If you aren’t sure if incorporation is appropriate for your business, read ‘How to Organize your Business in Ontario’.
A corporation is a separate legal entity set up for the purpose of carrying on business. It limits the liability of the business owners and can be used to defer and reduce taxable income. A corporation is also useful when a company seeks to raise funds by selling shares to investors.
Sometimes people incorporate using an online service provider with template documents. This can be problematic as frequently the individual incorporating does not ensure that the corporation is properly organized and because the documents may not adequately reflect the unique needs of the corporation.
This is especially true when the corporation consists of numerous shareholders or intends to raise funds via an offering. Corporate changes are most easily made at the time of incorporation or soon thereafter when there are few shareholders. The cost of waiting to deal with fundamental issues until the corporation has grown in profitability or number of shareholders can be significant.
With these points in mind here is an overview of the steps involved in incorporating and organizing a corporation in Ontario.
1. Federal or Provincial
In Ontario a corporation can be created under Federal law or under Provincial law. The laws in the respective jurisdictions are similar but not identical. Although there is no rule, often times those starting a company that will operate solely in Ontario incorporate Provincially while those also operating in other jurisdictions incorporate Federally. I like incorporating Federally because of the Federal government fees and the online service centre located at: http://www.corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/Intro
2. Naming your Corporation
One can either incorporate a numbered company (with a number as a name) or a named company. When incorporating a named company, prior to incorporation you must perform a NUANS search to ensure that the name is not confusingly similar to other existing names. A corporation’s name must be distinctive from existing business names and trademarks and contain a legal element such as ‘incorporated’, ‘inc.’, ‘corporation’ or ‘corp.’, among others. Companies that wish to protect their corporate name may also wish to register it as a trademark. Non-share corporations do not have a legal element to their name.
3. Filing Articles of Incorporation / Letters Patent
After a successful NUANS search you then file your Provincial or Federal Articles of Incorporation (for share companies) or Letters Patent (for non-share companies). This document structures your corporation stating for share companies the number of authorized directors, the permissible classes of shares and their characteristics and restrictions placed on the activities of the corporation, among other things.
The Articles / Letters Patent should be tailored to the corporation as is appropriate. For example, professional share corporations usually must have restrictions on the corporation’s activities and share corporations seeking to do an exempt offering can be required to have certain clauses in the Articles.
4. Corporate Organizing
Once incorporated the corporation is required by law to be properly organized. This includes having bylaws, appropriate founding resolutions, issuing shares and having the appropriate registers and ledgers.
5. Shareholder Agreement
In addition to organizing the share corporation it is often wise to have a unanimous shareholder agreement. A unanimous shareholder agreement is an agreement between the shareholders of a corporation and the corporation itself that governs the relationship between the shareholders and between shareholders and the board of directors. At a minimum a shareholder agreement usually puts restrictions on the transfer of shares to ensure that unwanted partners are not introduced to a closely held company. Shareholder agreements can also include other clauses such as requiring shareholder approval for certain actions and guaranteeing continued involvement and/or control for founding shareholders.
This blog and the contents herein are for informational purposes only and do not constitute legal advice. Readers are advised to seek legal counsel prior to acting on any matter discussed herein. I take no responsibility for any third-party sites linked, nor is the presence or absence of a link an indication of my endorsement of views expressed. The third-party links may not be applicable or appropriate for incorporating in Ontario and may contain out of date or inaccurate information.