Should you set up a corporation with friends to invest?

I will touch on some of the legal, tax and practical considerations in a case like yours for creating a corporation with friends.

Alternatives to corporations

When you run or buy an asset like a rental property, it can have multiple owners. Joint real estate is typically held by spouses, but occasionally, other family members may own real estate together. 

There is no requirement to set up a corporation to buy real estate with several owners, Gael. But for you, it may make sense, given there are multiple assets that may be purchased, and since there are so many unrelated owners.

A business venture—like a vending machine, an ATM machine or a lemonade stand, for that matter—can be owned personally without using a corporation. 

If you are the only party, you would use a sole proprietorship. If you have partners, you can have a partnership. The professional costs, like legal fees and accounting, may be less than with a corporation, and the income is reported on your personal tax return. 

Setting up a corporation

You can set up a corporation on your own or with a lawyer. Do-it-yourself incorporations often lead to mistakes, like incorrectly setting up the business structure, so using a corporate lawyer is generally advisable. 

The corporation will have up-front legal fees, as well as ongoing costs to maintain your corporate minute book. 

The accounting process for a corporation is more involved and more expensive than for a non-corporate business venture. Some Canadians do their own personal tax returns, but few people do their own corporate tax returns. There is software available—for example, from TurboTax Canada—but it’s much more complicated than a personal income tax return, so a professional tax accountant can be a big help.

Especially in your case, Gael, I think you would want proper legal, insurance and accounting advice up-front and ongoing. This could cost a few thousand dollars initially, as well as annually thereafter. 

What is a holding company?

In Canada, you can have a holdco. This is just a nickname for “holding company,” which is a corporation that owns assets. Generally, the assets include cash and investments, but they can include other assets like real estate—or, in your case, vending machines and ATMs. 

If your corporation will own real estate as well as carry on other business activities, it may technically be considered an “operating company”—or “opco”—as well as a holding company or holdco. 

Some businesses will maintain two separate corporations: an opco and a holdco. If the opco could have risk that could result in a lawsuit, for example, holding assets in a separate holdco may make sense to keep them safe. 

If an opco may be sold someday, keeping holdco assets separate may be necessary so that you can qualify for the lifetime capital gains exemption and keep your corporate savings and other assets separate. 

In your case, it might be simpler to keep everything in one corporation, but there are pros and cons. And, of course, you should seek legal advice. 

Use of shareholder agreements

It would also be advisable to use a lawyer to develop a shareholder agreement. If you have your own corporation, or you and your spouse own a company, this may not be as important. But once you have other shareholders, especially friends or business partners, a shareholder agreement is important. 

This agreement can deal with situations like if one of the shareholders becomes disabled, gets divorced or even dies. It can deal with situations where there are disagreements between shareholders. In the case of your property, what if some shareholders want to do a renovation and others want to sell the property?

The vending machine and ATM business could lead to even more decisions and potential disputes. 

If you are buying real estate with a down payment, you will presumably need to borrow money for the balance of the purchase. You should speak to a mortgage professional about the considerations for buying real estate with 10 friends and a $150,000 down payment through a corporation. 

You might even decide to buy the real estate corporately but keep the vending machine and other businesses separate, owning and operating them individually. 

Each of you should seek legal and tax advice on this venture. 

Should you create a corporation to invest in alternative assets?

For what it is worth, I would be inclined to check off other financial boxes before doing something like creating a corporation with friends. Paying off high-interest debt, opening a registered retirement savings plan (RRSP), having a healthy tax-free savings account (TFSA) balance, securing adequate disability insurance and, if you have a spouse or children, making sure you have sufficient life insurance as well. 

Keep in mind the venture you’re considering is highly illiquid. It’s difficult to get your money back on short notice. So it should be funded with money that is not needed anytime soon. It may also require capital calls, so the shareholders may need to be able to put in extra cash for renovations, repairs, vacancies or cash flow shortfalls. 

Read more about income:

• Is transferring your principal residence to your corporation a good idea?
• What’s involved with an owner withdrawal of cash from a corporation
• Incorporated business owners: Should you pay yourself a salary?
• Investing inside a corporation: what you need to know
• Should you buy real estate through a corporation?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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