Business FAQ 4

A corporation is a legal entity that is separate and distinct from its owners. The technical definition of a corporation is "an artificial creation of the law existing as a voluntary chartered association of individuals that has most of the rights and duties of natural persons but with perpetual existence and limited liability." In other words, a corporation exists as a separate legal structure, almost as if it were a person under the law. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes

The benefits of incorporation are limited liability, separate legal entity, perpetual existence, and free transferability.

In the event a corporation becomes insolvent, the owner and shareholders are not liable for the debts or other obligations incurred by the corporation. Yes, the shareholders will lose their investment, but they will not be responsible for its debt.

Separate legal entity refers to a corporation’s operating as distinct from its shareholders, directors, and officers.  A corporation (like a person) can own property, enter into a contract, sue and be sued, and be convicted of a criminal offense (corporations pay fines in lieu of imprisonment.) A corporation exists as its own entity, regardless of what happens to the individuals involved in the business.

Perpetual existence refers to a corporation’s continued existence until it is liquidated, dissolved, or acquired by another entity. When a business is incorporated, the owners, officers, and shareholders (the organizers) can choose to give it an end date when the mission of the corporation has been fulfilled. More commonly, a corporation acts in perpetual existence; that is it will continue to exist, until the organizers decide to end it. Even if the executive team and employees were to quit, the business corporation as an entity would continue to exist, and new employees could take their place.

Free transferability refers to the shareholders’ ability to sell shares without the consent of the directors, officers, or other shareholders, unless otherwise restricted in the corporate constitution. That being said, shareholders in a new venture often will want to prevent unrestricted transfer of shares and thus may provide transfer restrictions or buy-sell and redemption agreements in the articles of incorporation, further limiting transferability. There are separate rules and restrictions governing the transfer of shares in a private versus a public corporation.

All businesses, whether you are operating through a corporation or sole proprietorship, require a separate bank account. Bring either your Articles of Incorporation or your Master Business License to your bank or financial institution when you are ready to open a business account. You may also want to open an additional tax account to hold the HST you collect from your customers.

In order to be in good standing with your taxes, you will need to take care of some administrative details when launching a new start up business. Firstly, you will need to register for a business number (BN), HST account if you anticipate making more than $30,000 a year, a payroll account (PR) and a Workplace Safety and Insurance Board (WSIB) account if you have employees, and an Employer Health Tax (EHT) account if your payroll exceeds $450,000.

That depends on the type of business structure that you have. If your business is a corporation, you should organize your corporation set out in resolutions that clearly indicate who the director, officers, and shareholders are and the rights and obligations of each party. If your business is a partnership, then a partnership agreement should be drafted outlining the rights and obligations of each partner and how the profits of the business will be shared. Finally, if there are more than one shareholder, there should be a shareholders agreement to set out the rights, obligations, and duties of each shareholder, as well as the rules for existing shareholders, buying out of shares, and policies if a shareholder becomes disabled, dies or divorces.

When starting a business, you will likely require business contracts with suppliers, distributors, and service providers. Whether you are in the business of selling goods or services, you will likely need distributor agreements, supply agreements, service agreements, sales agreements, licensing agreements and lease agreements.

You cannot incorporate using an online service. There are many online services that claim to incorporate your business for as little as $100. However, they will not complete the incorporation process. They will only complete step 1 of a two-step process. That means, you will receive articles of incorporation, but that does not mean that the incorporation process is complete or valid. It is only complete and valid when you complete step two, which occurs when you prepare organization resolutions and issue shares to shareholders. You can complete step one by yourself. The provincial and federal government provides this service for free and do not need to spend $100-$200 for a service that provides no extra value at all. While it is possible to incorporate yourself, it will require a great deal of research yourself. You will have to review the Ontario Business Corporations Act and find out what the required resolutions are. You will have to prepare the resolutions, issue the shares, and obtain a formal minute book. For most people, they are advised to use a lawyer to incorporate, which will ensure that all the legal requirements for incorporation have been fulfilled. Using a lawyer will also help you get set up with all the other aspects of starting a business, from preparing employment, service, and distribution contracts, branding and trademarks, and obtaining the corrects licenses and permits.

If you do not prepare organizational resolutions and issue shares to shareholders, then your corporation is not incorporated legally. The Ministry can dissolve your corporation and you will have to start the incorporation process at that time. Additionally, you will lose all the benefits of incorporation. You will not have the benefit of limited liability or reap the tax advantages of incorporation. Further, you will not be able to sell your corporation as it was never properly constituted and you will be deficient in your annual resolutions, which under the law require directors and officers of a corporation to approve the financial statements each year.