Hey guys! In this post, we are going to dig deeper into more practicalities around the question of “what is a corporation.”
I am a lawyer and have been doing this for more than ten years. I have worked with a range of legal structures, and that includes corporations.
In a nutshell, a corporation is a ‘legal person’ created by the combination of applicable legislation and the initiative of one or more natural persons. Incorporation is a powerful legal structure that has both legal and business advantages. In the last post, we talked about limited liability.
But, you may have questions about what exactly it means to run a business through a corporation. I am going to introduce a few key points in this post.
It's all good, man.
Learn More
Last year, when we first got locked down, I was, of course, a bit shocked. As time goes on, I started thinking about how I can give something back. One idea was to create this blog as a source of credible, reliable information for first-time entrepreneurs.
Incorporation is a powerful legal structure that works well for some but not all entrepreneurs. It has both legal and business advantages as well as disadvantages.
Ultimately, a blog can't tell you *everything* that you need to know, but I do believe in the old phrase: "knowing is half the battle." I am writing up these rather detailed posts for you to learn as much as possible about what you are dealing with when you incorporate your business.
Feature 4: Multiple Owners
Canadian corporations can potentially have an unlimited number of different owners. The owners of a corporation are shareholders. Shareholders own a share of the corporation's equity.
Your business may still be in the start-up stage. But, the possibility of having numerous owners can be important, both at the beginning and as your business grows.
Ownership through shareholdings also makes it make it relatively simple to transfer ownership in the business. Why? Because the owners of shares may simply sell those shares either to another shareholder or back to the corporation.
Feature 5: Brand Building
The corporation's distinct legal identity has numerous consequences, as you might already know. Many of these consequences are advantageous for the shareholders.
One important consequence is that a corporation has no expiry date. Instead, a properly managed corporation may enjoy perpetual existence.
Furthermore, a corporation's name is protected by law (but this protection only applies in the jurisdiction where the corporation is registered.) A federal corporation benefits from name protection across all of Canada. A provincial corporation, otoh, will only have its name protected in its home province.
The combined significance of indefinite existence and corporate name protection is that incorporation creates a platform for building a brand.
Feature 3: Multiple Actors
Finally for today, a defining characteristic of the corporation that it is comprised of multiple actors.
Yes, a single person can theoretically act as shareholder, director, and officer of a corporation. However, this is very much the exception.
Even if a single natural person occupies all three roles he still needs to understand what role he is acting in. You might think of this in terms of knowing which "hat" you are wearing when you make decisions or take action.
Understanding and properly documenting the corporation's multiple actors is especially important if the corporation intends to issue additional shares or bring in outside investors. Even if outside investment is not anticipated, it is important to keep track of the "hats" for shareholders, directors, and officers (i.e. officers are seniors managers.)
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
A business partnership is an arrangement between two or more persons who share the business' profits and liabilities. In a general partnership, each partner is fully personally liable for the debts, contractual obligations, and torts resulting from the partnership's operation, just as in a sole proprietorship. 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.
In light of the above factors, it is generally less expensive to administer a partnership than a corporation. A partnership has some of the same characteristics of a sole proprietorship. But, because it is inherently going to involve more than one person, there is added complexity. In particular, a properly run partnership should have a partnership agreement, which should be properly drafted by a lawyer. And, prior to executing the partnership agreement, the partners should have at least had an opportunity to receive their own, independent legal advice.
A partnership agreement will cover a wide range of issues, such as the investment that each partner is making in the business, each partner's role, an agreed upon plan for dissolution of the partnership, and etcetera.
Cooperative
A co-operative is a legally incorporated corporation that is owned by its members who also either use its services or purchase its products. A cooperative can be structured as either a for-profit or a non-profit enterprise. Depending on the principles and priorities of the owners, a co-operative can have many advantages. Very generally, it is probably only worth looking into the co-operative structure if a large team with shared priorities are going to be involved in your business.
Peace Out
Thanks for reading today’s post. It provided a high-level introduction to three additional features of the corporation.
The key point is that a corporation is a legal person with a distinct identity and that this may have a number of advantages. But, the corporation is made up of at least three types of actors, i.e. shareholders, directors, and officers. Each of these roles entails specific rights and responsibilities.
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!