- What is a Corporation?
A corporation (also called "company") is a legal entity that has its own legal personality which is 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 Articles of Incorporation (also called a Charter, Certificate of Incorporation or Letters Patent) with the relevant government department or authority.
Every corporation is comprised of shareholders, directors and officers. Shareholders, as the name implies, are the ones who hold (i.e., own) the shares in the corporation. By reason of the votes that are usually attached to the shares, the shareholders control the corporation. If there is only one shareholder, that person has absolute control of the corporation. If the corporation has numerous shareholders, control of the corporation depends on who has a majority of the voting shares. However, the shareholders do not directly manage the corporation. They exercise their influence by electing and removing directors and approving or disapproving major corporate decisions.
- Why Should I Incorporate my Business?
There are several features that are unique to a corporation which make it the favoured legal structure for many businesses. These include:
- Limited Liability. A primary advantage to incorporating a business is the limited liability conferred upon its shareholders. The shareholders are not liable, in most cases, for the debts and other obligations of the corporation. A shareholder's liability for the debts of the corporation is limited to the amount of funds the shareholder has invested in the corporation. Creditors only have rights against the corporation itself and not against the shareholders.
- Perpetual Existence. A corporation has the feature of perpetual existence. It 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 members 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 sue (or be sued).
- Capital Acquisition. A corporation may offer greater potential sources of capital than other business forms (such as sole proprietorships and partnerships). Corporations can issue various classes of shares (in addition to other debt instruments such as bonds) to raise capital, which, typically, is more attractive to investors.
- Tax Advantages. There are tax advantages to incorporating your business, such as lower income tax rates and carrying forward losses of previous years to offset profits in subsequent years, among others.
- Credibility and Prestige. Incorporation may help provide your business with credibility and prestige in its dealings.
On the other hand, incorporating your business is subject to the following formalities:
- Start-Up Costs. The initial start-up costs (i.e., government fees) may be expensive when compared to other business structures (sole proprietorships and partnerships).
- Maintaining of Corporate Records. A corporation is required to diligently maintain its corporate records and hold meetings, elect directors and provide shareholders with certain information.
- 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). However, much of this double taxation may be minimized by offsetting the corporation's business expenses (i.e., salaries) with its income
- Where Should I Incorporate My Business?
The question as to where you should incorporate your business involves deciding whether your business should be incorporated under the federal laws of Canada (i.e., a federally chartered corporation) or under the laws of one of the provinces of Canada (i.e., a provincially chartered corporation).
There are advantages and disadvantages to both and there is no one best solution. Deciding which jurisdiction to choose may depend on the answers provided to these questions:
Do you plan on doing business in more than one province?
What percentage of the corporation's directors will be residents of Canada, if any?
Do I want to have 2 annual corporate reports (one for federal and one for provincial)?
Do I want to save money now for incorporation, even though it may cost me more in the long run?
Below are the most common factors that are used to decide where to incorporate.
If you intend on carrying on business only in one province, you may choose to incorporate a provincial corporation under the laws of that province or a federal corporation.
A federal corporation is generally entitled to carry on business anywhere in Canada under its name, subject only to registering in the province where business is carried on. There generally are provincial registration fees (except in Ontario and P.E.I.) that must be added to the incorporation fees of a federal corporation (will be detailed below).
The requirement for a federal corporation to register extra-provincially in the province must usually be satisfied within 30-60 days after starting to do business in the province.
DIRECTORS RESIDENCY REQUIREMENTS
Another factor that can be important in deciding where to incorporate is the Canadian residency requirements of each jurisdiction. This is especially relevant to foreigners starting a business in Canada. If these requirements are not satisfied, you cannot incorporate in that jurisdiction.
- Do I Need an Attorney to Incorporate?
There is no legal requirement that an attorney incorporate your business. You can prepare and file the complex government forms yourself; however, you should be well versed in the requirements of incorporation. Alternatively, you can choose to use Marceca Accounting Services to save money and time.
- How to Select a Corporation's Name?
Choosing a corporate name is probably the most difficult task of incorporating a business. Every corporation must have an acceptable name at the time of their incorporation because the corporation will then exercise its rights and carry out its obligations under this name. All corporate names must conform to various statutory requirements. You may wish to review the relevant acts and regulations of your jurisdiction.
The most common concern when trying to select a corporate name is that corporate name cannot be identical to or lead to confusion with another corporation or business already using an identical or similar name.
A corporate name is generally made up of 3 parts:
- Distinctive element;
- Descriptive element; and
- a legal ending.
The distinctive element of the name is the part that makes distinctive from other corporations, i.e. what makes them different. The more different or fanciful the name the better.
The descriptive element describes the main activities or type of business of the corporations.
The legal ending indicates that it is in fact a legal corporation and not just a business registration or partnership. You can choose from the following words: Incorporated, Limited and Corporation, or their respective abbreviations: Inc., Ltd. and Corp.
All corporations MUST have a distinctive element and a legal ending to their names. Some corporations choose not to have a descriptive element.
To increase the chances of your proposed name being accepted or not be in conflict with another business or corporate name or trademark, it is recommended that you choose a name that both accurately describes your business and is as specific and distinct as possible. If your proposed corporate name uses common or popular names, the chances of it being accepted are decreased dramatically. Furthermore, you may be prohibited from using a corporate name, which is either identical or deceptively similar to one that is already used by another corporation or competitor in your jurisdiction.
What is a "Named" Corporation?
Choosing a corporate name is a difficult task since it must conform to a number of legal requirements. Consequently, to increase the chances of your proposed name being accepted, it is recommended that you choose a name that both accurately describes your business and is as specific and distinct as possible. If your proposed corporate name uses common or popular names, the chances of it being accepted decrease. Furthermore, you may be prohibited from using a corporate name which is either identical or deceptively similar to one that is already used by another corporation or competitor in your jurisdiction.
In some cases, you may 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. Under these circumstances, the corporation's Articles of Incorporation may be required to be accompanied with additional documents, such as:
- a consent signed by the sole proprietor or all the partners;
- an undertaking by the sole proprietor or partnership that dissolution proceedings will begin before the proposed corporation carries on business; and
- a declaration by the sole proprietor stating that he/she is in fact the sole proprietor or by a partner stating that the consent and undertaking were signed by all the partners.
- What is a Numbered Corporation?
To speed up the incorporating process and to permit immediate delivery of the Articles of Incorporation, a corporation can, at the request of the people who incorporate the corporation, be assigned a number as its corporate name (for example, 123456 Canada Inc.). The corporation may then register a trade name and be known to its customers as doing business under the trade name. Although the corporation must be identified by its actual name (i.e., the number followed by Canada Inc. or Ltd.) for all formal and legal matters and relations (e.g., contracts), the corporation may use its trade name for exterior signs, business cards, letterhead, etc.
- Should I Incorporate a Named Corporation or a Numbered Corporation?
Even though using a numbered corporation is advantageous since it avoids the delays and expense involved in searching and reserving a corporate name, it is not suited to everyone's needs. In particular, a numbered corporation is not informative in that it does not describe the business in any way. This is one of the major considerations that people take into account when they decide on a corporate name. Moreover, having a numbered corporation may lessen the prestige and credibility associated with your business.
What Documents do I need to Incorporate?
Typically, most jurisdictions require the filing of Articles of Incorporation and the statutory government incorporation fees. The Articles of Incorporation will be prepared.
Furthermore, if you choose to incorporate a named corporation, you will be required to file a "name search" report with the Articles of Incorporation.
- What are the Government Fees to Incorporate?
The government fees will vary depending on the jurisdiction of your corporation.