When it is the right time to incorporate

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  • Making the move: there comes a time when a successful small business must consider the next step, incorporation. Doing so assists the business to handle the many challenges that can otherwise overwhelm a growing business

    Making the move: there comes a time when a successful small business must consider the next step, incorporation. Doing so assists the business to handle the many challenges that can otherwise overwhelm a growing business


This article is part of the Bermuda Investment Primer continuing series.

Millions of individuals the world over start businesses every day. It is stated that across the “North Atlantic Pond”, specifically the US, Britain and Canada, small businesses drive economic policies and contribute mightily to a country’s gross domestic product and government tax coffers.

Statistics for these countries are remarkable similar: small businesses contribute an estimated 40 per cent of the gross domestic product; employ 50 to 60 per cent of the workforce and account for more than 95 per cent of private sectors businesses in these countries.

Do we think Bermuda is any different? Local statistical research is coming soon.

Small businesses can grow big! Legendary tales abound of start-ups in garages, kitchens, closets, basements and the like, achieving astronomical success. Even for the those self-starters who reach modest financial goals, there is an enormous sense of satisfaction and personal control.

Self-made business persons know what it means to dream, dare, do. They are willing to put in the long hours; to facilitate the constant client satisfaction hurdle; to focus, then execute consistently on the large and tiny financial details that together signify profitability.

Small business owners hire the right people; inspire people; they know their local community customers and understand what they want (if they don’t, they are done — failure rates are very high in the first three years).

Most small businesses also start out as Mom and Pop in-house operations, aka partnerships, or sole proprietorships. They are easy to fire-up: a business card, word-of-mouth, minimal insurance (sometimes none, though not a good idea), drive and determination.

Most importantly, small business people have to self-finance, that is use their own capital — which can be savings, credit lines, etc — because they have precious little extra borrowing power.

Time to grow up

Why should successful, serious businesses incorporate? After all, they know it is going to cost money — lawyer fees and all that.

By way of an answer, we return to the story of the hypothetical Bermudian family that own MamaZina’s Pizzarina. This story was introduced 18 months ago, and you will find a link at the end of this article.

Let’s follow MamaZina’s concerns and reasons for assuring the future viability of the business (not-incorporated) that she, and the late George, so diligently built from scratch.

The business is still growing rapidly, but responsibilities, ownership shares, real concerns of lawsuits (it is a food operation), succession planning, informal debt repayment deals (loans from friends and relatives), bookkeeping, employee benefit and retirement planning have become almost overwhelming. The business needs structure along with assistance from independent professionals because MamaZina knows this business has tremendous upward growth potential.

So what is an incorporated company? It is a stand-alone, long-shelf life legal entity;

• it can survive successfully into perpetuity long after the original incorporators and shareholders are gone. For examples, think of massive companies such as Cigna Insurance, State Street Bank (1792) and DuPont Chemical (1802);

• it delineates clearly every single shareholder’s percentage rights of ownership;

• it protects the owners from personal liability;

• it has a defined management structure;

• it provides credibility and assurance for lending institutions that the business is a going concern (remember the failure rate noted above for small businesses).

When it comes to the incorporation of a Bermuda business majority owned by a Bermudian family, many questions arise.

The process of incorporation means converting an existing unincorporated business, or starting a new one, into a company and deciding upon the form of the corporation.

Decisions that must be taken, include choosing a name for the new entity, deciding on the number of shares to be issued and how they are to be paid for in capital contributions, and deciding how many shareholders there will be and their percentage ownership.

Then there is the choosing of a board of directors, the assigning a company secretary, and developing a set of byelaws that will regulate the corporation.

The corporation must be registered under Bermuda law and receive a corporate seal.

Other tasks include opening a company bank account, arranging for a qualified professional to implement a full set of financial statements in the company name, establishing a trademark, or a service mark to protect the corporation’s name and integrity of it intellectual property and related items.

The controlling document that is interpreted to implement and conclude the incorporation process is the Bermuda Companies Act 1981 and its amendments. There are more than 380 pages to wade through — one reason it is a good idea to use a qualified Bermuda corporate attorney.

Thankfully, conciseness and clarity in a summary question and answer format can be found at the Practical Law website, where you can find Corporate governance and directors’ duties in Bermuda: an overview written by Natalie Town and Jonathan Betts, Cox Hallett Wilkinson Limited. Here is the link: http://us.practicallaw.com/3-523-2418?q=&qp=&qo=&qe=

We will dissect the Act as it is intended for the Pizzarina business in the next article.

The Pizzarina family is now aware that there will be no more late night kitchen discussions on profit-sharing, ownership, primary responsibilities, and control. All will be spelt out in the newly formed corporate documents.

Stay tuned.

Links:

An article recapping the narrative of MamaZina’s Pizzarina can be read at http://www.royalgazette.com/martha-myron/article/20160709/introducing-new-series-on-investing

As an alternative, you can visit the Pondstraddler website: The Bermuda Investment Primer to read the series as it evolves http://www.pondstraddler.com/BermudaInvestmentPrimerStocksChp2-Part1.htm

Please remember the website is still a work-in-process. Hey, planning takes time!

Sources:

Small Business is the Backbone of America https://www.entrepreneur.com/article/77398

http://www.fsb.org.uk/media-centre/small-business-statistics

https://www.startupcan.ca/wp-content/uploads/2012/01/Statistics-on-Small-Business-in-Canada_StartupCanada.pdf

The Bermuda Companies Act Consolidated (courtesy of Conyers Dill & Pearman) https://www.conyersdill.com/consolidatedact-files/Bermuda_Companies_Act_1981_Conyers.pdf

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com

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Published Feb 4, 2017 at 8:00 am (Updated Feb 3, 2017 at 7:50 pm)

When it is the right time to incorporate

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