The Dangers of Self-Incorporation; Buddy's Story
Or you can just hire an accountant to help you.
Self-Incorporation is Risky Business
Meet Buddy. He has a day job as a shipper/receiver but is working to free himself from the yoke of corporate oppression by becoming his own boss as a businessman with a brand new product. He is certain this new product, plasticized cow-pie "pets", will really hit the ground running and wants to take his business to the next level; incorporation. Unfortunately, he is just starting out in the business world and, so far, has gained few smarts and fewer profits. Still, sales for his cow-pie pets are definitely starting to flow. Trusted friends and fellow entrepreneurs have suggested he should incorporate his business to protect himself from personal financial loss. Buddy discovered to his dismay, though, the incorporating process can be pretty pricey. Being the frugal type, he began considering accessing DIY incorporation forms to do the job on the cheap.
What's Wrong With This Picture?
Because Buddy, and other newbie entrepreneurs like him, are not familiar with the legal minefield that incorporation entails, he doesn't understand the liability risk exposure he faces by trying the do-it-yourself route. Having read up on incorporation on the Internet, Buddy feels he knows enough to get the main points, which he figures should be sufficient. Sadly, the vast majority of legal and accounting experts disagree. They know how ridiculous it is for a person to believe they can gain the knowledge needed to incorporate properly from hours of cyber-surfing when it takes years to learn in university and real-world settings. It would be like learning how to do thoracic surgery the same way. Would you trust a guy to take out your appendix if he's only had a few hours of Internet research to guide him?
Buddy's VP of Production Flies to Important Meeting
What Can Possibly Go Wrong?
To avoid complications down the road for our friend, Buddy, getting incorporation right the first time is a must. This means biting the bullet and involving professionals; usually both an accountant and a lawyer, as they are trained experts in different aspects of the procedure. They will treat your business as the unique entity it is and make sure the incorporation documents fit Buddy's business situation specifically. Regarding the paperwork necessary for becoming a corporation, one size definitely does not fit all.
What's the Worst That Can Happen?
Here are just some of the issues that can occur when you try your hand at self-incorporation:
- Mistakes happen. If you make errors in your documentation due to ignorance, you may be on the hook for a great deal of money through legal hassles. If all your forms were created by certified professionals, they will be on that hook for any legal issues caused by improper documentation instead of you.
- Surprises abound. Amateurs have no idea what to look for in the fine print or what elements represent future dangers. Genuine experts in the field have already made all their mistakes during the education portion of their experience set. They know exactly which pitfalls to avoid and what to look for in a perfect application.
- Generic docs can't anticipate eventualities. The forms which your accounting and legal professionals will develop will be customized to your exact needs; factoring in as necessary such things as shareholder agreements, stock purchase agreements, technical rights agreements and the like. Many of these types of agreements aren't covered in off the rack documents. Even worse, some cookie-cutter incorporation packages are designed for other jurisdictions and weren't intended for use by Canadians. Knowing what documents are right for your specific business is half the battle.
- Nothing worthwhile is free. If you "google" the word "incorporation", you will get 79,200,000 pages of information to sift through (approximately).. That's a lot of material to read without knowing what's appropriate for your business or jurisdiction and what is not. Since Buddy has no fore-knowledge of the complexities of incorporation, how can he know which of those 79 million pages will help him correctly fill out those "free" incorporation form templates? It's not like his time is free. Buddy's 9:00 to 5:00 employer doesn't treat Buddy's time as worthless and neither should Buddy. The Budster would be much better off sticking with his strengths and hiring professionals for the areas he's weak. Every hour spent in research of what the experts already know, takes away from what he does really well; the manufacture and marketing of his precious pie pets.
- No one likes hidden surprises. Buddy may not find out where he went wrong with his DIY incorporation until the cow-pie hits the fan, which might not happen until years down the road. By then, his past mistakes are now set in stone and extricating himself from a major legal mess may cost him many times the amount of getting professional advice at the outset.
What if Buddy has Pie-In-the-Sky Hopes but Little Liquidity?
One option that Buddy should consider, if he is really sold on the whole DIY deal, is to combine the two incorporation strategies. Buddy can bone up on incorporation law to fill out all the paperwork as well as he can, and then take the draft copy to a competent, licensed accountant to review for any errors or omissions. This way, Buddy will be protected from any mistakes he may have made and could conceivably reduce his incorporation costs, depending on how much work is required to dot his I's and cross his t's. Going it alone, however, without any professional guidance during such a complex, important procedure is just plain crazy. Just ask the fellow who took out his own appendix!