Why I Incorporated My Small Business

March 1st, 2022 | Sharing Circle

In 1999 I decided to buy a restaurant lease in a small community, on a gorgeous little Island on the West Coast. The existing business had been driven into bankruptcy due to misguided and inexperienced management. The purchase was going to be difficult. It involved several partners in various states of confusion, disillusionment and frustration. I heeded the advice of family and friends and decided to consult a business lawyer in Campbell River with a long history of litigation and advice with business and corporate start-ups, partnership agreements and bankruptcies.

Let’s call this business lawyer John. John advised me to steer clear of a sole proprietorship legal structure and suggested I incorporate due to the complexities of the pending purchase. The business included ownership of a large commercial building with a 12-year land lease, and use of three acres of land that included a campsite, restaurant, and laundromat downstairs. The business had liabilities that included a secured loan with Community Futures, an unsecured loan with a Venture Capital Company based in Vancouver, and the personal lines of credit and credit card debt of three registered owners. Two of the owners were desperate for a sale, discovering to their apparent horror they were personally liable for all debts the business incurred due to the current legal structure of the business, while the third adamantly refused to cooperate with a sale, despite the fact the restaurant business was closed, the power disconnected and the entire operation was seemingly insolvent.

We created a limited company with Class A and Class B shares and began to negotiate for purchase of the business. Faced with bankruptcy, all three owners agreed to the sale, and my corporation had to sign legal agreements and contracts with:

1. Community Futures

2. The Campbell River School Board that owned the land

3. The Partnership that owned the business

4. The Venture Capital Company that wanted to partner with me while rolling debt from the previous business into a minority ownership share in the new business.

John was incredulous at the complexity of the deal, declaring that in his professional life as a lawyer he’d never witnessed such a complicated business purchase for a small business. I could have used the funds used to pay the legal bill to buy a new Dodge Ram truck!

The business began as a restaurant and campground but evolved into a holding business with a traditional landlord and tenant operational model. A restaurant, natural food co-op, bookstore, art gallery, bike store, clothing store, skateboard shop and juice bar all became valued tenants. The incorporated legal structure of my business allowed for the quick and thorough (but never inexpensive!) drafting of lease agreements, with their myriad of terms and conditions. The partnership arrangement between the venture Capital company and myself was very clear – I controlled 60% of voting shares as managing partner, while the venture capital company controlled 40% of the voting shares, with little or no involvement in the day-to-day management of the company. Articles of Incorporation were drafted at the time of the corporation’s inception, detailing the procedures my partner and I would follow in the event we borrowed money, solicited new investors, and eventually sold the business.

In this business situation, an incorporated company served me well. It cost me about $1000 annually to maintain “corporate records and minutes”, and it forced me to keep up-to-date books (I had a wonderful bookkeeper, and never needed an expensive accountant) as it was a requirement of incorporation to provide annual financial statements. I secured further funding from Community Futures, paid off debts, and was able to declare operating losses from the first few years of operation against future earnings once the holding company model was adopted. There were a few legal and financial hiccups along the way, but my personal assets were never in jeopardy if the corporation became insolvent, and the corporate structure allowed me to attract amazing investors like the venture capital company and others, who’d never get involved in a sole proprietorship or partnership in such a complicated start-up.

If you’d like to protect your personal assets or attract good partners or other investors down the road, I would recommend the corporation business structure as it clears up a lot of the legal issues and partnership challenges and liabilities that complicate other business relationships. When challenging things happened, I always felt I had a cloak of armour in the form of a legal apparatus to guide me over the difficult rapids, and never once did I regret the higher costs of incorporating compared to the more affordable creation of a sole proprietorship. I often wish there were a different word than “corporation” to describe the legal structure I enjoyed, as it has so many poor connotations for many people. For me, my “corporation” served me well – it was my guardian, protector and guide.

Click here to learn more about Scott.

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