Nicolas Guevara-Mann | Queen’s Business Law Clinic | November 2021
Editor: Mikela Page
The for-profit corporation may be the most popular business vehicle for entrepreneurs. The ease at which founders are able to raise equity capital by issuing shares makes it an attractive option for businesses which do not wish to enter into debt but require investments to get off the ground. Corporations are managed by a centralized board of directors who are responsible for the corporation’s decisions. These directors may also appoint officers who manage the corporation’s day-to-day operations. The board of directors are elected by the shareholders. This is one of the ways that shareholders can exert management influence over the corporation. Additionally, shareholders are entitled to vote on other important decisions, such as changing the articles of incorporation or deciding whether to merge with another corporation.
There are three other features of a corporation which make it a unique business vehicle:
Separate Legal Personality: Corporations have all the legal rights of a person. The corporation is free to enter into contracts, borrow money, own property, and sue and be sued. A separate legal personality also means that there are no monitoring costs involved, because one shareholder’s creditor cannot pursue the corporation or other shareholders to recover their debt, unlike in a partnership.
Perpetual Existence: Because the corporation is its own legal person, the existence of a corporation is not tied to any one person’s natural life. Though the corporation’s founders and shareholders may pass away, the corporation will remain able to conduct business. A corporation will only cease to exist if it fails to comply with its governing legislation or when the decision is made to dissolve.
Limited Liability: Perhaps the most attractive feature of the corporation, shareholder liability is limited to the amount of their investment. If a corporation incurs debts or liabilities, its creditors cannot recover from the corporation’s shareholders in their personal capacity. This protection can be desirable for businesses that interact with the public and may in turn be exposed to potential liability.
The Incorporation Process
The incorporation process is highly formalized, and many factors must be considered. It starts with deciding on where you would like to incorporate: provincially or federally. There are different registration and annual filing obligations depending on the jurisdiction in which you choose to incorporate. Consider these obligations, where you plan to conduct business, and your future goals for your business.
Second, choose a name for your corporation. A corporation may choose an assigned numbered name (e.g. 123456 Canada Inc.) or may opt to use a worded name. If you choose the latter, you must conduct a name search to ensure that the name is not already taken. A legal suffix must always be attached to the name (e.g. Inc., Ltd., Corp.) to inform third parties that they are dealing with a corporation.
Third, prepare and file your incorporation documents. These include the Articles of Incorporation and the Notice of Initial Registered Office and First Board of Directors.
Finally, ensure that you complete all post-incorporation obligations to ensure that your corporation is organized to engage in business activity. This includes holding the first meeting of the directors, drafting and maintaining the corporation’s Minute Book, drafting the by-laws, and appointing an auditor. Later, the shareholders will confirm these decisions.
Conclusion
Although there are several benefits to incorporating, incorporation can be costly and burdensome to maintain. Be sure to fully understand all the legal implications that are involved with incorporating your business before filing for incorporation. Stay tuned for more discussions about organizing a corporation and issuing shares in upcoming blog posts!
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