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Lawyers are often asked by their clients - should I incorporate? In some ways this is putting the legal cart before the horse. Perhaps a more appropriate first question would be - what is a corporation?

A bit of historical background often assists in answering this question. The legal phenomenon of corporations as we now know them, has its origins in the l8th and l9th century business world of the United Kingdom. Business people at that time commonly wished to enter into ventures which involved shipping to and from exotic ports of call. However, they did not wish to do so at the risk of losing everything they owned. The risk could be quite great at that time, given small wooden ships were being sent half way around the world to pick up a couple of tons of spices and return them back to England. It was decided at that time that business people could create bodies which are similar to what we now call corporations and "limit" their liability to the worth of that corporation. This meant that if the ship was lost at sea and the business loss or debts exceeded the value left in the corporation, owners would not be personally liable for the balance of these debts and would not therefore lose their houses, farms, and other assets.

While most business people are not subject to the gales of the South Pacific in the l990s, they are subject to the whims and problems of creditors, bankers, and customers. The idea of limiting the liability of a business to its assets remains the major reason for incorporating in the Province of Ontario. The word "limited" as part of a company name as well as the words "limitee" or "incorporated" or their abbreviations all are meant to inform anyone dealing with these bodies that the liability of the business is limited to its assets and that they will not be able, generally, to pursue claims against this company beyond those assets; that is, they will not be able to sue the individuals who are the "owners" of the business for their homes or their personal assets.

This separate status with respect to liability is why lawyers often say that a corporation is a "person" in law; that is, it is a separate person for the purposes of suing and being sued, buying and selling, and doing business in general. Although a corporation is said to be a separate person, of course, in reality, this is simply a legal fiction and the corporation cannot do anything unless it is directed and authorized by the people who are behind it.

Within a corporation, there are several roles which are defined by Legislation. The most common of these are as follows:

  1. Directors - The directors of the corporation are the parties who authorize what the corporation can do from time to time. They meet annually to review what the corporation has done over the last year. It is becoming increasingly common to sue directors of corporations where their acts are seen to be improper, and directors must therefore be careful that they know what their corporations are doing from time to time.
  2. Officers - The officers of the corporation are generally known by titles such as President, Vice-President, Treasurer or Secretary. Although names like President sound important and full of authority, in fact the officers generally do not have much power in the corporation unless it is specifically given to them by its by-laws which are authorized by the directors.
  3. Shareholders - The shareholders are really the owners of the corporation. They own "shares" or portions of the assets of it, and must generally authorize its activities, expenditures, and loan agreements.

Nearly anyone may be either a director, officer or shareholder of a corporation separately, or they may hold all three or any two of these posts. In fact, it is quite common to have a one-person corporation in which an individual is the only director, officer and shareholder.

Aside from the protection of the personal assets of the directors, officers and shareholders of the corporation, there are other reasons for considering incorporation as a method of business operation. Some of these are the following:

  1. Prestige - It may be that the business will have more credibility in dealing with governmental bodies or in applying for loans if it appears to be more substantial because it is incorporated.
  2. Taxation - Depending on the income of the business, it may be possible to defer taxes substantially because of the combination of the effect of the Income Tax Act and accounting methods used by corporations. (It is strongly recommended that if this is a reason for incorporating, a comprehensive accountant's opinion be obtained prior to making any decision to incorporate.)
  3. Ease Of Passing On Ownership - If a business is operated through a corporation, it is usually easier and cheaper to transfer ownership to new parties without disturbing any of the structure or method of operation of an existing business than in a non-corporate setting.
  4. Family and Tax Planning - Possibly only part of the ownership in a business is to be transferred to a family member and part to some other person or it may be that there is a desire to pass on only some profits to a family member without ownership. The structure of a corporation can make this easier than it might otherwise be under another business form.
  5. Profit Sharing - The corporate structure creates a method for rewarding key employees by means of certain types of shares which may allow a form of profit sharing without actually transferring ownership.

As mentioned above, the real owners of the company are the shareholders, and although there are many kinds of shares, the most common type of share to hold in a company is in fact called a "common" share which is a share in the value of the company; that is, the total of its assets less its liabilities. If there are four owners of a company, and each of them owns one share, they will each own 25% of this value.

One of the major criteria to be taken into account when deciding whether or not to incorporate, is the cost of incorporation itself. Any person deciding whether or not they should incorporate, should carefully assess the legal and accounting fees not only for initially incorporating, but annually, since the corporation will be required to file annual minutes and file not one, but two additional tax returns.

Corporations can come to an end by means of a process called "winding up " which is simply a method by which certain documents are filed bringing the corporation to an end. Debts of course must be accounted for at this time and the winding up process cannot be used as a shortcut for avoiding these.

We would be pleased to speak to anyone in the Midland/Penetanguishene/Georgian Bay area interested in corporations on an individual basis, and to answer their questions and concerns on this topic. We hope this document has been helpful to you.


The foregoing articles are meant for informational purposes only and are not to be taken as legal advice. In the case of any questions, issues or needs arising from the above please contact us at Admin@deacontaws.com, Phone: (705)526-3791 or Fax: (705)526-2688



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