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Small
Business Tutorial - Canadian Corporations
A corporation
is a legal entity that has a "perpetual existence"
separate from the individual(s) who create, own
and run the corporation. A company can be incorporated
federally or provincially. Federal incorporation
is used if business will be conducted in more
than one province or outside Canada. Provincial
incorporation is used if all business will be
conducted in one province. The owners of a corporation
are its shareholders, who buy into the corporation
by providing money, goods or services to the corporation
in exchange for shares. Shareholders do not own
the assets of the corporation and generally are
not responsible for any of its debts of liabilities.
If a corporation has financial difficulties, its
shares may lose their value, but creditors of
the corporation cannot normally look to the shareholders
to pay off corporate debts or liabilities.
Advantages
of Incorporating: The traditional advantages
cited in support of incorporation are: limited
liability, ease of raising capital, ease of transferring
an interest in the business and tax advantages.
[Note: Before you jump onto the incorporation
bandwagon, please be cautioned that these reasons
may sound good on first blush but may not have
any real value or meaning to you in the early
stages of your business. Read the comments below
and remember, you can always change the status
of your business to suit your changing needs.]
Limited
Liability:
Incorporating a business does protect the
personal assets of the individual(s) who create,
own and run the business. However, most lenders
will require a personal guarantee from the owners
before loaning money to a (new) corporation without
assets. Suppliers may also want such personal
guarantees. The directors and officers of a corporation
are not completely protected from liability for
acts of the corporation. A director could be held
personally liable for: unpaid wages of employees
if the corporation became insolvent; employee
source deductions should the corporation fail
to remit same to Revenue Canada, or other breaches
of tax statutes or legislation.
Raising
Capital:
A private corporation [unlike a publicly traded
corporation] will usually be forced to raise capital
by borrowing it and will have little advantage
over a sole proprietorship or a partnership when
a lender demands a personal guarantee.
Transferring
Interest: It is not, in fact, easy to transfer
an interest in a private corporation by transferring
shares. This normally requires the consent of
the majority of shareholders or directors and
there is a limited market for anything less than
100 % of the shares of most private corporations.
Tax
Advantages: Because corporations are taxed
on profits at a flat rate [as compared to an increasing
tax rate on individuals as personal income goes
up], and especially in light of the new Five-Year
Tax Reduction Plan, Budget 2000 (published February
28, 2000 by Revenue Canada), some of the tax advantages
of incorporation can be real. Budget 2000 will
allow the following tax breaks for corporations:
- Corporate
tax rates will be reduced from 28 percent to
21% within five years . . . beginning with a
drop to 27% effective January 1, 2001;
- Corporate
tax rates on small business income between $200,000
and $300,000 will be reduced from 28% to 21%
effective January 1, 2001.
There
are additional corporation tax reductions in connection
with capital gains taxes, postponed taxation of
gains on shares, and tax-free rollovers of capital
gains on qualified investments from one small
business to another. For additional reading of
Budget 2000, go to http://www.fin.gc.ca.
Additionally,
if you incorporate your business you can control
when you receive income for tax purposes by choosing
the date of the corporation's year-end, deciding
when to pay yourself and deciding when to declare
a dividend for shareholders. However, if your
business operates at a loss in its early stages,
you would be better off operating as a sole proprietor
and deducting those losses from your personal
income. If you have incorporated, you won't be
able to deduct those losses. If your business
makes a small profit and you don't have much other
personal income, you may pay less tax as a sole
proprietor than you would if you were incorporated.
If
your business is really just you providing services
to a third party (where you would be the third
party's employee if it weren't for the corporation),
Revenue Canada may consider your business to be
a personal services corporation. As such,
your corporation would not be allowed to claim
a Small Business Deduction. If you think your
business may be a personal services corporation,
be sure to check with Revenue Canada before you
incorporate.
Other
Advantages of Incorporating: An incorporated
business may give the impression of more stability
and longevity to your clients and customers. The
owners (shareholders) are not responsible for
the acts or omissions of other owners the way
partners are liable in partnerships. You may take
advantage of offering profit sharing to employees
and you can use your corporation for estate planning
and the passing of assets to family members while
minimizing taxable capital gains on your death.
If
you still think you should incorporate, please
continue with the section below entitled Do-It-Yourself
Incorporation.
DO-IT-YOURSELF INCORPORATION (Manitoba only)
It
is not recommended that you attempt a do-it-yourself
incorporation unless your company will be a closely-held
corporation The definition of a closely held
corporation is a corporation whose voting shares
are held by a single shareholder or a closely-knit
group of shareholders (like you and your family)
who are in control of corporate policy and stand
to benefit personally from such policy. Representing
yourself in an incorporation or any other legal
matter is called "pro se" which is a
Latin phrase meaning "for [him]self"
or "in [his] own behalf" rather than
hiring a lawyer to represent you. If you are intending
to incorporate with a partner, it is recommended
that you have in a place a shareholders' agreement
to set out each shareholder's mutual rights and
obligations. For more information on this subject,
see subsection Shareholders' Agreements.
Provincial Incorporation: Manitoba incorporation
(share capital) or for-profit corporation. If
you need free information regarding federal incorporations
go to http://www.strategis.gc.ca/SSG/cs01001e.html.
If you need information on a not-for-profit Manitoba
corporation, please contact us at forms@leanlegal.com.
If you need information on non-Manitoba incorporations,
please contact us at forms@leanlegal.com.
Naming
a Corporation:
When you file articles of incorporation in Manitoba,
the corporation is automatically assigned a number
which you may decide to use as the name of your
company ["a numbered company"]. You
can then register a business name under which
you will operate your numbered company. You can
also incorporate your company under its actual
name [see general rules about names below]. In
order to name your corporation you will follow
a procedure similar to registering a business
name. Complete and file the following forms with
Manitoba Consumer and Corporate Affairs, Corporation
and Business Names Branch, 10th Floor - 405 Broadway
Avenue, Winnipeg, Manitoba R3C 3L6, phone number
(204) 945-2500.
If
the name is available, you must then file your
articles of incorporation under that name within
ninety days by completing and filing the following
forms with the Corporations Branch:
- two
copies of the Request for Service form
- two
copies of the Articles of Incorporation (Share
Capital) cover form
[both forms are available at http://www.gov.mb.ca/cca/comp_off/forms.html#forms]
- two
copies of the actual Articles should be attached
to the cover form [for standardized form see
subsection under Articles of Incorporation below],
- filing
fee of $250.00 payable to the Minister of Finance
Should
you fail to register the name within ninety days,
you will have to start over and re-file the name
reservation (and pay another filing fee). A corporation
is effective for one year. Each year, it will
be renewed by way of an Annual Report sent to
you by the Corporations Branch which needs to
be updated, signed and filed within ninety days.
Failure to file the annual return will result
in your corporation "lapsing" or being
cancelled by the government.
General
rules about names: the name can't be confusingly
similar to an existing corporation or business,
it cannot be obscene or contain words to suggest
any connection with the government like "royal,"
"crown," "federal" or "Provincial,"
it can't contain words like "university,"
"bank," or "stock exchange,"
it can't contain the name of a specific person
unless that person is involved in the business
or has agreed to the use of his or her name or
has been dead for more than 30 years. The corporation's
name must include one of the following words at
the end which indicates that it is a corporation:
Limited, Ltd., Incorporate., Inc. Corporation,
Corp.
Types
or "Classes" of shares:
There are two kinds of shares: "Common"
or "Preference" (sometimes called preferred,
pref or special shares). Common shares can give
a shareholder a right to vote at shareholders'
meetings and elect directors, to receive a share
of the corporation's property if the corporation
shuts down, or to receive a portion of the corporation's
profits in the form of dividends. Holders of Preference
shares may or may not have the right to vote at
shareholders' meetings, but do have the right
to receive dividends before common shareholders.
If you don't want all shareholders to have the
same rights to vote or receive dividends, you
will need more than one class of shares. You must
define the rights attached to the different classes
of shares in the "Articles of Incorporation",
including the following:
- Voting
rights
- Right
to receive dividends, or receive dividends before
other shareholders
- Right
to receive a share in the assets of the corporation
if it shuts down
- Right
to demand that the corporation buy back (redeem)
shares, or the obligation to sell back shares
to the corporation on demand
- Right
to convert shares into shares of another class.
Restrictions
on the Right to Transfer Shares: Most small
business owners want to set restrictions
on the transfer of shares by the shareholders
of their corporation. In this way, the business
owner maintains control over a fellow shareholder
selling shares to a third party without his/her
consent. Restrictions on the transfer of shares
is also necessary to qualify as a Canadian
Controlled Private Corporation (CCPC). Only
a CCPC qualifies for the Small Business Deduction
for income tax purposes. In all likelihood, you
will want to restrict the transfer of all classes
of shares.
Shareholders'
Agreements: If the owners of the corporation
are partners, there should be a shareholders'
agreement setting out their mutual rights and
obligations and dealing with the election of directors,
resolution of deadlock votes, agreements among
all the shareholders (unanimous shareholders'
agreement), a buy-sell clause that allows shareholders
to buy out a co-owner's shares or be bought out,
or what happens if a owner-shareholder dies. The
shareholders' agreements are prepared separately
from the incorporating documents and are not filed
with the government.
Directors
of the Corporation: Every corporation must
have at least one director to manage the affairs
of the corporation. A director of a corporation
must be a person (rather than another corporation),
at least 18 years of age, not bankrupt and of
sound mind. In many businesses, the directors
and shareholders are the same. A director has
certain legal duties to the corporation and its
shareholders. A director must be reasonably careful
and must exercise reasonable skill and must act
honestly and in good faith with a view to the
best interest of this corporation (call fiduciary
duty). This protects the corporation from
a director participating in activities which may
present a conflict-of-interest from which a director
could benefit or profit at the expense of the
corporation. In such a situation, a director would
have to pay back to the corporation any such benefit
or profits. Directors can be liable for the following
debts of a corporation:
- Employees'
wages if the corporation can't pay them
- Income
tax, sales tax, GST, employment insurance and
Canada Pension Plan which the corporation does
not pay
A director
can also be held responsible for any illegal actions
or activities of the corporation and can be convicted
of an offense if the director authorized or participated
in any criminal or provincial offense by the corporation.
Canadian Controlled Private Corporation
(CCPC): If you want to ensure that your corporation
is considered a CCPC for income tax purposes,
the articles of incorporation must include provisions
that the corporation is prohibited from offering
it shares to the public, and that the number of
shareholders in the corporation is limited to
50 (apart from past or present employees).
Articles
of Incorporation (share capital) are available
at the Forms Store, alone or as part of a complete
Incorporation Package (which includes articles,
by-laws, directors'/shareholders' organizational
resolutions and share certificates) as provided
by our consulting lawyers.
 Articles
of Incorporation (share capital)
Incorporation
Package
COMPLETING
THE ARTICLES OF INCORPORATION COVER PAGE
Name
of Corporation: state the full name of the
corporation. Don't forget to include "Inc."
"Ltd." "Corporation" or other
indicators of a corporation as discussed in the
subsection Naming a Corporation (above).
Address
of Corporation: this must be a registered
office (street address, not post office box) within
the province. This address does not have to be
the address where business is carried on.
Number
of Directors: "minimum of one (1) director
and a maximum of ten (10) directors" is a
standard which allows for future expansion or
growth of your company.
Classes
and Maximum number of shares that the corporation
is authorized to issue: Two classes of common
shares (one voting and one non-voting) and two
classes of preference shares (one voting and one
non-voting) will provide flexibility when expanding
a business to include issuing shares to a spouse
or children in the future without having to amend
the articles of incorporation. Paragraph 5 of
the incorporation form could look as follows:
- An
unlimited number of Class A Common Shares (voting)
- An
unlimited number of Class B Common Shares
- An
unlimited number of Class A Preference Shares
- An
unlimited number of Class B Preference Shares
(voting)
The Rights, Privileges, Restrictions and conditions
attaching to the shares, if any: Refer to
the articles as follows:
"See
attached Schedule "A" as part of this
document"
[For
more info see subsection entitled Types or "Classes"
of shares above]
Restrictions,
if any, on share transfers: This section should
also refer to the articles as follows:
"See
attached Schedule "B" as part of this
document"
[For
more info see subsection entitled Restrictions
on the Right to Transfer Shares above]
Restrictions, if any, on business the corporation
may carry on: "Nil"
It is not wise to restrict the type of business
in case you want to change the nature of the business
in the future.
Other
provisions, if any:
"See
attached Schedule "C" as part of this
document"
[For
more info see subsection entitled Canadian Controlled
Private Corporation (CCPC) above]
Incorporators:
All incorporators must be listed with their full
street address (post office box is insufficient)
and they must sign the form.
After
the articles of incorporation have been filed,
the Corporations Branch will issue you a file-stamped
copy of the Articles of Incorporation form which
is called a Certificate of Incorporation. The
Corporation cannot start to carry on business
until after a first directors' meeting at which
time the first directors will pass the corporation's
by-laws.
BY-LAWS
In
addition to the articles of incorporation, a corporation
must have by-laws (rules which govern how the
corporation will run). The corporation cannot
carry on business until it has had a first directors'
meeting and the directors have passed the corporation's
by-laws. The by-laws are not filed with the Corporations
Branch but are kept as a part of the corporation's
records. For more information about corporate
documentation and record keeping see subsection
Corporate Record Keeping below.
By-laws
cover issues such as:
- the
election of directors and how long they may
hold office
- how
meetings are called and held
- the
power of directors to borrow money
- where
the corporation will bank
- officers
of the corporation and their duties (i.e. president,
vice-president, secretary, treasurer, etc.)
By-Laws
are available alone or as part of a complete Incorporation
Package (which includes articles, by-laws, directors'/shareholders'
organizational resolutions and share certificates)
as provided by our consulting lawyers.
By-Laws
Incorporation
Package
DIRECTORS'
RESOLUTIONS
After
the Certificate of Incorporation is issued, the
directors are required to meet and pass a resolution
which:
- appoints
officers of the corporation [the officers of
the corporation run the corporation by carrying
out the orders of the directors]
- adopt
the forms of share certificates, set share prices
and issue shares to shareholders
- appoint
an auditor to hold office until the first shareholders'
meeting
- adopt
pre-incorporation contracts
The
directors will also meet as required to make decisions
about the affairs of the corporation. Any major
corporate decisions must be documented in the
form of a directors' resolution, e.g. buying property,
entering into a lease, signing an agreement. The
by-laws specify a minimum number of directors
who are required for a meeting to be held (a quorum).
Meetings can take place in person, by telephone
or conference call and the directors' decisions
are then recorded in the form of resolutions.
Resolutions can also be made in writing without
the necessity of a meeting in which case all directors
must sign the written resolution.
SHAREHOLDERS'
RESOLUTIONS
After
the Certificate of Incorporation is issued, the
shareholders are required to meet and pass a resolution
which:
- confirms
that the by-laws were passed by the directors
- elects
the permanent directors of the corporation
- appoints
an auditor
Corporations
are also required to hold annual shareholders'
meeting to:
- elect
directors
- appoint
an auditor
- review
the corporation's financial statements
Matters
which require shareholders' approval can be dealt
with at an annual meeting or at a special meeting
called for that purpose. For a shareholders' meeting
to proceed there must be a quorum, and most decisions
are made by simple majority vote. The decisions
of the shareholders must be recorded in writing.
An annual shareholders' meeting does not have
to be held if the shareholders deal with all matters
in a written resolution signed by all of the shareholders.
Shareholders'/Directors'
Organizational Resolutions are available alone
or as part of a complete Incorporation Package
(which includes articles, by-laws, directors'/shareholders'
organizational minutes and share certificates)
as provided by our consulting lawyers.
Shareholders'/Directors'
Organizational Resolutions
Incorporation
Package
Shareholders/Directors'
Annual Resolutions
Corporate
Record Keeping: Once
incorporated you must keep the following corporate
documents and records:
- incorporation
documents
- by-laws
- any
unanimous shareholders' agreements
- directors'/shareholders'
minutes and resolutions
- directors'/shareholders'
registers containing names and addresses
- register
of transfer of shares from the corporation to
shareholders or from one shareholder to another
- sample
share certificates for each class of shares
- a
capital account showing total paid by shareholders
for each class of shares issued
If
you are going to prepare and file you own incorporation
(pro se) and prepare your own corporate documents,
you should familiarize yourself with The Corporations
Act. The Corporations Act and other Manitoba statutes
can be found at the Centennial Library in Winnipeg,
the University of Manitoba Law Library in Winnipeg,
and can be ordered from: Statutory Publications
Office, 200 Vaughan Street , Winnipeg, Manitoba
R3C 1T5, (800) 321-1203 or (204)945-3101, Fax
No. (204) 945-3101 or go to the Manitoba
Statutory Publications site. The Lean Law
Library (Statutes and Cases) also contains many
other helpful links for legal research or educational
purposes.
Shareholders/Directors'
Annual Resolutions
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