When incorporating a new business, budget-conscious entrepreneurs typically, and understandably, focus on minimizing costs. While many free or low-cost online legal resources promise bargain prices, bypassing qualified and tailored legal guidance to help with your specific needs often leads to significant problems down the road, and can result in substantial costs and expenses that could have been avoided by getting proper legal guidance at the outset.
The importance of record books
While it may appear both easy and convenient to incorporate your business using an online service, such as government-run portals like BCOnline or OneStop Business Registry, problems can often arise for business owners when they attempt to open a new bank account, prepare a tax return using an accountant, or bring additional investors into the business. They may discover that they haven't carried out all the necessary steps and prepared all the important documentation.
This is because online incorporations typically do not include a complete set of record book documents. As a result, the client ends up with a "half-baked" incorporation that lacks the necessary organizational resolutions, central securities register, director/officer register, transparency register, share certificates, and other material documents that are provided when a client incorporates their business with a corporate lawyer.
What is a corporate record book?
All corporations in British Columbia are required by legislation to prepare and maintain an up-to-date record book pursuant to the Business Corporations Act (British Columbia) (the "Act"). A record book is often referred to, and reviewed by, accountants, lawyers, banks, and other stakeholders when a transaction or filing involving the corporation occurs, or by the CRA, BC Securities Commission, or other regulatory authority on an audit or investigation.
A corporation's record book serves as the official legal record of the corporation's activities. Essentially, the record book should document all material corporate transactions that affect and involve the corporation, including its creation and records of share ownership.
The documents typically generated through one of the online portals include:
- Incorporation Application
- Certificate of Incorporation
- Notice of Articles
- Articles (typically only the prescribed, standard-form Articles that are provided in the Act)
The above listed documents make up only a part of the full record book. A complete record book, which is what is often needed by other stakeholders, would contain additional documents including:
- Special Rights and Restrictions within the Articles (to create different share classes with different attributes typically used for tax and other corporate planning)
- Post incorporation, organizational resolutions to appoint first directors, officers, and waive auditors (an annual requirement under the Act), appoint signatories, appoint a bank and accountant, and confirm the legal registered and records office
- Central Securities Register (these set out the various shares issued in each class authorized by the Articles)
- Directors/Officers Register (setting out the current and past officers and directors of the corporation)
- Transparency Register (a new requirement since October 1, 2020, that requires all BC corporations to maintain at their registered office)
- Registered and Records Office Agreement (to ensure the corporation is continually maintained and kept up to date by the law firm)
- Shareholders' Agreement (this is separate from the incorporation, and highly recommended if there are multiple shareholders – setting out the relationship between them)
A failure to maintain a complete set of record book documents can result in administrative penalties under the Act and can have other practical negative repercussions when attempting to make use of the corporation in any transaction.
Savings in the long run
Simply put, most online portals are not equipped to generate a full set of record book documents required for compliance with legislation. Their focus is to register the business with a simple set of articles, without any guidance as to what may be necessary or appropriate for the new business being undertaken by the founder(s). Fees on these online portals, while appearing attractive, are priced to solely reflect the cost for registration.
A good corporate lawyer will help you understand what needs to go in a record book for your business, and will not only advise you if any customization or planning in establishing the corporate share structure is appropriate based on your particular circumstances, but will also ensure that the incorporation is carried out properly and efficiently the first time. This will reduce the likelihood of incurring unnecessary future costs. The cost for a lawyer to review, correct and prepare the corporation's missing record book documents after a self-incorporation often exceeds the cost of incorporating a new company, had legal counsel been used in the first place.
Rectifying or correcting record books
Clients are often surprised to find that, upon consultation with a lawyer regarding their self-incorporated entity, any perceived savings have evaporated as the inadequate product they received did not provide them with the fulsome and complete set of documents that they needed to move forward.
A good business lawyer will help clients identify and understand any missing record book documents which would be necessary before the corporation can be considered "ready" for sharing with banks, accountants, investors, and other stakeholders. Such a process typically involves a record book review, rectification, or reconstruction. The cost to rectify a record book typically depends on how much time has passed since the entity was originally incorporated, and the number of transactions that took place in the interim.
Conclusion
It is highly recommended to avoid incorporating your new business on your own, and instead to work with an experienced business law professional to ensure your business is set up and organized as intended for your particular situation, and to ensure compliance with the complex web of legislation which must be adhered to at all times. Starting your business on the right foot will go a long way in reducing unnecessary costs and headaches down the road.
If you have already incorporated your business yourself using one of the online portals, we strongly recommend having your incorporation documents properly reviewed and rectified by a corporate lawyer to ensure that you are not running afoul of the Act.
Most law firms provide registered office services at modest fees to ensure your record book remains in compliance with the legislation. It is in every business owner's best interest to develop a strong relationship with a legal advisor practicing in this area of law who understands your business and the people involved, and who can guide you through the complex regulatory world of business.
Originally Published by Watson Goepel, January 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
