Unlike a sole proprietorship or partnership, a corporation does not come into existence simply by virtue of one or several people starting a business. Rather, a corporation must be incorporated pursuant to a filing with the appropriate government entity, and the paying of a filing fee.

In Ontario, incorporation may be under the Ontario Business Corporations Act or the Canada Business Corporations Act. A federally-incorporated corporation must register in Ontario as an extra-provincial corporation; there is no additional filing fee for this registration, although there are filing requirements.

As with partnerships, it is possible for shareholders in a corporation to customize their relationship to the corporation and each other. Subject to certain limits, this may augment or replace elements under the OBCA or CBCA through provisions in the various components of the corporate constitution (articles and by-laws of the corporation, corporate resolutions of the directors and shareholders), as well as through a shareholders’ agreement.

Upon incorporation, the filing made by the corporation becomes a matter of public record. No registration under provincial business names legislation is required for corporations unless they yes a name different from their corporate name.

Characteristics of a Corporation
  1. Separate Legal Existence

The corporation is an entity with separate legal existence from its owners. The corporation carries own business, owns property, possesses rights and incurs liabilities.

Shareholders have a bundle of rights in relation to the corporation through their ownership of shares, but they do not own the business carried on by the corporation or the property belonging to the corporation. The rights and liabilities of the corporation are not the rights and liabilities of the shareholders. This is in contrast with sole proprietors and partners, who carry on the business, own its property, possess its rights and are directly responsible for its liabilities.

Separate legal existence has three other important implications.

First, a shareholder can be an employee and a creditor of the corporation, separate from being a shareholder.

Secondly, the corporation has perpetual existence; it is not dependent in any way on the continuation of its shareholders. The corporation is not affected if a shareholder dies or withdraws from the corporation by selling her shares.

Third, for income tax purposes, the corporation is taxed separately. Income or loss from the corporation’s business is determined and taxed at the corporate level.

  1. Separation of Ownership and Management

The rights and obligations of managers and those with interests represented by shares of the corporation are legally distinct.  Corporations are managed by a board of directors, which is elected by shareholders by majority vote, and by officers, who are appointed and delegated responsibilities by directors.

Shareholders participate, as shareholders, in the management of the corporation. In most small, privately-held corporations, these distinct roles are played by the same people – the shareholders are also the directors and officers. This may change as the business gets larger.

The primary power of shareholders is to elect directors in the first place, to refuse to re-elect them, and to remove them. This gives shareholders the power to ensure that directors and officers they appoint will act in their best interests.

RPL lawyers are experienced in advising on how to structure corporations for tax-efficacy and ownership by various shareholders. A shareholders’ agreement must be customized to each relationship between the partners; no two situations are alike. We routinely review, prepare, negotiate shareholders’ agreements for our business, real estate and media clients. We also offer flat-fee incorporation and shareholder packages. Contact us to schedule a consultation or phone call.

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