In my last instalment, the major issues relating to partnerships as well as the importance and benefit of a well drafted partnership agreement were briefly canvassed. In this chapter, we will delve into similar issues regarding corporations. A good starting point would be to answer the question - "why incorporate?" What is the point of creating this new entity we call a corporation?
The largest and most obvious benefit of incorporating a business is that the shareholders or owners greatly limit their liability. When running a business as a sole proprietorship or a partnership, the owners are entirely liable for all claims against the business. Barring certain specific situations, a shareholder of a corporation risks losing only as much as was invested, whether it is in the form of money, past services or property. The main exception to this is when the corporate veil is pierced. This is a topic that is beyond the scope of the current article, but as a starting point it is vital to recognize that corporate responsibility is an issue that has made its way to the forefront of society's expectations, especially in the wake of the Enron fiasco, and as such, cannot be ignored.
Corporations can sue and be sued in their own names. Generally speaking, and subject to personal guarantees, this limits personal claims made against the brains of the operation - you. They also have the potential to live indefinitely, a claim not easily made by most entities. Another benefit is the ability to incorporate provincially or federally. A federally incorporated company can carry on business in every province, and so (depending on your business plan or preferences) the opportunity to grow, expand, and reach various markets can be simplified by such a structure.
Corporations are separate tax payers from their shareholders. The taxation of corporations as well as the type and extent of tax incentives that can apply depends in part on the type of corporation that is created. For instance, for a certain amount of active business income in a particular tax year, a Canadian-controlled private corporation (CCPC) in Ontario is only taxed at roughly one-half the regular rate. Incorporation allows for a number of potential tax savings, and as such these are considerations that should be carefully explored.
When a business is incorporated, by-laws must be carefully drafted. The issues that can be dealt with in the by-laws (which will form part of the articles of incorporation) are virtually limitless. Some of the more generic ones are as follows:
Voting structures regarding decisions made by the shareholders or directors,
Limitations on sales,
Other matters relating to Directors and Officers.
Another great benefit of incorporation is the varying and creative solutions that can be developed regarding the setup and inner workings of the company. From the outset, the owners (shareholders) can make decisions regarding classes of shares, their differing rights, as well as privileges and restrictions that attach to those separate classes. This can include such topics as voting, amalgamations, revisiting the set up of the corporation or even selling the corporation's assets. Aside from a few particular limitations, any number of specifications regarding share classes can be arranged. Incorporation also gives the owners the ability to decide if or how the securities of the corporation will be distributed as well as the mechanism that must be followed to implement such distributions.
The freedom and flexibility that incorporation provides makes it increasingly understandable why so many businesses choose that route. However, once such a route is chosen, someone must be prepared to deal with the relevant issues – both the practical management of the business and the ‘backstage' technical requirements. How many directors are required by law? What are the duties and responsibilities of those directors? Which responsibilities can be delegated, and which cannot? Furthermore, how will the transaction of business work behind the scenes? How does a shareholder ensure their rights are protected? What freedoms are there to buy in or out of the corporation? Is there a shotgun clause? Has a comprehensive shareholders agreement been properly drafted for this corporation to deal with these and many other issues? If not, that should be one's foremost concern.
Other issues that warrant attention include the nature and details of the different kinds of dividends, purchase or redemption of shares, share capitalization, potential winding up of the company and the tax consequences/considerations of these and every other matter that has been raised in this article.
By no means has this been a comprehensive review of all the issues you must turn your mind to when incorporating a business, nor has it covered all of the requirements that must be fulfilled when you have already incorporated. There are mandatory filing requirements, notices that must be sent and fees that must be paid just to name a few. Moreover, to properly set up the corporation in terms of the by-laws, resolutions and shareholder agreements, legal advice would be ideal for any business person regardless of your degree of experience, so as to properly address all the issues that are of concern for your particular business. Shareholder agreements can range from very simple to dreadfully detailed and complicated. Furthermore, when faced with so many possibilities and arrangements, some external guidance could only help to achieve your goals and specific wishes that much more effectively.
With the proper upbringing, your corporation can grow into a major success. Being a parent is always challenging and seeking assistance with it can only work to the benefit of you and your baby. Wishing you the very best of luck during this exciting time in your life.