Realtors Incorporated

Ever ask yourself at what point you should consider incorporation? Join Corinne Lyall, Broker/Owner of Royal Lepage Benchmark and Charles Osuji and Jim Smith of Osuji & Smith Lawyers as they explore this very question!

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Introduction 0:10

Welcome to In Your AREA, a podcast designed by AREA to update, educate, and refresh realtors, brokers, and industry stakeholders on topics that matter most to you. Listen on the go, in your car, at a coffee shop, wherever your day takes you. This is a podcast designed with today's busy realtor in mind. Here is today's host Corrine Lyall.

Corinne Lyall 0:37

Okay, welcome to In Your AREA, a podcast for Alberta realtors on the move. Podcasting from the board room of the Alberta Real Estate Association, I am Corrine Lyall, your host for Realtors Incorporated. I am also broker owner at Royal Lepage Benchmark here in Calgary and I am a 2018 member of the AREA Board of Directors and a member of the AREA Professional Development Committee. I began my career 21 and a half years ago. I was 12 at the time, haha, and I was unsure on how to answer some of these questions we're going to discuss today. I would suggest as a broker it would be a question I get at least 50% of the time when new agents enter the industry. They want to know should I be incorporated or not? Just as a personal experience, I was mentored by my mother and some of the realtors who may be listening, might remember her name is Jan Lyall. She said something really great to me and she continued to say to many realtors as they entered the industry; "It only makes sense to incorporate when you spend less money than you make." That was something that stayed with me and I would imagine that our experts over here agree. Joining me are our experts, Charles Osuji and Jim Smith of Osuji and Smith Lawyers. Can you each tell me a little bit about yourself and why you've been invited here today?

Charles Osuji 2:10

As Corrine has correctly stated, my name is Charles Osuji and I'm the managing partner of Osuji and Smith Lawyers. I was called to the Alberta bar in 2014. I was a student of Jim's and I took over from Jim in 2017. We do a lot of general practice. We practice in the areas of real estate, employment law, civil litigation, family law for closures and wills and estates.

Corinne Lyall 2:37

Thanks. Jim?

Jim Smith 2:39

Yes, that's true that I took Charles in off the street. I dragged him in, he couldn't get away and he was an excellent student and he's become an excellent lawyer. In fact he's right that he's bought me out. I have to do bidding and I do the best I can. It's been a very good association and he runs the office and he's got qualities I've never dreamed of.

Corinne Lyall 3:12

He is a sharp dresser. I'm just saying that you can't see that or hear that in the podcast. I can describe it. I love his pink shirt or his tie. It looks good. Very, very sharp. Getting back to our conversation here, so maybe Charles you could tell me a little bit about just basic, what is incorporation and who should incorporate, when's the best time and specifically around real estate obviously.

Charles Osuji 3:39

A corporation is legal entity and in law, a corporation has independent legal personality. An incorporation allows a company to exist. That is the way a company can come into existence, by incorporation. Everyone can incorporate, but you have to look at the benefits and the disadvantages of incorporation. One, it depends on the kind of business you're wanting. It depends on the stage where you are with your business. If you're making $20,000 a year, I wouldn't recommended incorporation. If you're making more than $100,000 a year, I would recommend incorporation. There are other benefits of incorporation that we're going to talk about down the road as we proceed with the podcast.

Corinne Lyall 4:25

Okay. Well thank you for that. Jim, I don't know if you want to add to that at all?

Jim Smith 4:29

Go a little further that a corporation is a legal person. If I'm working for you and you make a mistake, then you're the one who's responsible. Even if I was your employee at the time. The same thing with a corporation. If I'm working for myself and I make a mistake then I take the hit. If I'm working for the corporation, that's a legal person. The legal person is responsible for it and my home and all my resources are not necessarily tied up with it. It can be very, very important that way. Another way is when particularly when you get to the point where you're making more money than you're spending and you may be bringing other people into the organization and so on. You don't need to do it in quarters or halves or whatever, but you can do it by shares and it's much more flexible that way. It can give you the means to plan your finances better so that you pay less money in taxes, but your tax planning. Those are all advantages. The big disadvantage is it's more work that you need to do. You need to get your resolutions but, particularly as you get into that area where the dividends are big, then the inconvenience I think pales besides that.

Corinne Lyall 6:00

Yeah. A couple of things you touched on, one is this idea that somehow, if I'm incorporated that will somehow protect me from litigation. I mean, is that something that is a value or is that just a myth or did they just sue everybody including the corporation?

Jim Smith 6:23

They can sue the corporation and the corporation normally doesn't have a lot of money in it. It has certain assets, but it doesn't, normally the corporation wouldn't own the family home and all the savings. There's a big reason there. It can insulate the realtor or the business person from much of the liability. No, for such things as fraud and so on, it won't protect you against that, but from ordinary mistakes or things that have gone wrong in the business, if used properly give you a great deal of protection.

Charles Osuji 7:07

To add more to what Jim had just said about liability when it comes to incorporation. Generally, the rule is the corporation is a separate entity. It has a separate personality in the sense I got to force its share holders that immunity or the insulation from being personally liable for the acts of the corporation. However, there are exceptions.

Corinne Lyall 7:34

There's always exceptions.

Charles Osuji 7:37

The shareholder cannot hide behind the veil of incorporation and commit a fraud. If that happens, the corporate veil can be pierced and the shareholder be personally liable. Secondly, if a director of corporation is personally liable for unpaid wages of the employees for up to six months. Again, that is very important because the director is in controlling mind of the corporation and if an employee is not paid the employee can actually sue the corporation director to be personally liable. Thirdly, a director can also be personally liable for what it costs as deductions. These are the payments you make to the CRA every month, the EI or CPP and all that. If the director fails to make those payments to the CRA, the director will be personally liable.There are a bunch of other duties and obligations a director owes to the corporation like duties of good faith, to act honestly. If the director fails to comply with those obligations, the director will be exposed to personal liability.

Corinne Lyall 8:44

Going back to "I'm a new real estate agent", what in your mind, what would be a reason for them to incorporate besides the fact of maybe they're making more money than they're spending? What would be some other good reasons to do it? I mean you do have to file taxes for both your incorporation and your personal taxes, which can be expensive unless you're actually saving a whole bunch of money, it doesn't make a lot of sense. That's what I've always thought.

Charles Osuji 9:13

We've talked about personal liability, which is a huge benefit of incorporation. There are other benefits as well for instance, flexibility and access to grants and loans. As a shareholder or director you have more access to grants and loans using their corporation. I understand that most banks are more comfortable giving loans out to corporate bodies than individual owners. That is a huge advantage. The second advantage is continuity because a corporation is an independent legal personality or independent legal person that means the corporation can continue in the absence of the director or the shareholder. If a company has five shareholders and one shareholder dies, the company doesn't cease to exist. It continues in the absence of that shareholder. Continuity is a huge advantage. Another advantage is savings in taxes. Corporate taxes are comparatively and relatively lower than personal income taxes. If we were making $250,000 a year, the director has the option of incorporating and keeping some of the earnings in the corporation and paying less in corporate taxes are lower than their personal income taxes. The director also has the ability to only pay himself or herself a certain amount of money in a year to lower the marginal tax rate that he/she are supposed to. That flexibility is there because of the fact of incorporation.

Corinne Lyall 10:54

Charles, does it make sense if one of the things that can be really great for us in our industry, one of our greatest ways to build financial wealth is to buy investment properties. If I'm buying an investment property a year, for instance, do I want to run that through my corporation or do I want that as a personal asset? What's better, or is there some that I would want in my corporation and some as personal cause that would be something that would be a consideration. Or Jim?

Jim Smith 11:23

That's one of the big advantages of a corporation. It's your accountant and your tax accountant who calls the shots on that or should. If you make $200,000 a year. If you get a paycheck of $200,000, there isn't a lot that your accountant can do to help you minimize those taxes. One of the things if you have a professional corporation or even any kind of a corporation through which you're getting your income, it gives him a lot more room to deal with that. There are all sorts of things that can be used to delay the payment due to various things. To get into that, you're looking through your accountant or your tax lawyer. The point is if you don't have your corporation, your tax lawyer or even the best tax lawyer in the city, there's not much you can do. You made this, these are your deductions, your hoop. That's it.

Corinne Lyall 12:31

I guess like any sort of investments, I mean there's offsets against your income that occur, but yet to your point, you certainly want to talk to your accountant before you make those decisions as to whether your company buys it or you buy it. Probably depending on what kind of income you're already earning.

Jim Smith 12:48

Your financing and the income from it; there's all sorts of things which change year to year, month to month or as I understand that sometimes week to week or even day to day. There are some of those changes and your tax accountant or your tax lawyer, that's their business and they will keep right on top of it.

Charles Osuji 13:07

Two things I want to add to the decisions to either buy properties to their personal name or through a corporation. The other benefit of buying through a corporation would be number one personal library. If you buy an investment property through your corporation and the corporation w ould pay the mortgage f or instance on the investment property and there's no personal guarantee. The corporation walks away. Sorry, the individual owner simply walks away. The c orporation w ould be responsible for the debt on the investment property. Then secondly is the small business exemption, which is o nly applicable to qualified businesses. If you buy an investment property and say 10, 1 5 years later, you sell it for a gain, you h ave the lifetime exemption of about $800,000 or so through the corporation.

Corinne Lyall 14:07

So your capital gains tax is high with being incorporated versus being personal?

Charles Osuji 14:14

Yes. That is an advantage you can benefit from.

Corinne Lyall 14:17

Okay. What if I'm a new associate coming into real estate cause this has happened with me and they already have a company. Lots of times it's just the ease of, well, I've been running my businesses this way for so long and I'm already incorporated so we might as well continue on with that. Does that muddy the waters, do you think having two businesses running through the same company?

Jim Smith 14:43

There again, I think you need to talk to your accountant first of all and then your tax lawyer. The accountant is where you to start, tax account is where you go further and then you go to a tax lawyer for the real tricky questions. There's lots of the minutiae it's not a simple area.

Corinne Lyall 15:00

Yeah. Generally that's what I tell them. Talk to your accountant first.

Jim Smith 15:03

Yeah. Plan it with him. There's one other thing. When you go to borrow money, yes it makes it easier your books are all there, but because the bank knows or the lender knows that you may not be held liable for that loan. When you are borrowing money you can expect it. When it's your corporation, you can expect that you'll have to sign a personal guarantee. It's not all pluses, there are minuses too.

Corinne Lyall 15:39

I've also heard though too, and again, there's probably exceptions to this or you might tell me to go talk to an accountant is that obviously borrowing through your company is also a good way to avoid higher interest rates through lets say a traditional lender. If your company has, let's say your company has several hundred thousand dollars worth of cash in it and you wanted to borrow from your company to do something with that, it could be a number of different things, but you're just taking a company loan so you can set that interest rate. It doesn't have to be what the typical lender would be, would it?

Jim Smith 16:17

Sounds great, but what am I going to tell you? Because you may get income attributed to you and that sort of thing. No, it's great to have a corporation, but it's not magic. It doesn't do everything by itself.

Corinne Lyall 16:38

Anything else that you can share with us?

Charles Osuji 16:41

Incorporation is nice but you need to do your homework. You need to make sure that the documents are all set out. I've seen clients go to the registration and pay $500, $600 and incorporate and they probably have a partner or two with respect to the corporation and they haven't set out the shareholders agreement. They haven't set out the written partnership agreement. They haven't really determined the classification of the shares. They simply just ticked the boxes, paid the money and have a company. I would really recommend against doing that. If you want to start a corporation you should start right. You should, as Jim said, get advice from an accountant, get tax advice, get a lawyer to help you with the structuring of the company. I have a matter that is in court right now we have a trial in a few months. What happened was two or three partners started to invest in a possible venture. They did have a partnership agreement which was a one pager. Just a one page agreement that said this is what A will do and this is what B will do. Two months into the relationship A was not happy with the way things were being run because A thought that we're going to make thousands and thousands and thousands of dollars. B didn't think so. They quickly realized that they were lost in translation and in fact, they were not on the same page from the get go. Right now they've spent thousands and thousands of dollars in legal fees, which could have easily been prevented by maybe $2500 in drafting up unanimous shareholders agreement or a clearly worded partnership agreement that would specify the obligations of each partner and expectations as well. Which is really where the problem comes from; expectations. Partner A might be expecting to break even within two months, while partner B might not have the same expectations as well. So you need to have these documentations in place and if it's going to cost him money to put them together. By all means spend that money. You're saving yourself headaches.

Corinne Lyall 19:02

It's all worth it. It's like anything else. Insurance, anything. You want to get those things in place. Otherwise this could cost you more than if you had done it in the first place.

Charles Osuji 19:13

Absolutely. Business would be distracted because things will not be going while are you are fighting each other.

Corinne Lyall 19:19

Well yeah and I've certainly heard some really terrible stories around one shareholder maybe having more power over the other one and stealing money. Right. And you don't know for a long time that all of a sudden the company has no money and you weren't made aware of that because you hadn't done the proper things in the first place to create the correct checks and balances between the various shareholders.

Charles Osuji 19:42

I have another horror story, Corinne. These folks, they drafted up the unanimous shareholders agreement and that agreement indicated that any loan by any of the directors to the company, the rest of the directors would be personally responsible for that loan. That was the deal. After my client spoke to me my client quickly realized that that might not hold water because in Alberta, the Acknowledgement of Guarantees Act, any personal guarantee must be backed by a certificate granted by your lawyer. So if a director/shareholder personally guarantees the loan, there has to be a certificate showing that guarantee. Most importantly, there must be a certificate showing that the lender understood or the guarantor understood the importance of the guarantee, that is missing with respect to my client's situation. They have an agreement. The directors will be personally responsible for any loan but there is no certificate showing that. It might be a little tough for my client to get back that loan from the individual directors because the company is not doing well. The individual directors may not be personally liable for the loan. Again, the importance of seeking professional advice in putting this system in place is sort of, you know, going on Google and doing it.

Corinne Lyall 21:20

It's kind of like getting your degree online as well. So is it that the certificate was missing or they just failed to...

Charles Osuji 21:29

Yes, the certificate was missing.

Corinne Lyall 21:29

Is missing. Okay, so keeping one with your lawyer or something might be a good idea.

Charles Osuji 21:37

They didn't have the certificate in the first place. They didn't know they needed one.

Corinne Lyall 21:41

That's sort of been the big takeaway. Get your professional advice first. You know, you need the expert advice before you make these decisions. Anything else? Jim, do you want to add anything?

Jim Smith 21:54

I think speaking about a realtor just starting out. I don't think it's necessary to incorporate right away. I think that comes later on depending on your cash flow and various other things. Usually when you want to expand and right away starting out, that's a tough enough business anyhow. But one of the real horror stories is people who can carry on business and don't incorporate to control the downside, the risk and there's all kinds of stories out there are people who have worked as partnerships or as they go under a trade name. I think sometimes they think that they're protected. They are not and people have lost their houses when things go wrong. That makes me as a lawyer cringe. If they'd have had that protection they'd have been a far off. It's so important when you're dealing with big risks.

Corinne Lyall 22:54

Yeah. As you're earning more money, it would be good to get more and more advice around what the best things are to do.

Jim Smith 23:00

If things go wrong, what can happen? Or as Charles was saying, when you have different people involved and you have a shareholder's agreement, it's very important that that shareholders agreement you understand it and you know what it does and what it doesn't do. Before you get caught on the wrong end of the stick.

Corinne Lyall 23:24

Actually one question sort of pops to mind. What would be a reason to dissolve a corporation? Cause that happens as well.

Jim Smith 23:33

If you and I go into business and we're going to run a Dairy Queen and this is excellent, they do good money and then I, for whatever reason, I think that we should really go into business and sell ski-doos, that's a big thing and it's just completely different. We each have half the shares and we can't decide what to do. I can't convince you, you can't convince me. Sometimes the only thing you can do is to dissolve the corporation. That's one of the things you should have in any good corporation, certainly where you have more than one shareholder, a shareholders agreement with a shotgun clause, which means that if you and I can't agree, then I can make you an offer to buy all your shares at $10 a share. You look at that and you can say, yes, I'll accept it. Or you can turn it around, which is where the shotgun comes in and I'll buy your shares at $10 a share because it makes it harder for the shareholder with more money to take an unfair advantage of the other shareholder. There are things like that to help. Ultimately there's always some risk, but there are ways to protect ourselves from those to a large extent, and that can be very important.

Corinne Lyall 24:55

You wouldn't typically set that price out in the shareholders agreement would you? Wouldn't you want to have a third party come in at that time or you set it out in advance?

Jim Smith 25:06

The standard way is that I can at any time, say you and I are the only shareholders, I can make you an offer at anytime. The point is it's the shotgun. If the shares are worth presumably $20 a share and I offer to buy yours at a dollar a share, you can turn it around and buy my shares at a dollar a share.

Corinne Lyall 25:34

You want to make sure it's market value.

Jim Smith 25:36

Or whatever I'm prepared that it can come back to bite me. So it's not just a one way deal.

Corinne Lyall 25:45

Makes it more equitable.

Charles Osuji 25:47

Another mechanism is to have a UAC, the parameter surrounding valuation. It is important to have that there. What I've done for my clients, what I do is I have them nominate an accounting firm/valuation firm that would provide the valuation every year at the end of the journal year. Right, so you have an accounting firm that has been designated and is responsible for conducting evaluation of the business every year. That would be another way of determining the valuation simply consulting with this firm and having them provide an evaluation of the shares. If there is a problem with respect to the evaluation. There's also a mechanism in the US where parties can appoint an arbitrator that will determine the value of the shares. Again, you undermine the risk that Jim has indicated with respect to shotgun conditions, make sure that the offer that you're making is that offer you can accept.

Jim Smith 26:55

In a small corporation, you can set all sorts of conditions on the shares that they cannot be sold without the, without the approval of all the shareholders that they can only be sold under certain circumstances and so on. To make it harder for the stronger shareholder to take advantage of the weaker shareholders and so on. The key is of course, get a good shareholder. Get a good partner.

Corinne Lyall 27:24

If I was considering getting incorporated, I think it's important to understand the difference between how a lawyer can give me advice and how an accountant can give me advice.

Charles Osuji 27:38

Okay, so a lawyer would help with the legal structuring of the organization, for instance, a lawyer will help you with the types of classes of shares and the rights that would be attributable to those classes of shares. Do you need Class A voting shares or do you need Class B preferred shares and all of the legal structure and the lawyer would also advise you as to your exposure to liability being incorporated versus being a sole proprietor. An accountant would advise you on the tax implications of being incorporated versus being a sole proprietor. The tax implications of do you pay yourself salary or do you pay yourself dividends and when do you pay yourself? So some of those nuances that have tax implications would be the portfolio of an accountant.

Jim Smith 28:36

Well to go further and muddy the water. I think Charles answered it quite well. But the accountant will give you advice as to the finances and to the taxes and how you can work within the structure as from that time on. Whereas the lawyer would be more likely to advise you as to pitfalls legally and more particularly when you have more than one shareholder. When you're starting out and you only have your one shareholder, then it's not much of a problem. When you get more than one, then you can run into problems and maybe eventually do because maybe no two people always agree completely all the time. That's what you have to deal with but you don't need to worry about that when you're just starting out and you only have yourself as a shareholder.

Corinne Lyall 29:32

Then you're just fighting with yourself. Thank-you so much Charles and Jim for your wisdom. AREA members, we want to hear from you. Your feedback and suggestions for future podcast episodes will be critical to making sure we make this the strongest resource for you. Thanks to all who took the time to listen. We hope to see you the next time we are In Your Area. Thanks so much.