Incorporation Canada: Incorporating a Business in Canada

By Eb Reinbergs

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The Legal Structure of Your Business

When you decide to start a business, one of the first decisions that you must make concerns the legal structure under which the business will operate. There are typically three ways in which you may carry on a business: as a sole proprietorship, a partnership, or a corporation. The corporate form is one of the most common ways to operate a business.

The Corporation

A corporation is a legal entity that has its own legal personality, distinct from its owners (called shareholders) and the individuals who manage and run its affairs and business (called directors and officers). The creation of a corporation occurs following the proper filing of the Articles of Incorporation (sometimes also called a Charter or Certificate of Incorporation) with the relevant federal or provincial government authority.

When incorporating provincially in Ontario, the Articles of Incorporation are filed with the Companies and Personal Property Security Branch of the Ministry of Government Services (formerly the Ministry of Consumer and Business Services). Federal Articles of Incorporation are filed with the Corporations Canada Branch of the Department of Industry. The appropriate fee must be paid (outlined below) and the Articles of Incorporation must conform to the requirements and form used within the relevant jurisdiction.

The Articles of Incorporation contain information such as 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 transfer of shares and the type of business conducted by the corporation.

Why Incorporate a Business?

A corporation has many unique features which often renders it the preferred way in which to run a business. These features include the following:

Limited Liability

The primary advantage to incorporating a business is that its shareholders are not liable for the debts and obligations of the corporation. A shareholder’s liability is limited to the amount of money which has been invested in the corporation by the shareholder. Except in some very limited circumstances (such as where a personal guarantee is signed by a shareholder), creditors have rights only against the corporation and not against the shareholders. In contrast, a sole proprietor or a partner could potentially lose personal assets beyond those invested in the business.

Perpetual Existence

The continued existence of the corporation is not dependent upon the life of its shareholders, directors and officers and will not be affected by changes in deaths or retirements of its officers since the corporation is considered a separate "person". This advantage allows for the orderly transfer of ownership of the corporation (i.e., its shares). Furthermore, due to its independent legal status, it may own property in its own right, enter into contracts and initiate a lawsuit (or have a lawsuit initiated against it).

Capital Acquisition

Corporations can issue various classes of shares (in addition to other debt instruments such as bonds) in order to raise capital. This is an attractive feature to investors because it allows for partial ownership of the corporation.

Tax Advantages

There are tax advantages to incorporating your business, such as lower income tax rates and the carrying forward of losses from previous years to offset profits in subsequent years.

Credibility and Prestige

Incorporation may help provide your business with credibility and prestige in its business dealings.

Mergers and Acquisitions

It is possible for a corporation to merge or amalgamate with another corporation.

Separation of Owners, Directors, and Employees

It is possible to separate the owners, directors and employees of the business within a corporation, whereas a sole proprietor is the owner and manager of the business, and cannot be his or her own employee.

Costs and Duties Associated with a Corporation

Start-Up Costs

The cost to incorporate your business (i.e., government fees and legal fees) can be high when compared to the start-up costs associated with sole proprietorships and partnerships.

Duties of the corporation

A corporation is required to maintain corporate records, elect directors, hold directors and shareholders meetings, and provide shareholders with financial information, among other duties. There are additional duties if a corporation offers its shares to the public.

Double Taxation

Income generated by a corporation is taxed at both the corporate level and shareholder level. A corporation must pay taxes on its income and the shareholders must pay taxes on the dividends (i.e., profits they receive from the corporation). Taxes may be minimized by offsetting the corporation's business expenses (i.e., salaries) with its income.

Annual Filings

Corporations are required to file annual returns with the government. If you incorporate federally, you will be expected to file one for the federal government, and one for provincial government. For provincial corporations there would be one annual filing for the province only.

Where Should You Incorporate Your Business?

Corporations must belong to a particular legal jurisdiction. In Canada, this means that a corporation may be incorporated under either provincial law or federal law.

A corporation incorporated under the laws of one province may conduct business in another province upon registering with the provincial government and paying the appropriate fees.

A corporation incorporated under federal law may conduct business anywhere in Canada, as long as it is also registered in the province or provinces in which it conducts business. Traditionally, federal incorporation has been appropriate for businesses that conduct business in several provinces in Canada.

There are both advantages and disadvantages to provincial and federal incorporation. When deciding where to incorporate, you must consider issues such as the following: the cost of incorporation, directors’ residency requirements, and protection of the corporate name.

Costs of Incorporation

A corporation incorporated under federal law is entitled to carry on business anywhere in Canada under its name, subject only to registering the corporation in the particular province in which its business will be conducted. However, a corporation which has been incorporated in one province under one name might not be able to use that same name in another province if the name or a similar name is already used by another person.

Except for Ontario and P.E.I., there are provincial registration fees that must be added to the incorporation fees of a federal corporation. Current government incorporation fees in Canada and the provinces are as follows:

Extra-Provincial Registrations

If you decide to incorporate federally, you must also register extra-provincially. The current provincial fees for a federal corporation which has its registered office in that province are (keep in mind that these costs are in addition to the $200.00 fee to incorporate federally):

In most cases, it is more expensive to incorporate a business federally because of the dual cost requirement, with the exception of Ontario, where extra-provincial registration is not required. (although a corporate information form must still be filed). In fact, in Ontario, it is less expensive to incorporate federally than to incorporate provincially.

Directors’ Residency Requirements

When deciding where to incorporate your business, you must also consider the directors’ Canadian residency requirement of each jurisdiction. This will be particularly important for foreigners starting a business in Canada. If these requirements are not met, you cannot incorporate in that jurisdiction.

These are the current residency requirements for each Canadian jurisdiction:

Protection of a Corporate Name and Its Use

Name of the Corporation

A corporation always has a number 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 Limited, while a federally incorporated company might be named 7654321 Canada Limited. Although using a numbered corporation is advantageous in that it avoids the delays and expense involved in searching and reserving a corporate name, it is not suited to everyone’s needs. A numbered corporation is not informative to consumers, in that it does not describe the business’ operation in any way. Additionally, having a numbered corporation may lessen the prestige and credibility associated with your business.

Alternatively, a corporation may apply for a name, in which case a current name search report (NUANS report) must be filed along with the Articles of Incorporation. The report contains information on names and trade-marks that are similar to the proposed name of the corporation. A corporation cannot have a name that is identical to or confusingly similar with an existing name or trade-mark. The NUANS report does not guarantee that a corporate name will not be attacked at some future date for violating a trade-mark 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, Corporation, or, Inc., Ltd. or Corp.". This part of the name is referred to as the legal designator.

The federal corporation has the most stringent criteria in granting the right to use a name as the corporation’s legal name. It provides greater legal protection for the corporate name than if the company is incorporated provincially, but still less than the protection guaranteed by a trade-mark.

Provinces, however, will grant almost any name, provided it is not identical to another name registered in that same province, thus providing very little protection of use. Additionally, any protection that is attached to the name will be limited to that province only, unlike federal corporations which provide Canada-wide protection.

How to Choose a Corporate Name

When choosing a corporate name for your business, the most common difficulty you might encounter is trying to create one which is distinct enough so as not to create any confusion with another corporation or business already using a similar name. However difficult this task may seem, it is very important that you choose an acceptable name because every corporation must exercise its rights and carry out its obligations under this name.

A corporate name is generally made up of three parts: the distinctive element, the descriptive element, and a legal designator.

Distinctive Element :

This is the part of the name which will help make your corporate name distinct from other corporations.

Descriptive Element :

This part of the name will describe the main activities or type of business of the corporation.

Legal Designator :

This part of the name will distinguish the corporation from sole proprietorships or partnerships. You can choose from the following list: Incorporated, Limited and Corporation, or their respective abbreviations: Inc., Ltd., and Corp.

All corporation names must include the distinctive element, and a legal designator.

Your corporate name cannot be identical to or confusingly similar to another corporation or business already using an identical or similar name. Typically, the criteria used to determine if there is confusion include:

• Distinctive character of each name and each of their elements
• Visual and phonetic similarity
• Similarity in the ideas they evoke
• Manner in which the names are used
• Notoriety of each name
• Actual or potential competition between the corporations
• Nature and quantity of goods and services offered
• Territory and number of persons served by both corporations

There are also certain words that are prohibited. These include:

• Obscene words or wording
• Co-op, co-operative or any variation
• RCMP
• Parliament Hill
• United Nations
• Red Cross
• Housing
• Association
• Any wording that might be confused with a government institution
• Engineering, Engineers
• College, University, Institute

To increase the chances of your proposed name being accepted, it is recommended that you choose a name that accurately describes your business and is as specific and unique as possible.

If you should decide to take over an existing sole proprietorship or partnership which has a name that is either identical or similar to your corporation’s proposed name, you must include additional documents together with the corporation’s Articles of Incorporation. Such documents include:

1. a consent signed by the sole proprietor or all the partners;
2. an undertaking by the sole proprietor or partnership that dissolution proceedings will begin before the proposed corporation carries on business; and,
3. a declaration by the sole proprietor stating that he or she is in fact the sole proprietor or by a partner stating that the consent and undertaking were signed by all the partners.

Organization of the Corporation

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 the newly elected directors and officers.

Share Structure of the Corporation

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 payment of dividends and/or the division of assets of the corporation in the event that the corporation is dissolved. As a result of statutory provisions or if the shares are "convertible" non-voting shares, under certain circumstances, such non-voting shares are given the right to vote, such as on an amalgamation of the corporation or the sale of substantially all of the assets of the corporation. "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.

The Shareholders of the Corporation

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 his or her initial investment in purchasing the shares.

Shareholders do not run the corporation. Voting shareholders elect directors who are responsible for the strategic direction of the corporation. The directors in turn appoint officers to manage the day-to-day operations of the corporation. Shareholders without voting rights have no ability to 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 when all, or substantially all, of the assets of the corporation are being sold.

The Directors of the Corporation

Directors are obligated by law to govern the corporation on behalf of shareholders in good faith and in the best interests of the corporation. A corporation incorporated federally or in Ontario must have at least one director who is a "resident Canadian", is 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 Canadians.

Directors are elected by a simple majority of the shareholders unless the Articles of Incorporation or a unanimous shareholders' agreement ( USA) provide 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 hold meetings as long as a sufficient number of directors are present (called a quorum which is determined by the corporate By-law and/or USA). 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 the following: liability for directors 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.

The manner in which directors manage a corporation's affairs may be governed by the terms of a USA and by By-laws to the extent permitted by law.

The Officers of the Corporation

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, the By-laws or a USA. 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, a President, Treasurer, and Secretary. Treasurers usually record the issuance of shares, while secretaries maintain the corporate records of the corporation. Other officers can include: a Vice President, Chief Executive Officer, Chief Financial Officer and Chief Technology Officer. One person may hold several offices of a corporation simultaneously.

The By-Laws of the Corporation

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. This By-law describes 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.

Corporate Maintenance

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. The same form must be filed within 15 days of a change to any of the information concerning the registered office or directors of the corporation.

Maintenance of 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.

Conclusion

Although your company's lawyers will likely look after all your corporation's legal requirements, it is wise to be familiar with the legal setup of a corporation, as discussed above, if you are involved in a company in a significant capacity such as a shareholder, director and/or officer.

* Information regarding the above quoted fees is current as of January, 2005 and is subject to change.