Setting Up a Corporation
After deciding to incorporate, you must begin the process of incorporation. Incorporating a business is a highly regulated legal process, so it is prudent to seek assistance from a lawyer. In this blog, we provide a high-level overview of the considerations involved in setting up a corporation.
1. Incorporate Provincially or Federally
You must first decide if you want to incorporate in Ontario only, or at the federal level. When making this decision, consider the following:
- Federal incorporation protects your corporate name nationally, in contrast to Ontario-only protection. However, it is more difficult to have your name approved nationally than within Ontario only.
- Federal incorporation allows you to register extra-provincially in any province under your corporate name, whereas an Ontario corporation looking to register extra-provincially may encounter name restrictions if their corporate name is already in use outside of Ontario.
- Federal corporations have lower registration fees, but incur higher long-term annual fees that do not apply to Ontario corporations.
- If timing is a concern, note that federal incorporation may take a few days whereas provincial incorporation may occur in as little as an hour.
- Federal incorporation may be preferred where carrying on business internationally, since international parties may not be familiar with provincial powers.
2. Corporate Name
You may select a specific name for your corporation or you can be assigned a number name on incorporation. The name for all corporations must include “Limited”, “Incorporated,” “Corporation,” or the French equivalent or abbreviation of any of these. Specific names require a NUANS name search to be provided on incorporation, and federally the name must be approved by Corporations Canada while number names are assigned by the applicable authority.
Pursuant to Ontario’s Business Names Act, a corporation may not carry on business or identify itself to the public in Ontario by a name other than its corporate name unless such business name is registered with the Ministry of Government Services. This registration operates as notice to the public that a business is operating under a name other than its corporate name.
3. Directors and Officers
A private corporation must have at least one director and offering corporations (offering shares to the public) must have at least three. All directors must be individuals, at least 18 years old, of sound mind, and not bankrupt.
Directors are elected by the shareholders. They have numerous powers, duties, and liabilities set out in the applicable provincial or federal act. If you are a director of a corporation, it is important that you familiarize yourself with these legal obligations.
Officers are appointed and supervised by the directors, and their duties are typically set out in the corporation’s general by-law. Officers manage the business and are subject to many of the same duties as the directors.
4. Articles, By-Laws, and Other Key Documents
The articles of incorporation, when filed with the appropriate government authority, create the corporation. The articles set out the basic information on the corporation, including its name and address, the number of directors permitted and the names of the first director(s), any restrictions on business, the classes and permitted number of shares, the rights and restrictions attached to the shares, any restrictions on share transfers or ownership, and any additional information.
Corporations also typically have by-laws covering the internal operations of the corporation such as meeting procedures, delegating signing authority, and setting the corporation’s financial year-end. By-laws must be approved by the directors then passed by the shareholders.
A corporation can also pass director or shareholder resolutions to conduct other business matters. Some resolutions require a simple majority of either directors or shareholders, others require a “special resolution” where two-thirds of shareholder votes are in favour of the resolution, and still other resolutions may require unanimous shareholder approval. Resolutions may be passed at directors’ or shareholders’ meetings or may be passed by a written resolution in lieu of a meeting provided all those who would have been entitled to vote on the matter at a meeting have signed the written resolution.
Any time a corporation has two or more shareholders, it is advisable to have a shareholders agreement in place. Shareholders agreements commonly provide for matters such as corporate governance, pre-emptive rights, transfer restrictions, and purchase rights.
You must decide how many classes of shares you will have and the rights and restrictions applicable to each class to be set out in the articles of incorporation. Where there is only one class of shares, these shares must have the following basic rights: the right to vote and receive the remaining property of the corporation on dissolution and, if it is a federal corporation, the right to receive dividends. Where there are multiple classes of shares, each of these basic rights must attach to at least one class.
You must then decide how many shares of each class the corporation is authorized to issue– either an unlimited number or a maximum amount. You should also consider if you wish to set restrictions on the shares, such as requiring approval by the board of directors or the shareholders prior to any share transfer. (Note: in order to be a private issuer for the purposes of National Instrument 45-106 Prospectus Exemptions, the corporation must be subject to restrictions on the transfer of securities either in its constating documents or a shareholder’s agreement)
There are many additional considerations involved in organizing your share structure, and we recommend speaking to your lawyer and your accountant to select a structure that will fit your business and financial needs.
Shareholders own the shares, and this gives them power to influence the corporation. However, the powers of each shareholder depend on the rights attached to the type of share(s) they own. For example, shares with voting rights can have a substantial impact on the corporation by voting on and passing resolutions at shareholder meetings, whereas non-voting shareholders are only permitted to vote on special matters set out in the applicable legislation.
At all times, the corporation must keep a list of all shares issued and who owns each share.
7. Initial Meetings
After incorporating, the corporation will hold a meeting of the directors to address matters such as enacting by-laws, adopting the forms of share certificates, and appointing officers.
The directors must then call a shareholder meeting, which must occur within the first 18 months after incorporation. At this meeting, the shareholders will elect directors, confirm (or modify or reject) the by-laws, and appoint an auditor or, alternatively, approve an audit exemption and appoint an accountant.
Any changes in the corporate information such as new directors, officers, or corporate head office resulting from the initial meetings should be filed with the applicable authority within the required time frame.
Now that you have successfully set up your corporation, you are ready to hit the ground running with your new business. However, don’t forget about your ongoing legal requirements.
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