A corporation is a separate legal entity from the individuals who manage it. It owns the assets and has the liabilities, not the shareholders (or the directors). A corporation may own property in its own name; it may sue and be sued in its own name. It is the corporation who owns the business, not the shareholders (or the directors). The shareholders of a corporation own shares. Shares are a bundle of legal rights in a corporation. The rights of the shareholders are limited to the legal rights against the corporation, but they have no right to the assets of the corporation.
In a corporation, the managers are the directors and officers. The shareholders elect the directors. The directors have the power and legal authority to manage or supervise the management of the corporation. The shareholders, directors and officers of a corporation have specific roles and specific legal rights, duties and obligations. It is important to understand this distinction, particularly in a small corporation where the shareholders, officers and directors are all the same people (e.g. family-run businesses).
John and Mary want to operate a business to carry on a website hosting business. They each want to be the directors, officers and shareholders as they will running the business together. At the beginning, they will work out of Mary’s house and will not have any employees: they will do everything themselves. They file articles of incorporation with the government and then each purchase 50 common shares in the corporation (as the first directors named in the articles of incorporation, John and Mary have to also pass a corporate authorizing resolution approving the issuance of shares to themselves and certify that the corporation has received payment for those shares). As shareholders, they then elect themselves as ‘permanent’ directors. As directors, they appoint John as the President and Mary as the Secretary-Treasurer, among many other things.
As you can see, there are two people performing three or four different functions within the corporation.
In a small corporation such as this, the lines between shareholder, director, and officer often become blurred; however, it is important to remember that each position or component of the corporation (director, officer and shareholder) has a specific function and purpose in the corporation. While it may seem inefficient to adhere strictly to the differences between the roles, it is vitally important to do so as negative legal consequences may result in not strictly complying with the legal requirements.
|▪ Limited liability for shareholders, except where a personal guarantee is given||▪ The initial expense of incorporation|
|▪ Lower income taxes for income retained in the corporation||▪ The additional cost of roll-over of assets|
|▪ Possible income splitting with spouse and children (who are over the age of 18)||▪ Maintaining corporate records|
|▪ Corporate pension plans can be established||▪ Maintaining separate financial records|
|▪ Can establish a year end other than December 31st||▪ Cumbersome technical requirements for small businesses with few individuals involved|
|▪ A corporation does not die even when its shareholders die (perpetual existence)||▪ Directors may be faced with personal liability|
|▪ The issuance of shares allow silent partners||▪ Personal liability may occur from improper use of corporate name|
|▪ Ownership of shares is easily transferred (but corporate rules have to be followed)||▪ Losses in the corporation remain in the corporation|
|▪ Estate planning potential|
|▪ Enhanced capital gains exemption|
Business Names and the Requirement to Register under the Business Names Act (Ontario)
If a corporation carries on business under a name other than the corporation’s name, it must register the business name under the Business Names Act (Ontario). A business name registration under the Business Names Act (Ontario) is valid for five (5) years. The responsibility to renew the business name before the expiry date rests with the corporation – the Ontario government will not remind the corporation that the business name needs to be renewed.
Example: The corporation that John and Mary incorporate for their website hosting business is called “Ottawa Valley WebHosting Inc.”. If the corporation uses “Ottawa Valley WebHosting Inc.”, it does not have to register under the Business Names Act. BUT, if the corporation decides to use “WebHosting by John and Mary” this name must be registered by the corporation as the corporation is carrying on business in a name other than its corporate name.
This article contains general information about certain legal and other related developments. It is not intended to be a complete statement of the law and is not a substitute for legal advice. To receive legal advice, you must speak with a lawyer. No part of this publication may be reproduced without the prior written permission of Kimberley A. Cunnington-Taylor.