So You’re a Startup: How to Incorporate
And so our So You’re A Startup series continues! Every week, we’re bringing you some more startup advice and answering another one of your startup questions. For So You’re A Startup number 9, we’ve decided to tackle incorporation. A big thanks goes out to McCarter Grespan for covering this huge topic for us.
Disclaimer
In the article below and in this paragraph, “you” and “your” refers to the reader, and “we” and “our” refer to the law firm of McCarter Grespan Beynon Weir LLP. The information in this article is general legal information and is supplied for educational purposes only. The information in this article is not legal advice and is not intended to be relied or acted on. If you are going to incorporate a corporation, you should first consult with a lawyer for legal advice that is specific to your situation. Although we have made our best efforts to ensure that this information is accurate and timely, we do not guarantee that it is either. By offering this information, we are not acting as your lawyers, and by reading this information, you do not become our client. We are not responsible to you or to anyone else for any loss suffered in connection with this article or the use of its content. We make no warranties or representations about this article or its contents. We do not accept any liability for your use of the information contained in this article.
Incorporation 101
Incorporation refers to the process of forming a corporation. A corporation is a separate legal entity unto itself. Each share in a corporation is an ownership interest in that particular corporation. A shareholder is the person or entity that holds shares in the corporation. Either an individual or another corporation may own shares in a corporation.
Why should you incorporate?
There are many possible reasons. Shareholders receive limited liability. A corporation is virtually perpetual, with certain exceptions, and does not cease to exist simply because a shareholder dies. There can also be certain tax advantages depending on the revenue and income of the particular corporation. A corporation is a good vehicle to hold intellectual property that is created by a number of people on a specific project. It is relatively easy to transfer shares in a corporation to others, and corporations can raise money by issuing shares to investors. Since a corporation is a separate legal entity, shareholders cannot sign contracts on behalf of the corporation unless authorized, and the corporation is not liable for the acts of individual shareholders.
What information do you need before you incorporate?
You can either have a number for your corporation or a name. There is virtually no difference. If you choose to have a name for your corporation you will have to conduct a name search to ensure that your chosen name is not similar to a name already incorporated in Canada. The name search costs approximately $50.00 and must be submitted with all other required documentation at the time of incorporation. If the search reveals that another corporation is already using your desired name, you will have to choose a different name. Corporate names are also required to have a legal suffix such as “Inc.”, “Ltd.”, “Corp.”, “Incorporated”, “Limited” or “Corporation” at the end of their name, and you should decide which suffix you prefer. There is no legal difference between them.
In addition to the desired name, you should know where you want the registered office of the corporation to be located. The registered office is the place where the corporation may be served with legal documents and where it may be required to maintain its corporate records. You should also know who will be the first director(s), and have their full legal name(s) and address(es) for service. The directors are responsible for managing the affairs of the corporation, and a corporation must have at least one director. Directors must be eighteen years of age or older and must be individuals (i.e. they cannot be another corporation). Directors cannot be bankrupt and cannot be of unsound mind. Directors can be shareholders in the corporation.
Additionally, you should know what officers you want the corporation to have and who will fill these roles. Officers carry out the day-to-day operation of the business, and typically include a president, secretary and treasurer. Directors and shareholders can be officers. Lastly, you should know who the shareholders are going to be, and how much of the corporation each shareholder will own. For example, if there are two shareholders, will they each own a number of shares that represent half of the corporation?
What is the process to incorporate a corporation?
In Ontario, a corporation is incorporated by filing Articles of Incorporation with the government and paying the required fee (which is approximately $300.00). Articles of Incorporation are like the “constitution” of the corporation, setting out the basic structure of the corporation. The Articles of Incorporation must be in a certain form, and must include certain information such as: the name of the corporation, the registered office address, the number of directors, the name(s) and address(es) of the first director(s), restrictions on the business of the corporation (if any), the classes and maximum number of shares that the corporation is authorized to issue, the rights and conditions attaching to each class of shares, the restrictions on the transfer or ownership of shares (if any), any additional provisions and the name and address of the incorporator(s). It is highly recommended that you speak with a qualified lawyer who can guide you through the process of filing Articles of Incorporation.
Once the Articles of Incorporation are filed and meet with government approval, the government will grant a certificate of incorporation, officially incorporating the corporation. The corporation now exists. However, the process is not finished yet. There are numerous post-incorporation steps that should be taken to set up the internal governance of the corporation. The first directors of the corporation typically adopt by-laws, which are constitutional documents that govern the internal procedures of the corporation. The first directors will also appoint the officers. The proposed shareholders will buy shares, and the first directors of the corporation will issue the shares in return for money. The shareholders must then elect (or re-elect) the directors, approve the by-laws and decide whether or not the corporation will have an auditor or accountant. If there is more than one shareholder, the shareholders should also consider entering into a shareholders’ agreement to govern their respective rights. There are many other post-incorporation steps that can be taken, and we have only set out the basic steps here. Again, the nuances are many and it is highly recommended that you consult with an experienced corporate lawyer so that the appropriate steps are taken. Failure to take the appropriate post-incorporation steps can be extremely costly in the long run. It is always more difficult and expensive to correct mistakes years later after they have become entrenched in the Corporation.
As you know, legal advice is always very dependent on the specific situation. We hope this gives you some insight into the process and helps you understand what you’re getting into, but definitely be sure to consult a lawyer when you decide it’s time to incorporate your startup!