Legal Brief for April, 2012

What is a Corporation?

In last month's Legal Brief we looked at a second common form of legal structure for a business - that of a partnership.  This is a form that many established businesses use for temporary ventures with other businesses.  In this month's Brief we will look at another common form of business structure - that of a corporation.

A corporation can be formed only pursuant to laws passed by either a provincial government or the Government of Canada.  In Alberta the governing law is the Business Corporations Act.  There is a similarly named act at the federal government level as well, so when deciding to incorporate the first decision to make is whether to incorporate "provincially" or "federally".  If your business is going to be operating only or primarily in Alberta, then it is best to incorporate in Alberta.

A corporation has three levels to its sructure.  The 1st level is that of shareholders.  Shareholders are the ones who actually own the corporation.  Shareholders can be individuals or other corporations.  There can be different types of shares.  The most common type of share has the right to one vote per share and the right to receive payments from the profits of the corporation, known as dividends.  These shares are usually known in fact as "common shares".  Another type of share is known as a "preferred share".  These shares do not have any voting rights, but often are entitled to receive a fixed amount payment each year (dividends are always discretionary) and have a "preference" on the assets of the corporation over the rights of holders of common shares.

The 2nd level of the structure is that of directors.  Directors are elected or appointed by the shareholders, and are responsible for the general oversight and direction of the business of the corporation.  They are generally appointed from year to year, and can be from the ranks of employees of the corporation or from outside.

The 3rd level of the corporate structure is that of officers.  Officers are appointed by the directors.  The officers are responsible for the day to day operations of the corporation.

Corporations are used by businesses both large and small.  They are a valuable form of business structure for small businesses because they provide the benefit of what is known as "limited liability".  If a corporation suffers a financial failure, and has debts owing, the only recourse that a creditor has is to sue the corporation.  The creditor cannot sue the shareholders of the corporation.  Hence, the personal assets of the shareholders are protected from liability for the debts of the corporation.  There are also a number of tax deductions and writeoffs that are available to corporations that are not available to individuals carrying on business in the form of a propriertorship.

The Province of Alberta currently charges a fee of $250.00 to issue a Certificate of Incorporation.  This fee is the same whether it is a small private business being set up by a couple of friends or by a large entity such as EnCana setting up a new subsidiary.  There are certain forms required to be filed with the government in order to become incorporated.  These forms can be completed and filed by an individual on their own, or by retaining a lawyer.  Once incorporated, there is a requirement to file a document each year on the anniversary of the incorporation date providing a listing of the current shareholders and directors of the corporation.  This is known as an Annual Return, for which the Province currently charges a $30.00 filing fee.  A corporation can be terminated by a voluntary act of its shareholders (known as a "dissolution"), or by the Registrar of Corporations if the corporation fails to file Annual Returns for two consecutive years.