Corporate Law

What is a Corporation?

A Corporation is a separate legal entity which is the most common form of business organization used in Canada for the following reasons:

  • Limited personal liability of Shareholders (subject to guarantees typically requested by Lenders and Landlords.)
  • Ease of transfer of Shareholder’s interest (family and estate planning.)
  • Perpetual existence.
  • Income tax savings.

Why incorporate?

There are some very important income tax issues relating to the incorporation decision:

  1. corporations which are “Canadian-controlled private corporations” enjoy preferential tax treatment in a number of areas including a low tax rate on the first $200,000.00 of active business income, the possible postponement of tax; and, the possible qualification of its shares for the enhanced capital
    gains tax exemption of up to $500,000.00 on sale.
  2. a corporation provides methods for achieving income splitting, such as salaries, dividends and Shareholder loans.
  3. dividends paid out of business income to a “connected corporation” are received free of income tax thereby establishing the basis for the standard “holding company/operating company” set up.

The greatest advantage of incorporation is the limited liability which it confers upon Shareholders with respect to the debts of the body corporate.

The corporation exists separately and distinctly from its Shareholders.

The Corporation, not the Shareholders, own the undertaking and assets of the corporate business. Similarly, the corporate liabilities are those of the corporation at law, and they are not the liabilities of the individual Shareholders.

Other Features

In certain situations it is advantageous to use a Unanimous Shareholders Agreement in order to preserve some of the best features of a traditional partnership with respect to a closely held corporate business venture.

The death or retirement of a sole proprietor, or a partner of a partnership, often drastically alters the business structure. On the other hand, in the case of a corporation shares are readily transferable so that the death or withdrawal of a Shareholder need not affect the existence of the body corporate, which enjoys perpetual succession.

Moreover, a partner is at the mercy of others in the partnership to the extent that each member of the partnership may, in so far as outsiders are concerned, bind the partnership by his dealings.

Additionally, participants in modern business must often have the facility for procuring additional capital. The corporation provides the most flexible “platform” for raising capital. The issuance of various classes of shares, with preferences as to dividends, redemption or convertibility, and the floatation of secured debt may be utilized by a corporation to procure funds for expansion or development as needed from time to time. Again, the limited liability feature permits a corporation in order to progress far beyond the possibilities of most partnership and sole proprietorships in this respect.

How to Incorporate

The decision regarding whether or not to incorporate should be made after the following steps have been taken:

  1. the development and assessment of the goals and objectives of the individuals who are the principals of the business, both as regards the business itself, and the personal, family and estate planning considerations which may apply;
  2. consultation with the accountant who usually acts for the business, and if necessary, an accountant who specializes in taxation matters; and,
  3. consultation with a lawyer who is knowledgeable with respect to corporate and taxation matters. Other issues which should be considered at this time are those regarding the jurisdiction in which incorporation should proceed and any pre-incorporation contracts and arrangements.

There should be an appropriate consideration of the share structure required by the corporation, both for its initial period of existence and for future possibilities, such as the raising of capital from third parties and the execution of family and estate plans.

There are those who feel that the matter of incorporation ought to be extremely simple and ought not to require much forethought. Suffice it to say that this attitude can lead to major mistakes and difficulties.

The incorporation decision and, if undertaken, its implementation, are serious matters which lay the foundation of the business venture. Such issues should not be left to chance.