You have a business idea and you’re thinking of incorporating - but what does that really mean? As your business grows, registering as a corporation can be an exciting step, but it also can be complicated to understand at first. While there are certain advantages to doing so, it is crucial to understand the implications of such a decision, including what makes a corporation distinct from other business structures in its functions and obligations as a legal entity. Corporations in Canada can take on various forms such as publicly traded companies, privately held corporations, and non-profit organizations. Each type has distinct regulations, rights, and responsibilities, but certain elements are applicable across the board. For the purposes of this article, we will focus on privately held corporations, meaning a corporation that is not listed on a public exchange (such as the TSX or the NASDAQ). If you are interested in learning about not-for-profits, please go to our Knowledge Centre for more information.
What Does Incorporation Mean?
A corporation is considered a separate legal entity that can own assets, pay taxes, have a bank account, and sue or be sued. Anyone over the age of 18, who is of sound mind and has no undischarged bankruptcy, can form a corporation under the Canada Business Corporations Act. or under similar provincial legislation such as the Business Corporations Act (Alberta) or the Business Corporations Act (Ontario). A business may be incorporated federally or provincially, but there are some differences to consider between federal and provincial legislation. For example, there is no residency requirement in Alberta, whereas federal incorporation mandates at least 25% of directors of a corporation to reside in Canada. Federal incorporation enables a business to operate across Canada under its corporate name, which means that no other corporation formed after will be able to use the same name. This can be useful if the business plan includes an expansion across provinces/territories. However, federal incorporation is not as common as provincial registration, likely because federally incorporated corporations still have to extra-provincially register in each province they plan on operating in, so the process is more onerous. The more common alternative is to incorporate under a provincial act, which easily allows for commencement of operations in that province, together with name protection only in that province as well.
After deciding where to incorporate, an application is made for incorporation that includes a unique name, the proposed bylaws, and names of director(s). These, and any other required documents, are the articles of incorporation.
Where no name is selected, the corporation can be incorporated as a numberco, which is the next available corporation number in the registry. Each jurisdiction may lay out specific requirements for incorporation that may vary.
Once incorporated, businesses are subject to extensive regulatory frameworks to ensure compliance with applicable laws and regulations. This regulatory oversight is provided by governmental bodies such as Corporations Canada, the Canadian Securities Administrators, which regulates securities markets (yes, even private corporations are subject to securities regulation), and the Competition Bureau, which aims to prevent anti-competitive behaviour by enforcing competition laws. Additionally, corporations are required to adhere to accounting standards established by the Canadian Accounting Standards Board and fulfill reporting obligations to regulatory authorities such as the Canada Revenue Agency and provincial securities commissions. Beyond formal requirements, the general public and consumers may have expectations for a corporation to engage in sustainable best practices, meet ESG goals, and/or engage in philanthropic endeavours alongside their day-to-day business practices.
Structure of a Corporation
A key point of differentiation between corporations and other business models is its internal structure, or corporate governance. This encompasses the mechanisms and processes by which corporations are directed and controlled. Corporate governance practices in Canada emphasize transparency, accountability, and shareholder rights, aiming to safeguard the interests of stakeholders and promote long-term sustainability.
Key stakeholders in corporate governance include shareholders, directors, executives, employees, and regulatory bodies. Shareholders capitalize the corporation and therefore are the owners of the corporation. They have certain rights under applicable corporate legislation, including primarily the right to: (1) vote, (2) participate in the growth of the company, and (3) receive dividends. Where only one class of shares exist, the number of shares owned is proportionate to the shareholder’s ownership in the corporation. These rights can be split into separate classes of shares, such that (a) some shareholders may hold voting shares while others hold non-voting shares, (b) some shareholders may hold shares that participate in the growth of the corporation, while others hold shares that are fixed in value, and (c) some shareholders may hold a class of shares that is entitled to receive dividends in priority to other classes. Mixing and matching these types of share attributes provide a tax effective way of growing your business or of protecting your businesses’ assets. Careful consideration should be given to the attributes and classes of shares being issued as it can be costly to try to unwind an improperly structured corporation.
Aside from capitalizing the corporation, the primary role of shareholders is to appoint the board of directors. The directors are the mind and management of the business, and their role is to oversee the strategic direction of the corporation and monitor its performance. The directors ensure that shareholder interests are protected, and that the corporation operates in a way that supports long-term growth and sustainability.
Directors also appoint officers in accordance with the corporation’s bylaws who are responsible for day-to-day operations of the corporation. Depending on their background and expertise, different officers will oversee different functions. Common officer positions include Chief Executive Officer, Chief Operating Officer, Chief Financial Offer, and Chief Technology Officer. An officer can be a shareholder and/or director in the corporation as well, and in many small businesses, it may be the case where a single individual is the sole director, officer, and shareholder.
Conclusion
Corporations are the most commonly used corporate structure in Canada due to their versatility, as well as their tax attributes and their ability to provide liability protection. While the intricacies involved in incorporating and the rules of operation can make corporations seem daunting, a corporate lawyer can help you make sure that you are putting the right structure quickly and your corporation can be up and running within a couple of days. Outsiders Law is here to support you to make this process easier. If you have questions about what incorporation might look like for your business, contact one of our business lawyers.
Disclaimer
The information provided in this article is for educational purposes only. Nothing contained herein should be considered as legal, professional, or tax advice. Please contact us directly if you require legal assistance.
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