Incorporating a corporation in Canada is a popular business structure in modern commerce due to its numerous advantages over sole proprietorships and partnerships. However, it’s important to understand the legal implications and considerations when starting a corporation. In this article, we’ll discuss the definition of a corporation, different classes of shares, the decision to incorporate provincially or federally, key pre-incorporation considerations, and the process of incorporating a corporation in Canada.
Table of Contents
What is a corporation?
To begin our discussion of corporations in Canada, we first need to define what a corporation is. In modern commerce, the corporation is a popular business structure due to its numerous advantages over sole proprietorships and partnerships. Its defining characteristic is its legal identity as a separate entity from its owners, which has important implications. The corporation is solely responsible for its debts and liabilities, and shareholders are not liable for any defaults beyond the amount they paid for their shares.
For example, if Jenny and Friends wanted to start a team management business, running it as a sole proprietorship would put Jenny’s personal assets at risk if the business failed. However, if they formed a corporation, Jenny’s assets would be protected.
This legal distinction is widely accepted as fair and just. The basic principle is that the entity that incurred the obligation is solely responsible for it, regardless of whether it is an individual or a corporation. Creditors must carefully consider who they do business with and bear the consequences of their decisions.
Although the concept of a corporation being a separate legal entity is complex, it was established in a landmark case in 1897, which remains a cornerstone of modern corporation law.
Classes of Shares
Shares are a representation of ownership in a corporation, but they differ from other forms of ownership. Unlike other types of ownership, they do not provide the holder with the right to use the corporation’s assets or to directly control or manage the corporation. Instead, the holder of a share is entitled to the specific rights attached to that share.
A corporation may choose to have only one type or class of shares, which includes all basic shareholder rights, such as the right to vote for directors, receive dividends, and share in the proceeds upon dissolution. This option may be suitable for a one-person corporation without plans for growth. However, to ensure future flexibility, it is wise to establish different classes of shares at the outset, rather than having to amend the corporation’s constitution later, which can be costly and complicated. Consulting with a business lawyer when creating shares for a corporation is always recommended.
Provincial vs Federal Incorporation: Which is the Right Choice for Your Business?”
The decision to incorporate provincially or federally depends on the circumstances of the business. The authority for company incorporation is split between federal and provincial governments, with each level enacting legislation that outlines different models for creating corporations. However, all methods of incorporation share common features such as creating a legal entity owned by shareholders with limited liability and managed by directors who owe fiduciary duties to the entity.
Federally incorporated corporations can operate in all provinces, while provincially incorporated corporations can only operate in the province of incorporation. Nonetheless, this distinction has little practical significance since each province has uncomplicated licensing procedures for corporations registered in other provinces to conduct business there.
Federal incorporation may result in lower administrative costs for corporations operating in multiple provinces. On the other hand, provincial incorporation typically results in lower administrative costs for corporations operating in only one or two provinces. Thus, businesses should carefully consider the option that best fits their specific needs.
Pre-Incorporation Considerations: Key Decisions for Starting a Corporation
Prior to preparing and filing incorporation documents, businesses must consider various pre-incorporation issues. These include:
- deciding on whether to incorporate provincially or federally,
- determining the type of shares available and their ownership,
- and selecting a name for the corporation.
Several factors will influence these decisions, such as the type of business being operated, intended location(s), management approach, growth plans, and availability of the desired corporate name.
Creating a Corporation in Canada: Important Legal Considerations
The process of incorporating a corporation in Canada follows a similar procedure across all jurisdictions, with some variations in specific requirements. Assuming a federal incorporation, the following documents must be submitted to the federal corporate registry in Ottawa:
- Articles of incorporation (which include the corporation’s name, registered office location, class and number of authorized shares, restrictions on share transfer, number of directors, any business restrictions, and other provisions as required).
- Notice of registered office (to provide a public record of the corporation’s official address).
- Notice of directors (which includes the names and residential addresses of the directors, and must match the number specified in the articles of incorporation).
- Newly Upgraded Automated Name Search (NUANS) Report.
- Filing fee payable to the Receiver General for Canada.
The articles of incorporation can include customized provisions, such as requiring directors to hold shares or limiting the number of shareholders. The names of the incorporators must also be included in the articles.
The Notice of Registered Office form has one purpose, to record the corporation’s official address for legal communication.
The Notice of Directors form lists the names and addresses of the directors specified in the articles.
Once the completed forms and fee are submitted to the Corporations Directorate of Industry Canada, the directors will issue a certificate of incorporation, acting as a “birth certificate” for the corporation.
Although provincial incorporation legislation may share some similarities with the Canada Business Corporations Act, it’s worth noting that the specific requirements and procedures may vary. To ensure that the corporation is established correctly and in compliance with the law, it’s highly recommended to seek the assistance of a knowledgeable small business lawyer.
Final Thoughts
Incorporating a corporation in Canada can be a complex process, but it offers significant benefits and protections for businesses. From choosing the right type of incorporation to customizing the articles of incorporation and filing the necessary documents, every step of the process requires careful attention and consideration. By seeking the advice of experienced legal professionals and taking the time to fully understand the legal requirements and obligations involved, businesses can ensure a smooth and successful incorporation.
About the Author:
Roberts & Obradovic Law is a Toronto-based law firm specializing in corporate law, and business strategy. With a proven track record of assisting various businesses in successfully handling intricate transactions, the firm is committed to safeguarding their clients’ interests. To find out more about their expertise and services, visit their website at https://robertsobradovic.com.
