My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, August 13, 2012

Governance Issues Private Corporations need to Review on an Annual Basis

I recently asked a corporate lawyer acquaintance of mine (who wishes to remain anonymous) which legal issues he suggests my corporate clients review and discuss with their lawyer on an annual basis. According to the publicity shy lawyer, if you own shares in a private corporation or are responsible for corporate governance, you should ensure you consider the following issues each year:

Updating Annual Minutes, Including a Minute Book Review


Upon the completion and issuance of a client’s financial statements, my firm Cunningham LLP includes in our client financial statement package, a minute’s letter addressed to the client’s lawyers. This minute’s letter reflects the date the financial statements were issued, the type of accounting report (audit, review or notice to reader), whether any dividends were declared and any bonuses declared and/or paid.

If you have a keen eye, you will note I said we provide a letter addressed to the client’s lawyer, not that we send the letter to the lawyers directly. Several clients have informed us that they do not wish to pay to have their minutes updated yearly, so we let each client make their own decision about whether they want their minutes updated.

Our firm strongly urges clients to update their minutes; however, as noted above, many do not. Most lawyers recommend on the strongest possible terms, that clients have annual minutes prepared by their corporate lawyers and executed by all directors and shareholders each year as soon as possible.

If annual minutes are not prepared on a timely basis, the death of a director or shareholder, or the development of litigation initiated by minority shareholders, may make having such annual minutes executed impossible.

In the case of litigation, minority shareholders may use the oppression  remedy to demand an audit for any year for which an audit waiver has not been signed as part of the annual minutes. Minority shareholder litigation is often expensive and by having the minute book up to date, this minority shareholder tactic is muted.

In addition, if your minute book is up to date, you will avoid the potentially lengthy legal delays that can occur when you are taking on new shareholders, buying or selling all or parts of businesses, or obtaining financing, when the minute book has not been updated for several years.

Where there is any change in the registered office, shareholdings, officers, directors or their respective addresses, these changes need to be properly reflected in the minute book and/or notice of change filings required by law must be filed with the appropriate governmental authority within relatively short time periods after the occurrence of such changes.

One other reason to update minutes is that when you are audited, one item always requested by the Canada Revenue Agency’s (“CRA”) is your minute book. Thus, you want to ensure your minute books are up to date and are consistent with your financial statements.

Proper Registration of Trade Names and Trade Marks


The corporate lawyer informed me that clients often assume that because they have been using a certain trade name and/or logo for an extended period of time, that they automatically have certain exclusive rights with respect to the use of such trade name and/or logo. This assumption is not necessarily true. The lawyer told me you run the risk of “trademark trolls” stealing your name and/or logo. While you may have certain common law trade mark rights, the level of protection from a practical perspective is next to nothing, and is far less than if the trade mark was registered with the Canadian Intellectual Property Office. Hence, even relatively small companies of modest means should have proper registration of their business name and also, in most cases, the registration of their trade name and/or logo as a trade mark in Canada. In certain select instances, such registrations are also advisable in the United States or other parts of the world.

Employment or Independent Contractor Agreements


A very controversial item with the CRA is whether a person is an employee or an independent contractor. This issue has both payroll and income tax implications. Despite the contentiousness of this issue, many corporations operate their businesses without any planning for the substantial contingent liabilities they are accruing. If you are treating an individual as an independent contractor, and the CRA determines that they are an employee, there could be amounts owing with respect to termination notice periods and the potential wrongful dismissal damages flowing from such notice periods.

The lawyer told me that many private corporations have not considered whether the CRA would characterize any of their workers as employees, although they may have been treating such workers as independent contractors. Certain employment problems may be reduced, or in certain instances, entirely avoided by the proper use of employment agreements or independent contractor agreements. For example, a structured payout termination provision in an employment agreement will be of great assistance in avoiding a claim by a recently terminated employee for wrongful dismissal damages.

An additional benefit to the corporation is that, by participating in the exercise of reviewing the organizational structure of the corporation with the corporate lawyer on an annual basis and thereafter having employment or independent contractor agreements professionally prepared, the client is forced to consider many aspects of their relationship with their employees or independent contractors that they may not have otherwise considered, sometimes resulting in an alteration in the underlying relationship.

Doing Business Outside of your Province


Another potential issue is if a corporation does business outside of Canada, or in any Province other than their province of residence, the client may be required to register in such other Province or State. This matter requires review on a case by case basis and should be reviewed each year. A non-registered entity may not have legal standing in another province if they have not registered in that province.

If you own shares in a private corporation or are responsible for corporate governance, you should proactively consider the issues noted above on an annual basis.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.