Businesses, the employees who work in them, those who manage the employees and the directors who oversee management and act in the interest of the shareholders all have rights and responsibilities when running the business.
KATA Accounting Solutions Professional Corporation is an accounting firm, not a law firm. However, in this article, we attempt to identify some of the rights and responsibilities of the business and those working in it and point you to some useful resources.
Obey the Law
It seems really simple. But do you know the laws that govern your corporation?
This is a no-brainer. If it’s a crime, don’t do it. However, many small businesses, especially those without internal financial and legal controls and those run by ethically dubious individuals, commit crimes regularly. For instance, it is not ok to make up a bill for someone else (or a fake one), it is not ok to commit fraud or embezzlement, and it is not ok to mislead people by presenting false information. Unfortunately, these are things we have seen happen.
Incorporated businesses in Canada need to follow the corporation acts that govern them. This is primarily the Canada Business Corporations Act, but each jurisdiction has its governing act.
Below, we link some useful sites about different provincial corporations’ acts. Please ensure you are seeking qualified legal advice to get your questions answered.
It seems like common sense to pay taxes. After all, taxes pay for the infrastructure, benefits and other shared services we all need.
Corporations must adhere to the governing tax laws of the jurisdictions in which they operate. The key acts that corporations operating in Canada need to pay attention to are the Income Tax Act, which covers most income tax matters, and the Excise Tax Act, which governs GST/HST matters and excise taxes.
In today’s global economy, there can be tax-related challenges that you may not think of right away. For instance, there are over 12,000 sales tax jurisdictions in the United States. It’s essential to seek advice to expand operations into unfamiliar territories. One of our favourites for helping determine and file state taxes is Avalera.
In addition, if you are operating in different jurisdictions, get advice on the local criminal codes and income tax laws to stay compliant.
Local and Industry Regulations
Many smaller jurisdictions, such as counties, regions or municipalities, may have regulations, licensing requirements and by-laws that must be followed. For instance, special licenses may be required for nail salons, restaurants and adult entertainers in different cities, counties or regions.
Don’t get shut down because you operated with impunity.
In general, information relating to the business is the business’s property. This includes the stewardship and custody of private information of customers, vendors and employees. Robust policies, procedures and training are vital to the ongoing custody and confidentiality of information.
Shareholders are the owners of the corporation.
Their information may need to be reported on a corporate tax return or other securities filing. It is important for a business to keep track of the ownership and to keep the information updated and current. Shareholders have different rights depending on the jurisdiction of incorporation and the class of shares they own. Even a minority shareholder can file suit against a corporation for violating their rights.
Suppose you’re considering purchasing shares in a private corporation. In that case, you must consult with independent legal counsel to ensure you understand what you’re investing in and the rights that come with the shares you purchase.
Corporations are required to keep their securities register up to date. It’s astounding the number of small businesses that can have trouble proving ownership because they’ve neglected to keep their corporate record book up to date.
Directors of a corporation accept certain responsibilities and potential liability.
They oversee management and steer the overall direction of the company. Being a shareholder does not make one a director. Corporations need to have directors. Looking at the original articles of incorporation will often reveal who the incorporating directors of the corporation are.
Government filings are required whenever a director is appointed or resigns or moves and changes their address. These filings should be added to your corporate record book.
Before accepting a director position, individuals should know their responsibilities and potential liability. If management or employees fail to do something, it may come back to haunt the directors even though they had no hand in it.
For instance, monies collected in trust, such as GST/HST and source deductions held back from employee pay, must be remitted to the CRA regularly. Failure to do so will result in penalties and interest and can pierce the corporate veil to impact the directors themselves.
Ensure you understand the responsibilities and potential liability of accepting a directorship role with any organization. You should complete a director’s consent form if you accept a director role.
Employee information must be kept confidential and secure. This means that the business must have policies and processes to protect the information. In addition, employees need to be educated about policies regarding safeguarding customer and vendor information, as well as trade secrets.
These basic policies need to be outlined in the employee handbook. There should be clauses in employment contracts about protecting privacy, protecting the company’s trade secrets, and adhering to company policies.
Financial statements, reports, books and records
These are the corporation’s property. The financial information of the company can include, but is not limited to:
- Sales Invoices and Sales Receipts
- Bills and Receipts
- Bank and Credit Card Statements
- Financial Statements
- Financial reports
- Customer, vendor and employee information
- Key leases, contracts, agreements and other important documents
- The books of the company
- The tax returns
- And more…
Nobody has the right to hold this information hostage. This can be part of what ransomware hackers do – it is illegal. As bookkeepers and accountants, we work on the books and records of the company. They are not our property, and we have no right to withhold this information from the business.
That being said, corporations must have clear policies about whom such information can be disclosed. Bookkeepers and accountants do not have privileges. If a court orders us to comply, we must. You cannot expect the same privacy as with a lawyer or doctor.
The best thing a business can do to help ensure they operate above board is to hire a strong team of professionals to advise them. These can be internal to the business if it has a budget or external. Often, it’s a good idea to consult with external professionals to ensure any internal teams are doing what is required to protect the business.
All businesses need legal counsel, and though it’s often avoided as an unnecessary expense, a small up-front investment can pay massive dividends down the road and prevent problems before they happen.
All businesses with employees need to understand what they are getting into when hiring. There are HR consultants available who can help smaller businesses, and there are a lot of government-funded educational programs about treating employees properly.
All businesses need a bookkeeper. For some small businesses, that might be the owner-operator.
However, it is important to ensure that things are being done correctly. If you own a corporation, ensure your bookkeeping is done using the accrual method, not cash accounting. This is a requirement under the Canada Business Corporations Act. If you don’t know what accrual accounting is, seek some advice.
Finally, all businesses need to file taxes. It needs to be done, whether that’s by the owner-operator or by a CPA.
In Canada, we are required to self-report. When you file taxes, you’re making an official statement to the government – ensuring you do it right is important.