book to start. If not, then you’ll have to prepare one yourself, including:

  • Certificate of Incorporation;
  • Articles of Incorporation;
  • By-Laws;
  • Consents to Act as Directors;
  • Director and shareholder resolutions
  • Minutes of director and shareholder seetings;
  • Registers of  the officers and directors;
  • Register showing the number of shares issued of each class of shares;
  • Record of the debt obligations of the corporation;
  • Stated Capital – the number of issued and outstanding shares;
  • Documents filed with government departments;
  • Share certificates, if used; and
  • The corporate seal, if used.

Then you’ve got to maintain the minute book, by keeping it up to date as the corporation does its business, including:

  • Resolutions from the annual meetings of shareholders and directors;
    • Electing directors each year;
    • Appointing accountants or auditors for each year;
    • Approving financial statements;
  • Records of loans to or from shareholders
  • Declared dividends;
  • Management bonuses paid;
  • Issuance or transfer of shares;
  • Changes in directors or officers;
  • Changes to how the corporation is run;

Can’t you just do it for me?

What’s tedious and boring to you is an adrenaline-fuelled rollercoaster ride of awesomeness for me. OK, maybe that’s a little extreme, but I’m happy to take the tedium off of your hands.  I can’t emphasize enough that it’s far far far far cheaper, easier, and less stressful to stay on top of this stuff than it is to go back and piece it together in an emergency – like when an investor or potential buyer wants to inspect your books.

Some clients like me to hang on to the record book and keep it updated when things change.  Others want to keep it themselves, and have me send them the updates when they make changes. Either way, this is one of those things that you shouldn’t waste your time doing…

Hey, you just read this blog,
and this is crazy,
but here’s my website,
so call me, maybe.

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw