A corporate lawyer knows there are many ways to structure and run your business, but there are legal differences between them. We provide advice and service from starting a business to sale or retirement. Our lawyers know the ins and outs of business law and can guide you to success.
There are a number of ways to carry-on business. One such way is through a Sole Proprietorship. A sole proprietorship is categorized as consisting of just yourself, operating under a Trade Name that you think up and can register. Under a Sole Proprietorship, you remain personally responsible for the debts of the business. Although there are risks to operating in this manner, a Sole Proprietorship is generally thought of as being relatively simple and inexpensive to start.
Another way of carrying on business is through a Partnership. A Partnership is registered as a business entity in each province where they carry on business. In an ordinary Partnership, each partner (and there can be many) are jointly responsible for the debts of the partnership, sharing both in the profits and the risks of the business. The partners in the Partnership may be Corporations.
In a Limited Partnership, there are two types of partners: General Partners and Limited Partners. Each of these types carries with it different rights and responsibilities. For example, there is can be a limit on the liability of a Limited Partner, while the General Partner’s liabilities are not limited in the same way. The liability of a Limited Partner usually depends on the amount this partner contributes to the Limited Partnership.
A Limited Liability Partnership (requires the addition of the acronym ‘LLP’ in the name) is a partnership consisting of partners carrying on practice in an eligible profession such as Accountants, Lawyers, Physicians, Dentists, Chiropractors and Optometrists.
Incorporation is the most common way of carrying-on business and is generally thought of as being the most flexible. Corporations are registered in each province where they carry on business. Corporations have Directors and Shareholders and can be structured to best suit the running of the business.
To individuals, carrying on a business seems simple enough- provide goods and services to the public- however there are more and more complexities, laws, rules and regulations, government agencies, taxes, frauds, technologies, bankruptcies, patents, credit instruments, and borrowing hurdles that you as a business owner may need to consider. In our experience, Incorporation is the preferred option of owners to manage and operate their business.
You should always get legal advice from a qualified lawyer and tax advice from an accountant or tax lawyer before deciding on what type of business structure you need. Our lawyers can make sure you understand all the important differences and advise you on your preferred choice.
There are usually good reasons to Incorporate. They are:
- limited liability;
- Income Tax considerations;
- flexible business relationships..
- raising Capital;
- professional business profile;
We will explain these below
- Limited Liability
The benefits of limited liability cannot be over stated. By incorporating, you will separate your personal and business obligations. A Corporation is a separate and distinct legal entity from is Shareholders. This is crucial, as an Industry Canada study concluded that only half of all small businesses survive beyond their first five years.
If you incorporate and your company’s business fails, your personal assets will remain protected and untouched from creditors of the business (*unless of course you pledge those assets as security to a lender, beware of Personal Guarantees!). If you do not incorporate, and operate your business as a sole proprietorship or a partnership, you will remain personally responsible for the debts of the business - which can put your personal property (like your home, car or investments) at risk.
WARNING: There are times when Directors of a Corporation can be personally liable for certain obligations of the company. The most common examples of this include:
- Unpaid employee wages and vacation pay: Up to six months' wages and 12 months' vacation pay.
- Employee source deductions and remittances: Includes source deductions for employee income taxes, EI and CPP contributions.
- GST/HST Remittances: This includes GST/HST that has been collected by the corporation but was not sent to the government.
If you are, or have been asked to become, a Director of a Corporation, speak to one of our Lawyer’s to better understand both the rights and responsibilities that come with that role.
- Tax Advantages
Corporations are taxed differently by the government than individuals are. In Canada, the tax rate for corporations is lower than the tax rate for individuals. There are also further tax reductions available to incorporated small businesses. For example, whenever you can leave money in the corporation, rather than transferring it to your personal account, you can reduce the personal taxes you pay. You also have the flexibility of choosing how you get paid. You can pay yourself in salary, dividends, or a combination of both depending on what will result in the lowest tax burden. We recommend you speak to an Accountant or an Income Tax specialist to better understand these benefits of Incorporation.
- Raising Capital.
If you want investors to invest in your company, you will generally need to be Incorporated. Without being incorporated, you will not have shares to sell to investors. Also in our experience, Lenders prefer to do business with companies that are incorporated, being easier to assess and analyze.
- Flexible business relationships
The flexibility of the Corporation is one of its most appealing features. For example you may wish to hire your spouse or a relative to work with you. You may also want to have a partner or a junior partner. You may also have a relative that is lending money to your company, or have someone transferring land or patents or other assets into the company for a share in the business. You can often custom tailor the interior workings of the company to reflect these various realities.
- Professional Business profile.
In our experience, when working with clients, your business comes across to the public as more professional when your business is incorporated. For example, invoices and communications are sent to your clients with your incorporated business name and information. This communicates to your clients that you take your business seriously.
Our lawyers can advise you on the why and how of incorporating your business. We can complete the incorporation for you to make the process as easy as possible.
1) Choosing a Business Name
You need to ensure that your business name satisfies three legal requirements. It must have: (1) a distinctive element, (2) a descriptive element, and (3) a legal ending (eg. Limited, Ltd. Corp. Inc.). When naming your company, you must first obtain a NUANS report which cross-references all the currently registered companies to make sure there’s no conflict or confusion to the public with the name that you are proposing for your business. If there are conflicts, or a name that could lead to confusion with another existing business, you may be liable for damages if you do not choose a different name.
2). Filing Incorporation documents with Government
After you've decided on your name, you'll need to file the initial registration forms with the government. For this step, you'll need to determine your share class structure along with deciding on the company's first director(s). More information on this below.
3). Internal Company Formation Documents
Filing documents with the Provincial or Federal corporate registry is not all that is required when incorporating your business. You also need to properly complete all of your company formation documents such as Corporate Bylaws, Shareholder and Director Resolutions, Director Consents, Share Subscriptions and Share Issuances. These are all legal requirements under the Business Corporations Act, which governs Corporations in Alberta or Canada.
4) Federal v. Provincial Incorporation
In Canada, you have the option of incorporating Provincially or Federally. If you choose to be Incorporated Federally, you will still need to register the company in the province where your business is located and operating. The main benefit to incorporating a Federal Corporation is that it provides your company with increased name protection- that is your business name will be registered throughout Canada rather than just one province.
Our lawyers can advise you on the why and how of incorporating your business. We can complete the incorporation for you to make the process as easy as possible.
1. Different Roles in a Corporation
There are three major roles in a Corporation. They are: Shareholders, Directors and Officers. Although these are different roles, it is certainly not uncommon- particularly in a small business- for one person to be the sole Shareholder, sole Director and sole Officer of the Corporation.
Shareholders: A shareholder is a person that owns shares in a company. The unit of ownership of a company is called a “Share”. Shareholders are legally separate from the company. As a result, shareholders are not liable for the debts of a company (*unless a shareholder has signed a personal guarantee on behalf of the company). There will also be a further explanation of the different types of Shares that exist below.
Directors: A Director has overall responsibility for the Corporation. Collectively, the directors are called the “Board of Directors”. Directors are appointed and removed by the voting shareholder(s) of the Corporation.
Officers: Officers actively operate and manage the business. A company can have several different Officer positions. For example, every company MUST have a President and Secretary (which can be the same person). Companies can create other positions like CEO, CFO, Vice-President, and Treasurer. These can all be held by the same person. Officers are appointed by the directors to run the day-to-day operations of the corporation.
Officers and directors owe a duty of care to the corporation. This means they must act honestly and in the best interests of the corporation. This is referred to as a “Fiduciary” duty. They must also avoid conflicts of interest if they hold a position as a Director or Officer.
Employees: Directors may be paid for holding that position. Officers of the corporation will often also have long-term employment contracts and be ‘key’ persons within the business. Shareholders, Directors and Officers will most often have other areas of work for which they will receive compensation/wages. For example there may be bonuses or share purchase options available to encourage and reward performance. Again, flexibility is there, and many solutions can be tailored for your unique situation.
2. Ownership of the Corporation
The number of shares owned by each shareholder reflects the proportion of the company they own. But that doesn't necessarily mean all shareholders are equal. When first incorporating your company, you can create many different types of shares called “classes” of shares to allow different groups of shareholders to have different rights, privileges, obligations and profits/returns.
a) Voting and Non-Voting Shares
The most common difference among share classes is the ability to vote on matters relating to the business. Voting shares will be held by those shareholders who want to actively participate in the decision-making process such as the founders, directors, senior managers, and so on. Non-voting shares are intended for shareholders who wish to benefit from the company's long-term growth, but aren’t involved in high-level decisions- for example, employees, passive investors, family, etc.
b) Common Shares
Common Shares are the standard shares in the Corporation. As the Corporation grows and becomes profitable, the value of the Common Shares will increase. Generally, the directors will determine, declare and pay dividends on Common Shares which can be at any time and in any amount.
c) Preferred Shares
Preferred Shares are referred to as being 'preferred' because they entitle the shareholder to be paid back before the common shareholders, for example if the Corporation stops conducting business. Preferred Shares usually have a set amount of “principal” and a specified rate of interest for return. Preferred Shares may be a useful instrument to give to passive investors. They are often issued for tax-planning reasons on the advice of an Accountant.
As always, you should get legal advice from a corporate lawyer before jumping into incorporation. Our lawyers can advise you on the why and how of incorporating your business. We can complete the incorporation for you to make the process as easy as possible.
Who Makes Decisions and How?
The individuals that make up the board of directors is very important. The board defines the direction that the company will take.
The shareholders elect the board, and so the shareholders have to trust that the board of directors will make good decisions. Shareholder agreements that establish who will make up the board are important. These agreements are also necessary to limit the powers of the board if shareholders prefer to keep certain decision making powers for themselves. It may set out certain higher percentages that are required for a particular vote depending on the importance of the decision being made, for example, borrowing money, purchasing assets, or terminating personnel.
Our lawyers can draft your Shareholder's Agreement to best suit the needs of your business.
Ongoing Legal Obligations
After incorporating, your business has an obligation to maintain certain documents and records. In exchange for the legal and tax benefits of incorporating, you are expected to keep your corporation up-to-date and in compliance with the law. There are three main things that every company is legally required to keep up-to-date:
a) Minute Book & Share Records
You are required to keep your company documents in an organized manner. A Minute Book must be maintained, holding the incorporation documents, Certificate of Incorporation, share certificates, debt instruments, by-laws, Unanimous Shareholders Agreement (if one exists), and Annual Returns. This must be kept at the Registered Office of the company and be available to be viewed by the public.
b) Company Updates
Anytime your company details change, for example when you want to add a new director or change your registered address, you have an obligation to file forms with the government and prepare corporate resolutions which officially approve the changes.
c) Annual Return and Resolutions
Each year, your company will need to file an Annual Return with the government and pay the associated fees. You will also need to prepare annual shareholder and director resolutions. These are all mandatory documents in order for your business to stay compliant. If you fail to file the annual return, the government can dissolve your company.
Our office can manage your Minute Book and automatically do your Annual Returns for you each year.
There are so many different legal issues and transactions that can arise in running your corporation. Some of these things include:
- Shareholder Agreements/ Unanimous Shareholders Agreements (USA)
- Raising funds & dealing with debt
- Rules for the Board of Directors
- Agreements for founding shareholders who are also employees
- Transferring shares
- Valuing shares
- Controlling Sale of shares (Buy-Sell Clauses)
- “Shotgun” clauses
- Policies regarding dividends
- Corporate promises to directors, officers & employees
- Employee non-disclosure agreements
- Solving problems between shareholders
Just to name a few!
Our lawyers have the expertise to advise you on all of these issues and the experience to guide you through it with as little stress as possible.
Buying or selling a business can be an exciting and also an overwhelming time.
There are many details to consider and usually requires the assistance of a lawyer to review and draft documents for you and to help you during the period of transition. You will often require the advice of many professionals such as a lawyer, accountant, business valuator, and so on. Our lawyers are here to help simplify this process and walk you through the necessary steps to owning or selling your own business.
In our experience, there are five key steps you should take when you are about to buy a business:
- Preliminary Research & Disclosure
- Decide on a Structure for the Purchase: Assets or shares
- What Price will be Paid, and When and How will that Amount be Given to the Seller?
- Negotiating all other terms
- Offers to Purchase and related closing documents
Each of these steps involves a lot of activity and information. For example, in the "initial research", you will be seeking disclosure such as:
- Financial statements, corporate tax returns (3 years worth), GST returns, source deduction declarations
- Lists of customers and suppliers
- List of employees, including a breakdown of salaries and years of service
- Details of any major contracts necessary for the operation of the business, including the lease of any premises
- List of all equipment and hard assets of the business
- Any related debts, licenses and liabilities
Our lawyers can help you navigate every step involved in buying or selling your business.
As you can see, there are many details and options to consider when starting a business, maintaining a business, buying a business and selling a business. We are here to help navigate what can be difficult and confusing terrain. We help simplify the process and help you to understand how to succeed. A corporate lawyer should be viewed as a valuable and essential part of your business “team” and we here at Kinetic Law want to help.
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