Setting up a Corporation



Michael J. Velletta with the assistance of Paul Waller, for The Lawyers Weekly

The Corporation is an excellent vehicle for doing business, offering many potential advantages over other business organizations, such as partnerships or joint ventures. Corporate lawyers can help with the incorporation process. While a Corporation may not be the best alternative in every situation, deciding to incorporate is only the first step. Once your Corporation is created, there remains a need to fully set up and organize it to derive maximum benefits.

Classes of Shares

In Canada, many Corporations are created with a single class of Common Voting Shares. It may be worthwhile to expand the classes of shares to include a variety of voting participating shares, non-voting participating shares and preferred shares.

Voting Common Shares

Typically in Canada, the holders of voting shares have by simple majority the right to elect a Board of Directors, which in turn run the Corporation. The Voting Shareholders also have by special majority the right to alter the Memorandum, Articles or Bylaws of a Corporation. As common shares, they are entitled to participate in distribution of profits of the Canadian Corporation.

Non-Voting Common Shares

Holders of this class of share have no voting rights to elect a Board of Directors. However, the holders of Non-Voting Common Shares are entitled to participate in distributions of profits of the Canadian Corporation.

Preferred Shares

Preferred shares may be voting, or non-voting. By design, their main feature is a wide array of potential preferences over common shareholders. Frequently the holders of preferred shares enjoy a priority on the return of paid up capital in the event of the winding up or dissolution of the Corporation. Other preferences include a right to receive a dividend at fixed, or floating amounts, or a right of redemption under which the Corporation is required to buy back the shares. Preference shares are frequently used as an attractive way to raise capital for the Canadian Corporation.

Who do you want to participate in the Corporation?

There may be a temptation to include family members and loved ones as Shareholders, Directors or Officers in a Corporation. Before doing so, carefully consider the ramifications. For example, if children or spouses have voting shares, they may be in a position to influence the direction of a Corporation or otherwise interfere in the way you wish to do business. Family members may move or lack enthusiasm for the day-to-day business of the Corporation creating practical problems. On the other hand, in Canada spouses and children participating in the Corporation with non-voting shares may offer certain tax advantages and estate planning benefits for the family. These opportunities should be fully discussed with your corporate lawyer and accountant.

Again, there is often a temptation to bestow upon a family member the title of Director or Officer. One should be careful in doing so, though, as Directors and Officers have fiduciary duties and obligations. Furthermore, Officers and Directors may be liable for unpaid wages, withholding taxes, corporate taxes and a limited number of other liabilities of the Corporation, or for acts of fraud. In fact, it may be prudent to exclude family members from the Board of Directors and as Offices of your Canadian Corporation.

Still, it may be advantageous through the use of non-voting shares to involve key employees in your Canadian Corporation to foster loyalty and as a means of profit sharing.

Capitalization

Corporations in Canada at the time of creation have no assets or capital with which to do business. The Corporation must acquire capital and assets through investment from Shareholders, or by loans from Shareholders and/or other sources. Here are a few options:

Income Tax Act s.85 Rollover

If you have existing business assets, s.85 of the Income Tax Act is a special provision allowing for the transfer of your assets into a Corporation, while deferring Capital Gains Tax that would otherwise be payable.

Shareholder Loans

A typical method of providing capital to a Corporation in Canada is through Shareholder's Loans. Simply stated, the Shareholders loan money to the Corporation, at mutually agreeable rates. Later, the Corporation pays the money back to the Shareholder. Only interest, if any, is taxable. Shareholders' loans are also a good tool for tax planning purposes.

Selling Shares

Through issuing and allotting shares a Corporation can raise capital. A public offering of shares, though, falls under Securities Legislation and is complex and expensive.

Corporate Borrowing

A Corporation in Canada can seek to borrow money from any source, including banks or investors. Beware, though, that banks and investors alike often require the personal covenant of the principal Shareholders of the Corporation, guaranteeing the obligations of the Corporation to the lender. This may defeat limited liability benefits.

Doing Business in Other Jurisdictions

Most Corporations in Canada are set up in individual provinces. A small number of Corporations are federally incorporated. Regardless of whether your Corporation is provincial or federal, it must be registered in Canadian provinces where it is "doing business". Doing business for the purpose of registration typically means having employees, facilities or offices in the jurisdiction. Merely entering into contracts in Canada or selling goods or services in another jurisdiction, does not necessarily require registration in that jurisdiction.

Corporations in Canada can also be registered in foreign jurisdictions including most states of the United States, Europe and elsewhere.

Conclusion

Corporations in Canada offer a flexible array of options making them an excellent business structure. However, to operate legally, and to take full advantage of a Corporation it needs to be properly set up and organized. With the assistance of a corporate lawyer and input from your accountant many advantages may open up for the businessperson creating a Corporation.

Michael J. Velletta is a lawyer and partner with Velletta & Company in Victoria practising Corporate and Commercial law and has contributed to The Lawyers Weekly.

A great way to start your search for a local Canadian corporate lawyer is at Canadian-Lawyers.ca. Go to the 'Find a Lawyer' search box that appears on the right hand side of this screen to start your lawyer search. Type in corporate law or the name of the law firm, the city and the province that you are looking to hire a lawyer from, and click on the 'Search Now' button. This will generate a list of local Canadian corporate lawyers.


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