Congratulations Mr. Mrs. Smith! Its A Healthy Babycorporation
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Congratulations Mr. Mrs. Smith! Its A Healthy Babycorporation
This baby may not have your eyes or nose but in many respects it is just like any other human being. The baby is given a name and starts off quite small but before you know it your little corporation has grown right before your eyes into a mature adult and a responsible contributing member of society. In a legal sense this new member of society is considered a person and a separate entity from its shareholders. It can own property and carry on a business in addition to enjoying certain rights and even being able to incur liabilities.
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 societys 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 Canadiancontrolled private corporation CCPC in Ontario is only taxed at roughly onehalf 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 bylaws must be carefully drafted. The issues that can be dealt with in the bylaws which will form part of the articles of incorporation are virtually limitless. Some of the more generic ones are as follows:
Shareholder rights
Voting structures regarding decisions made by the shareholders or directors
Limitations on sales
Meetings
Resolutions and
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 corporations 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 ones 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 bylaws 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.
About the writer: Jordan S. Halpern is a lawyer with BrazeauSeller.LLP. He practices in the areas of corporate/commercial transactions as well as commercial and residential real estate.
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