Hey guys!
In this post, we will keep digging into the question of "what is a corporation?" We are going to look at three practical features of a corporation.
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with a range of legal structures, and that includes corporations.
Last year, when we first got locked down, I was, of course, a bit shocked. As time goes on, I started thinking about giving something back to those around me. One idea was to create this blog as a source of credible, reliable information. In particular, I hope this first set of blog posts helps guys (and girls) who may be first-time entrepreneurs.
Incorporation is a powerful legal structure. It has both legal and business advantages as well as disadvantages, which we are going to introduce below.
It's all good, man! Let's get started!
Learn Something New Everyday
In a nutshell, a corporation is a 'legal person' created by the combination of applicable legislation and one or more persons' initiative. Incorporation is a powerful legal structure that has both legal and business advantages.
But, you may have questions: what exactly is a corporation, and what are the advantages of incorporation?
What is a Corporation
A corporation is a structure -- you may also refer to it as a 'legal form' --- for carrying out business activities.
Incorporation was historically justified as a means of allowing private individuals to pool risk. Sharing risk helped people to undertake distant journeys. (These long-distance trips were otherwise only possible for states.)
In today's world, there is a related orthodoxy. It holds that the corporate form enables business people to reduce transaction costs. The corporation also standardizes agreements between the various participants in a corporation (i.e. directors, executives, shareholders). These agreements are too complicated and expensive for individuals to articulate through private contracts alone.
Ultimately, a blog can't tell you *everything* that you need to know.
Still, I think that everyone deserves to know as much as possible about what they are dealing with when they incorporate their business. For that reason, I am writing up these rather detailed, technical posts.
The rest of today's post introduces three key features of the corporation.
Feature 1: Distinct Legal Person
At law, a corporation is its own separate and distinct entity.
The corporation has a unique legal identity. Thus, the corporation enjoys what is sometimes called 'legal personality or 'legal person-hood.'
The previous post talked about three theories for why corporations get a separate legal existence. The bottom line, tho, is that Canadian courts will treat a corporation as having a distinct identity. That means that the corporation's legal identity is separate from its owners, i.e., the shareholders. The corporation's legal identity is also separate from its management, i.e., the directors and officers.
A corporation's separate identity has several significant consequences.
Feature 2: Limited Liability
The corporation's separate identity results in limited liability for the owners. Let's think about this a little more.
In practice, the corporation's separate identity means that while the shareholders own the corporation through their ownership of shares, they do not own the corporation's property. Likewise, the rights and liabilities of the corporation are not the rights and liabilities of the shareholders.
A shareholder has limited liability because the corporation's distinct identity means that the shareholder's personal liability is limited to whatever amount he has invested in the corporation's share capital. Put more simply, the most the shareholder can lose is whatever he or she has put into the corporation.
(The word liability refers to both financial liabilities and legal liabilities.)
Feature 3: What Can a Corporation Do?
Another key feature of the corporation is the expansive range of activities that a corporation can participate in. This feature also relates to the corporation's legal person-hood.
Historically, individual corporations were created through the granting of a corporate charter by a national government. The corporate charter was essentially a mandate. It set out what the corporation could do. By extension, if a certain activity was not listed in the corporate charter, then the corporation was not legally authorized to participate in that activity. In Canada, acts outside the corporation's charter were referred to as ultra vires.
The law has changed, however. In Canada, corporate law now embraces a liberal approach to corporate acts. A corporation can own property, carry on business, possess rights, and incur liabilities. It can enter into contracts. It can sue or be sued. It can lend money, borrow money, buy insurance, and soon. The default assumption is now that there is not a need for specific authorization.
Today, if the founders of a corporation want to limit its activities, they can do so in the Articles of Incorporation. However, most corporations today do not tie their hands in this way.
Alternatives
You may now be wondering: "are there any other options for structuring my business."
Yes! There are most definitely other options. Here is a brief rundown.
Sole Proprietorship
A sole proprietorship is simply put a business owned and operated by a single individual. It can do business under the owner's name or under a trade name that the owner has chosen (subject to certain limitations.) The rules for a sole proprietorship will vary slightly depending on the province or provinces in which you intend to carry out business. For information on this structure, please check out our post.
Business Partnership
In a general partnership, each partner is personally liable for the debts, contractual obligations, and torts resulting from the partnership's operation. Also, the persons who own the partnership and the partnership itself are not separate entities at law. Therefore, the profits - or losses - of the partnership will flow to the individual partners as business income.
Cooperative
A cooperative is a legally incorporated corporation that its members own. The members also either use the cooperative's services or purchase its products. A cooperative can be either a for-profit or a non-profit enterprise. Depending on the principles and priorities of the owners, a cooperative can have many advantages. It is probably only worth looking into the cooperative structure if a large team with shared priorities and interests will be involved in your business.
Peace Out
What was this post all about??
Thanks for reading today’s post. It provided a high-level introduction to three features of the corporation.
The key point is simply that a corporation is a ‘legal person.’ If you are thinking of incorporating your business, there are quite a lot of details to nail down. I'm going to continue to write about this topic. See you in the next post!