Complete corporate records more than just filing annual returns
By Helen Burnett-Nichols, Contributing Editor
Filing annual returns online may seem like an easy process in British Columbia — but privately held companies who keep their own books may not realize that they must hold onto a number of supporting documents that will play a vital role in their business, Vancouver corporate lawyer Jonathan Reilly tells AdvocateDaily.com.
“The B.C. system is very easy. It’s streamlined, it’s computerized, right from incorporation, filing annual returns, dissolution — there are certain exceptions for this, but it's almost all done online,” says Reilly, founder of English Bay Law Corporation.
However, as filing online appears to be easy and relatively inexpensive, he says this can lead to some problems for clients who do their own books.
“The filings you do online are supposed to be supported by a number of documents that you’re not required to file but should have in your own filing cabinet, in your own records,” he adds.
As a result, says Reilly, some business owners may file the required documents online, but fail to have the records to back them up.
“This causes some problems if they go to buy property or borrow money or sell the business because you’re going to have to put together a written history.”
For privately held companies, these documents, he says, include the annual shareholder resolutions appointing the directors and confirming the number of directors, and records relating to choosing the auditor or waiving the audit.
“The Business Corporations Act requires the company to have an audit every year, unless it is waived by the shareholders. And you cannot waive it permanently. This has to be done every year.
"The shareholders get to pick who the auditor is or waive appointing an auditor,” explains Reilly, whose firm practises corporate/commercial, real estate and wills and estates law.
Documents a company must have on file also include the annual directors’ resolutions approving the financials, the use or non-use of a particular financial standard, and the appointment of officers.
“The directors are responsible for preparing the financial statements. So part of the directors’ annual resolutions would be to approve the financial statements and authorize the use or non-use of GAAP or IFRS, which are the financial standards the businesses can subscribe to.
"And the directors will also annually appoint the officers — the president, the treasurers, secretary, vice president, whatever the officers of the business are. And the directors set the remuneration for the auditor and they actually negotiate the audit contract,” says Reilly.
While this may seem routine, Reilly says it is vital that this is completed.
“There will come a time in a company’s history when they need to borrow money, they want to buy or sell property or they want to sell the business. One of the things that will happen at that time is the other party in that transaction will want confirmation that the directors are validly appointed and authorized to act.
"And in the absence of those written resolutions, that opinion will not be given. That opinion is given by a lawyer and the lawyer won’t give that opinion in the absence of those resolutions,” he says.
For privately held corporations, it can be worthwhile to have a lawyer looking after the minute book — or corporate records — for a number of reasons, says Reilly.
“If questions arise, like the bank wants a copy of the registered shareholders and the registered directors, or your accountant wants a copy of the share classes or has given instructions for tax restructuring, if a lawyer has the books, they can get up to speed very quickly. If you do a great deal of work with the lawyer, they’ll already be familiar with what’s going on in your company,” he says.
In addition, if a lawyer holds a company’s minute book, Reilly says, they will also ensure the company’s information is up to date with the registrar.
“When clients move — whether personally, or they move the business — they often forget to change the corporate records. So this provides an annual check on whether or not the client has moved as well. If you forget, it can be very serious.
“If you maintain your own minute book and you move and forget to change the address of the company with the registrar of companies, a lawsuit is validly given if it is sent to the address on file. A client could get served and lose a lawsuit because they didn't defend it, because they never actually knew they got it.”
For businesses whose lawyers hold their corporate records, any legal notices will be sent to the lawyer first — including notices of a lawsuit.
“We’ll alert the client that it’s been received and spur them on to action if that should need to take place. And we prepare those resolutions and we review the information in the minute book to make sure we have the right address for the client.”
Consequences can also be significant for companies that fail to submit their corporate filings. Businesses are allowed to file late twice, but at that point, says Reilly, the registrar will start procedures to dissolve the company.
“Dissolution of the company is a problem because it’s a tax event. If you forget to do your filings and your company gets dissolved, you will be deemed to have sold your business and you will crystallize a capital gain if there is one.
"You will trigger a year-end. And then it costs money to get the company reinstated, and if it owns anything that has any assets, those assets escheat to the Crown.”
However, he adds: “If your books are at your lawyer’s, a lawyer will get served with a notice that the registrar started the dissolution proceedings. The lawyer can contact the registrar right away and get those proceedings delayed.”
Although some sole shareholder businesses in B.C. may question the value of hiring a lawyer for annual corporate filings when it seems easy to complete this task online, Reilly says the benefit isn’t always easy to see in the near-term.
“Some of the value is over the long haul — that familiarity with the business and the shareholders and having the records at your fingertips. That comes out over time,” he adds.