Do I need a lawyer to incorporate?
One of the most frequent questions we are asked is, “Why do I need a lawyer to incorporate?”
Many see the advertisements online promising incorporation for as low as $100 without the need for a lawyer. Many ask, why would I use a lawyer to incorporate when I could do so myself for a tenth of the cost? The quick answer is, these websites do not complete the incorporation process: they only complete Step 1 of the Two-Step process to incorporation.
In this article, we break down the two-step process required to incorporate. We will also explain what you will get if you choose to incorporate using an an online service compared to what a business lawyer provides, and how each affects the status of your corporation. For more information on whether incorporation is right for you, see our article on the benefits of incorporation here.
Two Steps to Incorporate: Step 1 and Step 2
Incorporation can be broken down into two basic steps.
- In the first step, Articles of Incorporation are prepared, filed and issued with the Ministry.
- In the second step, organizational resolutions must be prepared which organize the new corporation and issue shares to the shareholders. Additionally, if the case of provincial incorporations, an information return must be filed with the Ministry within 60 days of incorporation, which informs the Ministry about its organization. At that point in time, the incorporation is complete.
The online websites offering incorporation for extremely low fees because they complete the first step only. They simply log in to the government website and give the Articles of Incorporation to you. You could do this very same service yourself by logging in to the government website and having the Articles issued without any third party involvement. These online incorporation services have added zero value to a service that’s already provided to the public by both the provincial and federal governments for free.
You will then receive Articles of Incorporation believing that the incorporation is complete. You have essentially paid $100 or $200 for no reason at all, as you could have done the same on your own.
Why Incorporating Online is Deficient
In most cases, online incorporation services fail to tell you that they have only completed Step 1 of a 2-part process. They fail to tell you that if you don’t complete step 2 subsequent to your receiving the Articles of Incorporation, your corporation is deficient and can be forcibly dissolved by the Ministry in a few years time, should the deficiency not be rectified.
It is certainly unfortunate to see these sites taking advantage of the public by failing to inform that further steps must be taken on their own. They leave no guidance as to how to complete step 2 and, in most cases, fail to inform you that step 2 is required at all. You think you are incorporated because you hold Articles of Incorporation. This, unfortunately, is untrue. The incorporation is incomplete.
What is Step 2? And why is it important?
Step 2 is the stuff that lawyers do.
When filing Articles of Incorporation in step 1, the government only requires the name of the corporation, the registered head office and the name of the director. Then Articles are issued. You are then required to complete the incorporation process in step 2 by electing directors, appointing officers and issuing shares to shareholders.
In Step 2, organizational resolutions are also prepared, which confirm the central tenets of the new corporation as required by law under the Ontario Business Corporations Act.
These resolutions confirm the following:
- appoint the directors and officer
- issue share certificates to shareholders, specify the amount of their shareholdings, class of shares, and percentage of ownership
- confirm fiscal year end
- confirm corporation’s bank
- confirm corporation’s accountant
- confirm corporation’s solicitor
- provide consent to exempt itself from the requirement to prepare audited financial statements
- indemnify directors and officers.
- obtain an official minute book that houses all of the corporate records.
All of the above is required by law.
Why is Step 2 Required? Why Aren’t Articles of Incorporation Good Enough?
A corporation that doesn’t complete step 2 does not have legal shareholders or validly appointed directors. And a corporation without shareholders cannot exist. A fundamental and required aspect of a corporation is its owners/shareholders, without which the corporation legally belongs to no one. As well, the directors have not consented to act as directors, which is required by the governing legislation. At a basic level, the requirements at law to create a corporation have not been met.
Once step 2 is completed, the lawyers return to the Ministry and file a Form 1 Initial Return. This Form 1 reports back to the Ministry that the organization was completed in Step 2. This Form 1 must be filed within 60 days of provincial incorporation and is required under the Corporations Information Act.
If Form 1 is not filed (which is the case with online incorporations), the corporation can be struck off the registry and forcibly dissolved by the Ministry, which will likely happen in a few years time.
You will then have to hire a lawyer to reinstate the dissolution of the corporation, or incorporate a new corporation properly.
The Disadvantages of Not Incorporating Properly
Without Step 2 and the passing of resolutions organizing the corporation, your corporation
- is not legally valid and therefore does not exist
- does not have legal shareholders
- does not have a legal director
- can be struck off the Ministry’s registry and forcibly dissolved
- will likely have extreme difficulty being sold, as it was never properly constituted.
- will have difficulty income splitting, as shares have not been properly issued.
- will have difficulty defining the roles and shareholdings of any partners because these have never been determined.
- will not be able to reap the benefits of incorporating which is (a) the limitation of liability and (b) tax planning.
- is deficient in its annual filings and resolutions
- will need to be reconstituted some time down the road at greater cost
You will, in all sense, not have incorporated a corporation.
Rectification of a Corporation
Much of the work we do at Kalfa Law, unfortunately, is rectifying and reconstituting corporations, which were incorporated online without a lawyer. This usually occurs a few years after incorporation when the business begins to pick up and generate income. The owners are then interested in confirming the corporation was structured properly, or sometimes they are interested in selling all or a part of the business. We review what was done, and in most cases, only Articles of Incorporation were issued, which means the corporation is deficient.
Finally, in 95% of the cases, corporations which were not completed properly at the outset, are also not carried forward in accordance with the law as well.
Annual resolutions are required each year in which the directors and officers of the corporation approve the financial statements of the corporation, a requirement under the law. Another reason why it is beneficial to incorporate using a lawyer is because the lawyer and the accountant ensure these filings and resolutions are completed each year. Incorporations which were incorporated online usually are deficient in its annual filings and resolutions as well.
Cost, and Do-It-Yourself
Lets be honest about the costs to incorporate a corporation.
Lawyers charge anywhere from $1,000 to $2,000 to incorporate depending on the law firm and the complexity. Incorporating online can cost as low as $100 or $199; however, you have not created a valid corporation. You have two choices: either hire a lawyer or do it yourself.
If you are savvy and resourceful, you could certainly review the Ontario Business Corporations Act and find out the required resolutions in order to complete step 2. If you are cost sensitive and have the time to do the research, prepare the resolutions, issue the shares and obtain a formal minute book, you could certainly do so on your own.
Why You Should Incorporate Using a Lawyer
However, many with limited time and resources choose to have a professional undertake to do this work for them. Using a lawyer gives you the peace of mind and assurance that the corporation was incorporated properly, and it won’t be forcibly dissolved by the government for deficiency later down the road. Using a lawyer also ensures that you have set up the corporation to maximize the tax planning and income splitting opportunities available to a corporation. Why pay more tax than necessary?
Thinking of Starting a Business?
If you have a new business venture and are considering incorporation, speak to a lawyer. We offer no-charge 25 minute consultations. We can discuss the reasons for incorporating and whether incorporation is the best business structure for you.
Don’t just incorporate quickly online, lest you regret making this hasty decision later. In most cases, using a lawyer to incorporate is far more beneficial, and at the end of the day saves you the legal fees in correcting it later.
Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.