What is a corporation?

Do you own a business in Canada and want to grow your business while protecting your personal assets? The business corporation is the most suitable legal structure, which is why so many Canadian entrepreneurs choose it.

From incorporation to day-to-day management, this article will show you how a corporation can change your business life by protecting your assets and optimizing your business structure.

Definition of a Corporation

A corporation, also known as a company, is a separate legal entity created under company law. It allows one or more individuals, known as shareholders, to hold shares that confer rights such as receiving dividends or voting at general meetings.

How does it differ from other legal business structures?

Here are the main differences between a corporation and other legal structures:

• Sole proprietorship: directly linked to the owner, who assumes all financial and legal risks.
• Partnership: responsibilities are shared among the partners, but this structure does not offer protection of personal assets.
• Limited partnership: combines limited partners (limited liability) and general partners (unlimited liability).

In contrast to these legal forms of business, a corporation protects its shareholders through limited liability, which limits their potential losses to the amount of their initial investment.

If you're looking to incorporate your business in Quebec, the partner lawyers at T2inc.ca can help with an easy and accessible online solution. Visit our services page and fill out an online request for more information.

How does a corporation work?

The operation of a corporation is based on a legal and organizational framework that ensures clear governance and protection of the parties involved.

Its organization is based on four fundamental pillars:

1. Incorporation legislation

Every business corporation is created by legislation, either federal (Canada Business Corporations Act) or provincial.

The incorporation act defines:

• The rights and responsibilities of shareholders, directors and officers.
• The legal obligations that must be met, such as:
  • Holding annual general meetings.
  • Prepare financial statements.
  • Compliance with tax and transparency requirements.
• Specific restrictions or privileges depending on the jurisdiction, such as:
  • Greater flexibility in Quebec for sole proprietorships.
  • National business name protection for federal corporations.

The Canada Business Corporations Act serves as a general framework that governs all activities of the corporation throughout its existence.

2. Articles of Incorporation

The Articles of Incorporation, often referred to as the "corporate charter," are filed at the time of incorporation and define the structural foundation of the company.

This essential document specifies:

• The legal name of the corporation, which must be unique and conform to standards.
• The types of shares the company may issue, such as:
  • Common stock (voting rights, variable dividends).
  • Preferred shares (priority for dividends and assets in liquidation).
• Authorized share capital, indicating the number of shares that may be issued.
• Directors, specifying their minimum and maximum number and general powers.

Articles of incorporation are often drafted with the assistance of professionals to ensure that they meet the current and future needs of the company.

3. General rules for internal operations

The by-laws detail the operational rules that govern the Company. They ensure consistent and structured management by covering :

• Meeting procedures:
  • Quorum required to validate decisions.
  • Voting rules at shareholder or director meetings.
• Directors' powers:
  • Control over strategic decisions, such as issuing shares or entering into major contracts.
  • Limits on financial authority (e.g., authority to borrow money).
• Day-to-day management:
  • Designation and responsibilities of executives (e.g., CEO, CFO).
  • Methods of communication between stakeholders (reports, minutes).

The bylaws are adopted by the board of directors and approved by the shareholders. They may be adjusted over time to reflect changes in the company.

4. Shareholder agreements for cooperation

Shareholders' agreements play an important role, especially in companies where several people hold shares.

This document, although optional, helps to prevent conflicts and clarify internal relationships and can include elements such as:

• Share management:
  • Terms and conditions for the purchase or sale of shares (e.g. pre-emption or compulsory redemption clauses).
  • Restrictions on the transfer of shares to unauthorized third parties.
• Distribution of profits:
  • Define dividend distribution rules based on shareholder priorities.
• Decision-making:
  • Establish thresholds for strategic decisions (e.g., unanimous approval to sell the company).
• Protection clauses:
  • Non-compete clauses to protect the company's interests.
  • Right of first refusal in the event of a share transfer.

The unanimous shareholders' agreement guarantees smooth management, even in the event of changes in the company's structure.

What are the benefits of a corporation?

The advantages of a corporation are numerous and can play a critical role in the success of your business.

Here are the key benefits that distinguish this legal structure and make it a strategic choice for business owners.

Reduced tax liability

One of the main advantages of incorporating a corporation is the possibility of benefiting from a lower tax rate than that applicable to individuals. This translates into a greater ability to retain a significant portion of profits, which can then be reinvested in the growth of the business.

At the federal level, eligible SMEs benefit from the Small Business Deduction (SBD), which provides a reduced tax rate on the first $500,000 of taxable income. In addition, several provinces offer additional deductions or tax credits that provide further tax assistance to incorporated businesses.

It's important to note that tax rates and benefits can vary based on a number of criteria, such as company size, industry, or province of tax residence. This underscores the importance of understanding the options available in each situation.

Less financial liability for shareholders

Unlike a sole proprietorship, where the owner is fully liable for the company's debts, shareholders in a corporation enjoy unique legal protections.

Shareholders' liabilities are limited to the value of their shares because the corporation is considered a separate legal entity. This means that creditors cannot seize the personal assets of shareholders to cover the debts of the corporation. But it also means that shareholders' financial risks are tightly controlled, giving owners greater peace of mind.

As a practical example, if a company runs into financial difficulties or is sued, shareholders will only lose their initial investment, with no impact on their personal assets.

The ability to accumulate income for later use

Unlike a sole proprietorship, where all income is taxed directly in the hands of the owner, a corporation allows you to strategically manage profits to optimize their use and tax impact.

Depending on your goals, you may choose to distribute a portion of the profits as dividends to shareholders for an immediate return on investment. Or you can allow the earnings to accumulate in the company, an option that offers both strategic and financial advantages:

• Tax optimization: by deferring the distribution of earnings, you can choose the right time to pay dividends. This can be advantageous when shareholders' personal tax rates are lower, or when it suits their financial needs.
• Strengthen the company's financial capacity: retained earnings remain available to finance various growth initiatives, such as:
  • Purchase of new equipment or technology.
  • Developing new products or services.
  • Expand into new markets.
• Build a financial reserve: by earnings in the company, you can build a reserve to deal with unforeseen events, such as a temporary drop in revenue, or to take advantage of business opportunities, such as a strategic acquisition or key investment.

No obligation to have a board of directors (provincial only)

The shareholder(s) of a provincially incorporated company, such as in Quebec, may, under certain conditions, decide not to create a board of directors or to eliminate one if it already exists. This option reduces administrative formalities while ensuring efficient management adapted to the size of the company.

If the shares are held by several persons, the shareholders must sign a "unanimous shareholders' agreement". If the company is owned by a single person, the document to be produced is called a "Sole Shareholder Declaration".

Simplified business financing

Corporations offer a wide range of flexible ways to raise funds for your projects. This flexibility makes the corporation particularly attractive to companies looking to expand rapidly.

They can finance themselves either by borrowing money from the bank or by issuing shares and bonds. To issue new shares, the company must obtain authorization from the Autorité des marchés financiers. Once this has been obtained, the company can receive funds without having to pay them back or pay interest.

Continuity of existence

A corporation continues to exist until it is dissolved or merged into another company. The death of the owners (shareholders) does not mean the end of the company.

A corporation has a life span independent of that of its owners. It continues to exist until it is dissolved or merged into another company, even in the event of the death of shareholders or the sale or transfer of shares.

This continuity is an important asset for family businesses or entrepreneurs who wish to ensure the continuity of their business beyond their own involvement.

T2inc.ca's partner lawyers can help you

As you've seen, a corporation is an ideal structure for entrepreneurs who want to protect their personal assets, take advantage of tax benefits and grow their business in a structured, professional manner.

Want to know how to incorporate a corporation in Quebec? Read our detailed article on the essential steps to incorporation and find out how our legal and tax partners can simplify the process for you. At T2inc.ca, our legal and tax partners simplify the process for you. Whether you choose federal or provincial incorporation, we're with you every step of the way to ensure compliance and optimize your business structure!

Contact us today to take advantage of our online services.