What is a corporation?
A corporation is a legal business entity separate and distinct from the owners (shareholders) of the business. A corporation may own property, enter into contracts, and conduct business under its own name.
As the corporation is a separate legal entity distinct from its members and has the capacity to own property, to sue and be sued, it affords limited liability protection to its members. This means that individual members are not personally liable in certain instances, for the corporation’s debts and obligations.
The corporation is not affected by changes in its members, be it due to death or any other reason. Therefore, it is easier to enter into a number of transactions in the name of the corporation such as, banking, owning real estate or signing a lease or contract.
A majority of the members of the corporation have the power to bind the others by their acts.
Operating as a corporation provides a certain prestige that does not necessarily go with being a sole proprietor or independent contractor. Of course, you are providing the same quality product or service you provided before, but the world is likely to see you as more professional because you are doing business in a format that is recognized as professional in the business world.
Protection from personal liability: When you form a corporation, it is a separate legal entity, a "person" separate from you personally. Thus, your corporation's property and assets are separate from your personal property/assets. Recognizing the need to protect personal assets from business debts and liabilities is what prompts many people to incorporate.
Tax advantages: Many tax advantages are available to corporations that are not available to individuals, sole proprietorships and independent contractors. This is usually at a lower tax rate than the individual would otherwise be taxed. This is however very dependent on your particular circumstances. Please check with your tax professional to see if a corporation may benefit you.
Access to Capital: Banks and other financial institutions are more comfortable providing loans and financing to an incorporated company than to an individual. The share structure of an incorporated company also facilitates external investment.
Professional image: Like it or not, in business, operating as a corporation provides a certain prestige that does not necessarily attach to being a sole proprietor or independent contractor. Of course, you are providing the same quality product or service you provided before, but the world is likely to see you as more professional because you are doing business in a format that is recognized as professional in the business world.
Disadvantages of Incorporation
As the corporation is a creature of statute, it is subject to some supervision by the Government of Ontario and it must conduct its affairs in accordance with the applicable statutes. For example, the constitution or by-laws of the corporation, the election of directors and the calling of meetings of members are all governed by the Corporations Act. In addition, a corporation is required to report certain information on a regular basis to certain departments of the Government. Failure to comply with reporting or disclosure requirements could render the corporation and its directors and officers liable to certain penalties, the ultimate penalty being the cancellation of the charter and dissolution of the corporation.
Components of the Corporation
Jurisdiction: Just as a human person can be a citizen of a particular country, corporations must belong to a particular jurisdiction. In Canada, this means that a corporation may be incorporated provincially or federally. A corporation must comply with the laws of the jurisdiction where it was incorporated, in addition to the laws of any jurisdiction where it conducts business.
A federally incorporated corporation may conduct business anywhere in Canada, so long as it is also registered in the province or jurisdiction where it conducts business. For example, a federally incorporated corporation may conduct business in Ontario upon filing the appropriate provincial form. Traditionally, federal incorporation has been appropriate for businesses that conduct business in several provinces in Canada. A corporation incorporated under the laws of Ontario may conduct business in another province upon filing the required forms and paying the appropriate fees. Corporations may "move" from one jurisdiction to another upon following the appropriate procedures.Articles of Incorporation
Articles: Articles of incorporation serve as the corporation's constitution and "birth certificate". The corporation is created by filing Articles of Incorporation with the appropriate governmental authority. In Ontario, Articles of Incorporation are filed with the Companies and Personal Property Security Branch of the Ministry of Consumer and Business Services, while federal Articles of Incorporation are filed with Corporations Canada branch of Industry Canada. The appropriate fee must be paid and the Articles of Incorporation must conform to the requirements and form used within the jurisdiction.
The Articles of Incorporation contain information as to where the registered office of the corporation is located, the share structure of the corporation, the rights, privileges and conditions attached to each class of shares, the number of corporate directors and the restrictions, if any, on the type of business conducted by the corporation and on the transfer of shares.
Name or Number: A corporation always has a number or name assigned to it at the time its Articles of Incorporation are filed. In the absence of a corporate name, that number will act as the company's name. Such corporations are often referred to as numbered companies. For example a numbered company incorporated provincially in Ontario might be named 1234567 Ontario Inc., while a federally incorporated company might be named 1234567 Canada Inc.
Alternatively, a corporation may apply for a name, in which case a current name search report (NUANS search) must be filed along with the Articles of Incorporation. The report contains information on names and trademarks that are similar to the proposed name of the corporation. A corporation can not have a name that is identical to or confusingly similar with an existing name or trademark. The NUANS report does not guarantee that a corporate name will not be attacked at some future date for violating a trademark and/or for not complying with the statutory rules. In addition, names should not inaccurately describe the business of the corporation or contain offensive terminology or terms prohibited by the relevant legislation and regulations. Corporate names are also required to have a term that differentiates the corporation from partnerships and sole proprietorships. This is achieved by the insertion of a limiting term at the end of the name, usually "Incorporated, Limited, Inc., Ltd. or Limited".
After a corporation has been incorporated, it should be properly organized. Normally this is achieved by: issuing shares to the initial shareholders; electing the initial directors; appointing the initial officers; approving the By-law(s), and filing the initial notices advising the appropriate governmental authority of newly elected directors and officers.
Share Structure: A corporation must have at least one class of shares. The nature of the share structure should mirror the complexities of the capitalization of the corporation. Simple capitalizations usually have one or two classes of shares, whereas complex capitalizations may require several classes of shares.
Usually "Common" shares are a class of shares to which the principal right to vote at meetings of shareholders is attached. "Preference" or "Preferred" shares usually have no voting rights, but have preference regarding, among other things, the payments of dividends and/or the division of assets of the corporation in the event that the corporation is dissolved. "Convertible" shares are shares that may be changed from one class of shares into another class in certain circumstances.
The Articles of Incorporation may limit the number of shares that may be issued in a class or provide that an unlimited number of shares may be issued. Shares of a class may also be issued in series. The different classes of shares of a corporation must have among them the right to vote at meetings and the right to the assets of the corporation upon its dissolution, although these rights do not have to be concentrated in one class of shares.
Shareholders: Shareholders are the owners of the corporation. Their ownership is evidenced by share certificates. A corporation may be owned by one or several shareholders. Shareholders do not own the assets of the corporation, rather, the assets are owned by the corporation. Accordingly, shareholders do not own the debts of the corporation, nor are they responsible for the debts of the corporation. As previously mentioned and subject to minor exceptions, the maximum amount that a shareholder can lose in an unsuccessful business operated through a corporation is the amount of their initial investment in purchasing their shares.
Shareholders do not manage the corporation. Voting shareholders elect directors who are responsible for the overall oversight of the corporation through the appointment of officers and the making of major decisions relating to the corporation's operations. Shareholders without voting rights do not elect the directors of the corporation.
Generally, all shareholders have the right to vote at meetings of the shareholders in circumstances where there is a fundamental change to the corporation, such as when the Articles of Incorporation are being amended or all or substantially all of the assets of the corporation are being sold.
Directors: Directors are obligated by law to manage the corporation on behalf of shareholders in good faith and in the best interests of the corporation. A corporation incorporated federally or provincially in Ontario must have at least one director who is a "Resident Canadian", over 18 years of age, and not a bankrupt. In Ontario, a majority of directors must be Resident Canadian, whereas only 25% of the directors of a federal company need to be Resident Canadian.
Directors are elected by a simple majority of the shareholders unless the Articles of Incorporation provides otherwise. Directors control the selection of the officers who manage the corporation. Directors also define the scope of the responsibility of officers. Directors are commonly involved in major corporate decisions such as forming the business plan, making decisions about selling or issuing shares, assuming debts and liabilities, allocating corporate profits and paying dividends to shareholders.
In making such decisions, directors can either hold meetings as long as a sufficient number of directors are present (called a quorum determined by the corporate by-law). Alternatively, resolutions agreed to in writing must be signed by all the directors. Often a chairperson is elected to lead meetings of directors.
Notwithstanding the separate legal personality of the corporation, the law in Canada imposes significant potential liability on directors of corporations. Some of these liabilities include: liability for director's failing to comply with their fiduciary obligation to act in the best interest of the corporation including obligations to avoid conflicts of interest; liability for the corporation's failure to remit Goods and Services Tax as appropriate; liability for the corporation's failure to remit employee Income Tax source deductions as required; liability for unpaid wages including vacation pay up to a certain period; and liability for environmental damage caused by the corporation's activities. As a director, it would be wise to monitor and supervise the corporation's affairs to avoid personal liability.
Officers: The directors of the corporation appoint the officers of the corporation and may delegate certain powers to them to manage the affairs of the corporation, subject to the terms of the Articles of Incorporation. Officers are subject to the same duties as directors to act in good faith and in the best interests of the corporation and to avoid conflicts of interest.
The more common officers appointed include, President, Treasurer and Secretary. Treasurers usually record the issuance of shares, while secretaries maintain the corporate records of the corporation. Other officers include, Vice President, Chief Executive Officer and Chief Financial Officer. One person may hold several offices of a corporation simultaneously.
By-Laws: While not mandatory, by-laws are almost always enacted by directors and approved by shareholders to provide for matters of a continuing nature relating to the operation of the corporation. Normally a By-law Number 1 is enacted during the initial organization of the corporation, which by-law would cover the procedure for meetings, including location, notices and quorum requirements and provision for proxies. By-laws may also delineate responsibility of officers and determine who may sign documents on behalf of the corporation.
Filing Requirements: The filing requirements for a corporation will vary depending on the jurisdiction used to incorporate. For example, apart from regular annual filings, an Ontario corporation will have to file a Form 1 - Initial Return/Notice of Change within 60 days of the date of incorporation. The form contains the location of the registered office of the corporation in addition to the identity and addresses of the directors and officers. The same form must be filed within 15 days of a change to any of the information concerning the registered office, officers and directors of the corporation.
Corporate Records: A corporation's life is reflected through its documents such as directors' resolutions and minutes of shareholders meetings. Usually, these documents are placed in the company's minute book, which is often maintained by the corporation's solicitors on an ongoing basis.