Guide to Incorporations
What is a Corporation? A corporation is a separate legal entity. It has the capacity to enter into legally binding relationships, to sue and to be sued. Technically, the corporation is owned by the shareholders. Shareholders have limited liability in that they cannot be held responsible for the debts, obligations, acts, omissions or liabilities of the corporation. A corporation can be federally or provincially incorporated. It can operate under a numbered company or as a named company. A federal corporation can operate its business throughout Canada but will be required to register in each province in which it does business in. What are the Advantages of Operating under a Corporation? Here are some of the advantages to operating your business under a corporation:
The owners have limited liability;
A corporation never dies and can survive those operating the corporation; and
There can be tax advantages to operating as a corporation.
What are the Disadvantages of Operating under a Corporation? Here are some of the disadvantages to operating your business under a corporation:
There is a greater (although not significant) cost to incorporating, as opposed to operating as a sole proprietor or partnership;
There is a greater (although not significant) administrative obligation to incorporate and maintain the corporation.
Who are the Corporate Players? There are three key corporate groups of players that are involved in a corporation, which we summarize below:
Director manage and/or supervise the management of the business and affairs of the corporation. Directors are entitled to attend and be heard at annual shareholders meetings. Director can be paid for their services, which are determined by the directors themselves. There are certain requirements that must be met in order to qualify to be a director, including the director must be over 18 years old, of sound mind, an individual and not bankrupt. There is also a Canadian residency requirement to be a director. At least 25% of the directors must be Canadian. Directors must operate the corporation in compliance with governing laws and have a good faith duty obligation to act in the best interests of the corporation. They must remain informed about the corporation’s activities and that those activities are legal and in the best interests of the corporation. Directors make key strategic decisions regarding the business, such as:
the location of the business,
its marketing strategy,
hiring of management,
signing of major contracts,
making, amending or repealing bylaws,
making banking arrangements,
Officers comprise the senior management of the corporation. Officers are appointed by the directors of the corporation. The officers implement the strategic decisions of the corporation and manage the business and affairs of the corporation. Officers hire and manage employees and perform the daily activities involved in managing a business. Traditionally, there are several key officer positions:
President: leader of the management team
Secretary: manages government, tax and legal matters (in conjunction with professionals)
Treasurer: manages financial assets of the corporation
Officers must operate the corporation in compliance with governing laws and have a good faith duty obligation to act in the best interests of the corporation. They must remain informed about the corporation’s activities and that those activities are legal and in the best interests of the corporation.
Shareholders are essentially owners of the corporation. They are individuals that invest into the corporation and own shares, which provides them with rights to the corporation. Shareholders usually have the least amount of decision-making powers, as compared to directors and officers (unless they enter into unanimous shareholder’s agreement). However, in smaller corporations, directors and officers may also be shareholders. Generally, shareholders do not make business decisions for the corporation and their ability to affect the financial direction of the company is limited. What is a Minute Book? The Articles of Incorporation is the document that creates the corporation. The minute book is comprised of key documents that are mandatory and that govern how the corporation is structured and run. It includes the Articles of Incorporation, by-laws, resolutions, registers, ledgers. It is mandatory to maintain an accurate record of these documents.