Proper Documentation for Business

Brothers Charles and Henry embark on a business plan of buying and renting residential properties. The first is a family residence, with 2 tenants in the basement, but all of Charles’ and Henry’s family also occupy the property as a principal residence.  Their Dad and Mom, their wives and their collective 4 children, a total of 12 people including the tenants in 1 house. 

They take title as joint tenants (which means, if Charles dies, Henry owns the whole house with no credit to Charles, his wife or kids).

Clearly fraught with risk to say nothing of the possibility of brotherly discord or Canada Revenue Agency’s interpretation of “principal residence”.

Then Charles and Henry go on to buy 6 other houses, each in a machination of joint tenancy ownership and tenancy in common (which means, contrary to joint tenancy, each of Charles and Henry has a specific direct percentage ownership in each house and death of either of them doesn’t matter – his respective interest passes to his next of kin).

What were they thinking?  Well, first, do it on the cheap, presumably.  Then, “nothing will go wrong”; it’s family after all.

Well, that’s 3 recipes for disaster.  What should have occurred?

Get it all in writing right from the beginning.  Should have had accounting and legal advice.  When the inevitable occurs, the unwind costs and the process will definitely be both a multiple (possibly 10 x’s) of the costs of proper set up, but also total family discord.

Call us before you embark.

Business Set-up

We are approached frequently by budding entrepreneurs seeking to set up a business.  Almost invariably, the issue of costs arises, equally frequently with limited funds.

A substantial number of introductions involve “partners” joining forces to start a business.

What to do?

First, the usual default structure is to incorporate:  Tax advantages; liability avoidance; limitations on economic exposure; ease of structural arrangements among participants.

But:  (i) costs upfront.  First, about $1,800 to incorporate in Ontario.  Then a unanimous shareholders agreement – possibly $3,500 – $8,000 to complete.  Obviously, a heavy front-end expense.

But:  (ii) given the downside of personal exposure, these set-up costs ought to be viewed as insurance.

Further, if the business is, among others, a food consumable, a product delivery with representations, medical services, financial investments and a raft of other types of businesses where litigious exposure exists, there should be no doubt that your personal assets need to be protected.  If the business is importation of cotton, distribution of electronics, or much similar lesser personal exposure types of businesses, nevertheless, why forego the advantageous tax treatment?

As a wise adage offers:  Never do a deal for tax advantages only.

Similarly, I suggest, never begin a business without proper set-up.

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