Business Structures
The sole proprietorship business structures are for businesses that have only one business owner. This type of business structure is simple and inexpensive to set up. If the business is operated under the owner’s personal name, then no registration is needed. Registration is required only if operating under a trade name. The regulatory burden of the sole proprietorship is light with minimal paperwork and legal costs. Moreover, there are no employees, partners, or investors to contend with, which may be advantageous if your business earns less than $100,000 a year. The simplicity of the sole proprietorship makes a great deal of sense, particularly if don’t envision selling your business or passing on your business to heirs. A sole proprietorship is a pass-through tax entity. A pass-through entity is a special business structure that is used to reduce the effects of double taxation. That means that there is no tax paid at the sole proprietorship level. Instead, all profits flow to the sole proprietor directly. In summary, the advantages of a sole proprietorship include the following:
- Easy and inexpensive to register.
- Regulatory burden is generally light.
- You have direct control of decision making.
- Minimal working capital required for start-up.
- Some tax advantages if your business is not doing well.
- All profits go to you directly.
The disadvantage to the sole proprietorship is that the owner assumes personal liability for debts and does not have access to certain tax planning strategies, such as income splitting and the Lifetime Capital Gains Exemption. In summary, the disadvantages of a sole proprietorship include the following:
- Unlimited personal liability. Your personal assets are at risk.
- Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket.
- Pay tax on all of the business income you earn at a high tax rate; lose investment income.
- Lack of continuity for your business if you are unavailable; difficulty of transitioning business to next generation or selling business.
- Can be difficult to raise capital on your own.
The partnership business structure is for businesses that have two or more partners. Setting up a business as a partnership is more advanced and expensive than a sole proprietorship. The partners must file both a T1 Income Tax and Benefit Return to file personal income as well as a T5013, a Partnership Information Return. Partners in a general partnership agreement assume personal liability for debit and do not have access to certain tax planning strategies, such as income splitting. However, if the partnership is a professional one (e.g., dentists, doctors, accountants), the partners can set up a Limited Liability Partnership (LLP), which will limit the personal liability of the partners themselves.
Setting up a corporation is complex and expensive, however there are a number of benefits: The benefits of incorporation are limited liability, separate legal entity, perpetual existence, and free transferability. The most important advantage of setting up a business as a corporation is the income tax savings. Although there is double taxation, once on the corporate level and again on the shareholder level, once dividends are transferred to shareholders, less tax is still paid overall on income that is earned through a corporation, where the business is a Canadian Controlled Private Corporation (CCPC). Currently, a CCPC in Ontario is taxed at 11.5% on the first $500,000 of ABI in each year, which is 25.5% less than the combined average marginal personal tax rate. A corporation can also utilize tax savings strategies such as income splitting and the Lifetime Capital Gains Exemption. It should be noted, however, that a professional corporation, which is a corporation owned by members of certain professions, such as physicians, lawyers, accountants, and doctors, cannot income split with family members. Finally, a corporation protects the corporation’s owners from personal liability, thereby safeguarding the owner’s personal assets from corporate creditors and/or lawsuits. Sole proprietors are liable to the full extent of their personal assets for the liabilities of their businesses, whereas a shareholder’s liability to creditors of the corporation is limited to the amount of the shareholder’s investment. Directors are not liable at all (except where the director engages in fraud).
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.
A Limited Liability partnership is a type of general partnership structure where each partner’s liabilities is limited to the amount they put into the business. LLP’s are only permitted in Ontario for the sole purpose of carrying on a profession, such as lawyers, physicians, and accountants.
With an LLP, the personal assets of the partners who are not negligent are not exposed to claims against errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees of the firm, just as in a corporation. Another advantage of an LLP are it offers a fluid governing structure, allowing for assets and funds to be moved in and out of the business with ease. A limited liability partnership also offers a simplified tax structure. As a pass-through tax entity, a special business structure that is used to reduce the effects of double taxation. That means that there is no tax paid at the partnership level. Instead, the partnership’s income is allocated among the partners, who pay income tax at the individual partner’s level. While this simplified structure avoids double taxation, it will be difficult for a high-earning partner to shield his income from a high tax rate. Finally, an LLP offers lower costs in maintenance in the long run; while there are higher start-up costs in the short term, in the long run, the costs will be lower as there are no annual tax filings or legal fees incurred on a regular basis.
Buying and Selling a Business
The Agreement of Purchase and Sale (“APS”) is a binding contract between the purchaser and seller that obligates the purchaser to buy and the seller to sell assets or shares of a corporation subject to the terms and conditions in the APS. The APS will include terms such as the purchase price, representations and warranties, conditions, and the closing date. When a purchaser is buying assets, the APS is called an Asset Purchase Agreement; when the purchaser is buying shares, it is called a Share Purchase Agreement.
The purchaser will typically have a conditional period anywhere from five to twenty days after the APS has been executed to perform due diligence and secure financing. The following are the most common conditions required before closing:
- Financial and Legal Due diligence: Financial due diligence involves reviewing the financial statements of the target business to ensure that it is a viable business and the financial position of the business justifies the purchase price. Whereas the purpose of legal due diligence is to assess the risks and obligations of the business. For example, the purchaser will likely assume the existing lease of the business on an “as-is” basis so it is important to review the lease to identify any red flags.
- Financing: The transaction will often be conditional on the purchaser securing financing on satisfactory terms and conditions. At this stage, the purchaser will likely have had at least preliminary discussions with lenders regarding financing this transaction.
- Landlord’s Consent: If the business operates out of a leased premises, the parties will be required to obtain landlord’s consent. If the transaction is structured as an asset sale, the landlord will have to consent to assigning the existing lease to the purchaser. In a share sale, the landlord will have to consent to the change of control of the corporation. It is important to review what is required under the lease.
A purchase agreement (APS) is merely an agreement to sell the business at a certain date in the future. On the closing date, closing documents must be exchanged between the purchaser and seller in order to effect the sale. For example, a Bill of Sale is a closing document that is required to legally transfer the assets of a business from the seller to the purchaser on the closing date. The APS alone does not transfer the assets – it merely states that ownership of the assets is to be transferred by way of a Bill of Sale on closing. The business will also require various permits or licenses for its specific type of operation.
That depends on the transaction, but potentially there are many closing documents required to close a deal. They include the following for a share sale: Consent to transfer of Shares, New Share Certificate in favour of Purchaser, Resignation of Vendor as director and officer, Section 116 of the Income Tax Act statutory declarations by the Vendors and Pas to their age and Canadian residency, Undertaking by Vendors’ solicitors to withhold closing funds to pay off debts and obligations, and many more. Closing documents required in an asset sale include the Bill of Sale and General Conveyance or Assignment, the Purchaser’s Certificate of Representation and Warranties, Vendor’s Statutory Declaration re residency, Non-Competition Agreement, Statement of Adjustments, and many more.
Commercial Law and Transactions
The Agreement of Purchase and Sale (“APS”) is a binding contract between the purchaser and seller that obligates the purchaser to buy and the seller to sell assets or shares of a corporation subject to the terms and conditions in the APS. The APS will include terms such as the purchase price, representations and warranties, conditions, and the closing date. When a purchaser is buying assets, the APS is called an Asset Purchase Agreement; when the purchaser is buying shares, it is called a Share Purchase Agreement.
The purchaser will typically have a conditional period anywhere from five to twenty days after the APS has been executed to perform due diligence and secure financing. The following are the most common conditions required before closing:
- Financial and Legal Due diligence: Financial due diligence involves reviewing the financial statements of the target business to ensure that it is a viable business and the financial position of the business justifies the purchase price. Whereas the purpose of legal due diligence is to assess the risks and obligations of the business. For example, the purchaser will likely assume the existing lease of the business on an “as-is” basis so it is important to review the lease to identify any red flags.
- Financing: The transaction will often be conditional on the purchaser securing financing on satisfactory terms and conditions. At this stage, the purchaser will likely have had at least preliminary discussions with lenders regarding financing this transaction.
- Landlord’s Consent: If the business operates out of a leased premises, the parties will be required to obtain landlord’s consent. If the transaction is structured as an asset sale, the landlord will have to consent to assigning the existing lease to the purchaser. In a share sale, the landlord will have to consent to the change of control of the corporation. It is important to review what is required under the lease.
A purchase agreement (APS) is merely an agreement to sell the business at a certain date in the future. On the closing date, closing documents must be exchanged between the purchaser and seller in order to effect the sale. For example, a Bill of Sale is a closing document that is required to legally transfer the assets of a business from the seller to the purchaser on the closing date. The APS alone does not transfer the assets – it merely states that ownership of the assets is to be transferred by way of a Bill of Sale on closing. The business will also require various permits or licenses for its specific type of operation.
That depends on the transaction, but potentially there are many closing documents required to close a deal. They include the following for a share sale: Consent to transfer of Shares, New Share Certificate in favour of Purchaser, Resignation of Vendor as director and officer, Section 116 of the Income Tax Act statutory declarations by the Vendors and Pas to their age and Canadian residency, Undertaking by Vendors’ solicitors to withhold closing funds to pay off debts and obligations, and many more. Closing documents required in an asset sale include the Bill of Sale and General Conveyance or Assignment, the Purchaser’s Certificate of Representation and Warranties, Vendor’s Statutory Declaration re residency, Non-Competition Agreement, Statement of Adjustments, and many more.
Starting a Business, Registering a Business Name
The business loan agreement is a contract that is often required under a variety of circumstances, such as starting a business, buying a building, buying equipment, or buying products to build an inventory to sell. It specifies the amount of the loan, the rate of interest, terms of repayment, and payment dates so that both the borrower and lender have a clear outline of the terms of the loan. The elements of a business load agreement include the following:
- Opening: beginning with names and residential locations of the parties in the loan agreement
- Loan amount and interest including total interest, fees and extra charges, and interest calculation method.
- Date payment is due
- Defaults and Penalties if the loan goes into default
- Governing Law indicates which provincial laws the loan agreement is subject to
- Costs refers to the costs on the borrower including ensuring collateral is in good standing as well as the ability to pay lawyer and collection fees should the loan go into default
- Representations of the Borrower refers to assurances related the ability to repay the loan, such as assurance that all tax returns have been filed, all taxes have been paid, and that there are no liens on the business.
- Covenants refers to promises made by both parties; for example, proof of insurance, life insurance, guarantees that business will not take on more debt, and promise to present financial statements on a regular basis
- Binding Effect refers to the borrower’s ”heirs, successors, and assigns” to ensure that the loan continues to be repaid should the borrower die or become unable to repay the loan.
- Amendments refers to how the loan agreement can be amended or modified in the future.
- Severability allows the remainder of the contract’s terms to remain effective, even if one or more of its other terms or provisions are found to be unenforceable or illegal.
Business Contracts
Almost all businesses in Canada must register their business name in their respective provinces or territories except for sole proprietorships that use only the owner’s legal name with no additions. All other forms of business ownership, including partnerships, must register their business names.
The basic procedure to register a business name for a sole proprietorship or partnership is to conduct a business name search, fill out the appropriate business registration form, and pay your fee. The procedure to register a business name for a corporation is more involved. Besides conducting a name search and getting a NUANS report, if you wish to set up a named corporation, you will also have to prepare Articles of Incorporation, a cover letter and an incorporation application to go along with your fee.
You must renew your business’s name it every five years; however, you can renew a registration within 60 days after it expires.
In order to complete registration of your business name, you will need to provide the name and address of the business where legal papers can be served, as well as the name and home addresses of each partner where a partnership has 10 or fewer partner. You will also need to provide a description of the business activity being performed; and a valid email address if you are registering via email.
No it does not. Registering your business name does not mean that you have exclusivity. That will require you to trademark your name. While the Business Names Act does not prohibit you from registering a name that is the same or similar to others, you may find yourself in a lawsuit. That is why it is best to conduct a names search first to make sure that no one else is using the name that you want.
You can register your business name online, mail, or register in person. To register online, you can register with the following services:
- Service Canada’s Business Name Registration Service
- Service providers Cyberbahn, ESC Corporate Services Ltd, and OnCorp Direct Inc. or
- CRA’s Business Registration Online Service
If registering in person, go to the following address: Ministry of Government and Consumer Services Central Production and Verification Services Branch 375 University Avenue, 2nd floor Toronto, ON M5G 2M2
If registering by mail, write a cheque or money order for $80, made out to the Minister of Finance, and mail to the following address: Ministry of Government and Consumer Services Central Production and Verification Services Branch 393 University Avenue, Suite 200 Toronto, ON M5G 2M2
Home Based Businesses
If you spend most of your business working hours at home, and if your home is the place where you meet with clients, customers, or patients, then the CRA has deemed you eligible to claim ‘business use of home expenses,” which calculates the percentage of your home expenses that are devoted to conducting your home business.
To calculate your business use of home expenses, calculate the percentage of your workspace by dividing it by the total area of your home. This is a “workspace calculation.” For example, suppose you have a home office that is 10 x 10 feet in a house that is 2,500 square feet. The allowable portion of “business use of home” expense would be 100 divided by 2,500 = 4%. The personal use portion would be 96%. You will then want to calculate your home business tax deduction by deducting a portion of all your allowable household expenses, including utilities, telephone, cleaning materials. If you own your own home, you can also claim a portion of your insurance, property taxes, and mortgage interest (not the mortgage). If you rent, you can claim a portion of the rent you pay. Then you will divide your business use of home expense by the total expense of maintaining your home to arrive to your allowable deduction. For example, if your total expenses is $19,500, and your business use of home expense is 4%, your allowable deduction that you can claim on your T125 is $780, representing 4% of your total home expenses devoted to your home office.
Yes, you can also deduct equipment that depreciate in value over time, such as filing cabinets, computers, and printers, which fall under the rules for capital cost allowance. According to the CRA, a capital cost allowance is a “tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to wear and tear or obsolescence.” You can’t deduct the entire cost of your equipment on your income tax for that particular year. Instead, you only claim a portion of the original cost as a tax deduction each year and continue doing this over a period of years until the property or the equipment fully depreciates.
Shareholders
Shareholders agreements have a host of provisions focused on (a) who makes decisions relating to the management and operations of the company, and (b) how shares can be transferred, distributed, and sold. Shareholders’ agreements will also set out the rights, roles duties and responsibilities of the directors and officers, create options to buy or sell shares, determine what will happen in the case of death or retirement of a shareholder, establish the number of directors on the board and their duties, and provide existing shareholders with the right to approve future shareholders.
While directors of the corporation generally are invested with the power to resolve disputes, a “unanimous shareholders agreement” is one that is shared among all the shareholders, which will restrict the powers of the directors to manage and operate the corporation and will stipulate the procedures for how shareholders will settle disagreements.
Private equity investors are high net worth individuals who invest in private equity corporations in exchange for shares. The company, thereby, is able to raise additional capital, while the private equity investor hopes to make a financial return. Because of their financial clout, private equity investor hold substantial powers relating to the operation of the corporation, including when the private equity investor will exit to maximize profit through the selling of shares; rights to appoint and remove directors of the Board; control of the sale and transfers of shares; control to borrow or issue dividends; protection of intellectual property and restrictions on competition if founders leave; and disclosures (warranties) that reveal any financial obligations to third parties.
A minority shareholder owns less than half of a company. As a result, if a dispute arises over the sale or distribution of assets, or another issue requiring shareholder votes, a minority shareholder doesn’t have voting strength on his own. That being said, a minority shareholder can still ensure certain rights by the inclusion of provisions related to how shares will be distributed and various clauses, such as the right of first refusal, piggy back rights, and pre-emptive rights. See our answer below for more details about these important shareholder clauses.
Right of First Refusal allows shareholders to buy the shares another shareholder would like to sell first before the shares are sold to outside third parties. This allows shareholders to retain their percentage and protects them from unwelcome shareholders.
Similar to a Right of First Refusal, pre-emptive rights protect the rights of shareholders in cases where the corporation decides to sell newly issued shares from treasury to a third party. This will allow shareholders to buy shares before they are sold to third parties and consequently retain their percentage share in the corporation.
Piggyback rights, also known as “tag-along” rights protects minority shareholders in the event of a third party buyout of a majority shareholder’s shares. This allows the minority shareholders to sell their shares at the same price and terms if they so choose, effectively piggybacking on the transaction. This protects minority shareholders from being in business with an unwanted new co-owner and from being forced to accept less attractive offers.
A drag-along right is the mirror opposite of a piggy-back right; it is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.
A valuation clause sets out a method for determining the value of shares. This clause will set out how the value of the shares will be determined, which will become necessary when shareholders want to sell their shares or when a shareholder dies and the other shareholders want to buy those shares. A valuation clause is key and is primarily intended to avoid disputes at such time as when a shareholder wishes to exit from the business, on retirement or for other reasons.
A non-compete clause refers to situations where one party to the contract agrees to not enter into or start a similar profession or offer the same or similar services in competition against the other party, usually the employer, for a prescribed period of time. For a non-comp provision to be enforceable under Canadian law, it must be sufficiently limited in temporal (time) and geographical scope (space).
A non-solicitation clause prevents shareholders or former shareholders from inducing other shareholders, directors, officers or employees of the corporation to leave the corporation or to compete against it. This clause prevents an influential shareholder from poaching other employees. In contrast to the non-compete clause, the non-solicitation clause does not contain a geographic area or apply to only particular types of products or services.
A “shotgun” clause is a method which enables a party to exit a corporation. It permits one shareholder, at any point in time, to offer his shares to the other shareholder(s) at certain price terms. The other shareholders can either agree to sell their shares at that price, or they can buy the offering shareholders shares at that same price. The benefit of the shotgun clause is that it forces a fair and reasonable valuation of shares between the parties when one of the parties wishes to exit the corporation. The shotgun clause is risky as the offering shareholder may “kill” himself in the process; that is, he may be forced out of the corporation if the other shareholders decide to buy himself out in turn.
Yes, they can if the shareholders’ agreement provides provision for this. Since capital expenditures lock up large sums of money, minority shareholders may require that they approve any significant expenditure of capital to protect their investment in the business.
Shareholders agreements have a host of provisions focused on (a) who makes decisions relating to the management and operations of the company, and (b) how shares can be transferred, distributed, and sold. Shareholders’ agreements will also set out the rights, roles duties and responsibilities of the directors and officers, create options to buy or sell shares, determine what will happen in the case of death or retirement of a shareholder, establish the number of directors on the board and their duties, and provide existing shareholders with the right to approve future shareholders.
While directors of the corporation generally are invested with the power to resolve disputes, a “unanimous shareholders agreement” is one that is shared among all the shareholders, which will restrict the powers of the directors to manage and operate the corporation and will stipulate the procedures for how shareholders will settle disagreements.
Private equity investors are high net worth individuals who invest in private equity corporations in exchange for shares. The company, thereby, is able to raise additional capital, while the private equity investor hopes to make a financial return. Because of their financial clout, private equity investor hold substantial powers relating to the operation of the corporation, including when the private equity investor will exit to maximize profit through the selling of shares; rights to appoint and remove directors of the Board; control of the sale and transfers of shares; control to borrow or issue dividends; protection of intellectual property and restrictions on competition if founders leave; and disclosures (warranties) that reveal any financial obligations to third parties.
A minority shareholder owns less than half of a company. As a result, if a dispute arises over the sale or distribution of assets, or another issue requiring shareholder votes, a minority shareholder doesn’t have voting strength on his own. That being said, a minority shareholder can still ensure certain rights by the inclusion of provisions related to how shares will be distributed and various clauses, such as the right of first refusal, piggy back rights, and pre-emptive rights. See our answer below for more details about these important shareholder clauses.
Directors can be elected in several ways: the majority shareholder can elect the directors or each shareholder can elect a representative director. Alternatively, the shareholders may agree to elect a list of specified directors. All Directors have a duty to act in the best interest of the corporation no matter how they were elected and which group of shareholders they represent.
Corporations
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.
