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In Canada, there are many forms of business structures, including corporations, partnerships and sole proprietorships. As businesses commence operations, or grow and evolve, owners and managers need to determine which structure is appropriate. For those who are considering starting a business, or changing the structure of an existing business, advice from a business lawyer and other relevant advisors is recommended. This article will look at the distinguishing characteristics of a corporation.

Understanding corporations

In Canada, there are many forms of business structures, including corporations, partnerships and sole proprietorships. As businesses commence operations, or grow and evolve, owners and managers need to determine which structure is appropriate. For those who are considering starting a business, or changing the structure of an existing business, advice from a business lawyer and other relevant advisors is recommended. This article will look at the distinguishing characteristics of a corporation.

What is a corporation?

The majority of commercial activities carried on in Canada are conducted through corporations. In Ontario, a corporation is both a person and a separate legal entity, distinct from its owners and managers. The owners of a corporation are called “shareholders”. Like natural persons, corporations can own property, enter into contracts, possess various rights and be responsible for a variety of liabilities. Since the corporation and its shareholders are separate legal entities the business and property of the corporation is not the business and property of the shareholders. Similarly, the rights, duties and obligations of the corporation are not the rights, duties and obligations of the shareholders.

Corporations have traditionally been considered the safest business entities from which to operate a business. The main reason for this is because corporations generally protect one’s personal assets from creditor actions. Corporations also provide numerous tax advantages, including favourable tax rates and treatment. Finally, the ability of a corporation to offer shares allows it to raise capital in an efficient manner, which is important as capital is the lifeblood of a corporation.

Shares of a corporation can be obtained in exchange for money, property, or past services, which then belong to the corporation. Shareholders of a corporation are said to have “limited liability”. This is because the extent of a shareholder’s exposure to loss in connection with their shareholdings in a corporation is limited to the value of the assets the shareholder provided in exchange for the shares of the corporation owned by that shareholder. In the event that the corporation is unable to satisfy its debts as they become due, any creditors of the corporation can only demand payment from the corporation and look to the assets of the corporation, not the shareholders or the shareholders’ assets. The shareholders will own shares that have no value and will have lost their investment in the corporation, but the amount that they paid for their shares is all that they will lose. However, shareholders may be required to make payment to creditors of the corporation if the shareholders have personally guaranteed to pay the debts of the corporation to its creditors. These obligations arise because of the guarantee, not because of the guarantor’s position as a shareholder.

As indicated above, corporations are artificial legal entities, and therefore, corporations can both sue and be sued. Further, corporations have perpetual legal existence. A corporation is dissolved only if the requisite majority of the shareholders resolve that it should be, if a Court orders the corporation be dissolved, or if the law under which the corporation was created dictates that the corporation be dissolved because it is inactive or has breached certain statutory provisions.

A consequence of corporations being separate legal entities distinct from their owners (the shareholders of the corporation) is that the income generated by the corporation is determined at the corporate level, not at the shareholder level. Corporations must pay tax on their income separately from the tax that shareholders have to pay on their incomes. The separate legal identify between the corporation and its shareholders also means that shareholders cannot treat the income or loss of the corporation as the shareholders own personal income or loss. In the event that a corporation has any after-tax income, the corporation may decide to pay some of this after-tax income to its shareholders as dividends.  Shareholders will be required to pay tax on any dividends that they receive. However, if the shareholders of a corporation are another corporation, dividends may be received tax-free.

Conclusion

There are many options when organizing a business in Canada. A corporation has some advantages and provides the shareholders some protection against liability and financial loss. If you are considering incorporating your business you should seek legal advice in order ensure the best interests for you and your business.
Adnan Chahbar is an Associate with Siskinds Business Law Group. His practice is focused on advising individuals on commercial issues including incorporation, corporate structuring and restructuring, purchase and sales and succession planning. He can be reached at: adnan.chahbar@siskinds.com, 519-660-7804.

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