A corporation (also referred to as a company) has a separate legal existence than its owners and is considered its own legal person. The rights and liabilities of the corporation are not the rights and liabilities of the shareholders. As a separate legal entity, a corporation has the rights, powers, and privileges (and potentially the obligations) of a natural person. It can hold property and carry on a business, and it is subject to legal and contractual obligations. A corporation offers the greatest flexibility in both the structuring of decision-making authority and of investment in the business.
A corporation can be registered by one or more individuals or entities. It is an ideal business structure for anyone who intends to get investors for the business, issue shares to investors and shield from personal liability.
Liability of Shareholders
Since the corporation remains responsible for liabilities, a shareholder’s liability is limited to the value invested in or transferred to the corporation by the shareholder as consideration for its shares. Therefore, creditors cannot seek repayment from shareholders for any debts owed by the corporation.
Corporations have the option of issuing bonds or share certificates to investors, making it easier to raise capital. As a general rule, the shareholders of a corporation are not liable for any act, default, obligation or liability of the corporation. The financial liability of the shareholders is limited to their investment unless the shareholder has another relationship with the corporation. If the corporation has no assets, creditors cannot claim to be paid personally by the shareholders.
Dissolving a Corporation (winding up)
Voluntary dissolution of a corporation is an extensive process, which requires owners to file documents and fulfill all obligations to creditors. To dissolve an Ontario corporation, the documentation including articles of dissolution and letter consenting dissolution from Ministry of Revenue must be submitted to the Ministry of Government Services. A federal corporation can only be dissolved once it no longer has property or liabilities.
Federal or Provincial incorporation
In Canada, a corporation may be incorporated under federal law pursuant to the Canada Business Corporations Act or under the provincial law, eg. Ontario’s Business Corporations Act. The key distinction between the two types of corporations is that a federal corporation may carry on business in any province or territory provided that it complies with the applicable registration and reporting requirements of each province. In contrast, a provincial corporation is required to obtain an extra-provincial licence and register in any other province where it carries on business. Many incorporation statutes have minimum Canadian residency requirements for directors.
Benefits of Corporation
- Incorporation can be done at the federal or provincial/territorial level
- Shareholders have limited liability, limited to their investment
- Corporation potentially has continuous existence, since it does not dissolve due to the death or personal bankruptcy of its shareholder
- Corporation has a separate legal entity, so generally, personal assets of the shareholders are not exposed to creditors
- It is easier to raise capital through a corporation
- Different types of shares can be issued, giving more decision-making authority to owners
- A federally incorporated company can conduct business in any province
Drawbacks of a Corporation
- Corporation is closely regulated and requires more formalities to set-up
- More expensive to incorporate than a partnership or sole proprietorship
- Extensive corporate records required to be filed on an annual basis
A corporation provides maximum flexibility to the owners in terms of limited liability and control over the business. A corporation has the potential to exist even after the death or incapacity of its shareholders. For a business that has the potential to expand or require extensive investment, incorporation is the ideal option. It is essential for the shareholders to execute a shareholders’ agreement, setting out the rights, liabilities and duties of each shareholder.
Non Profit Corporations
To register a for profit or non profit corporation, prepare minute books, update minute books, prepare commercial agreements, contact us.