The process of incorporating is an essential step for many early-stage businesses. This article explains the significance of creating a corporation and the relevant process at both the federal and Québec provincial levels.
Corporations: Overview
While the two terms are often conflated, a corporation is not the same thing as a business:
- a corporation is a type of legal entity through which business activities may be carried on, and exists separately from the individuals who carry on these activities;
- a business can be defined as a series of activities carried on to generate profit, and can be carried on without a corporation.
For example, someone selling lemonade from a lemonade stand on the sidewalk may have a business — the activity of selling lemonade — but is not likely carrying on that business through a corporation. Instead, the individual selling lemonade would be considered a sole proprietor, operating the business in their individual capacity; any profits generated by the business would be included in their personal taxable income.
The process of incorporating a business creates a legal entity separate from the people who own, run, or are employed by the business — its shareholders, directors, and employees. Corporate “ownership” is vested in shareholders; corporations issue shares to shareholders in exchange for shareholders’ contribution to the corporation. Shareholders are then granted the right to vote, receive dividends, and receive residual assets when the corporation is wound up.
Because corporations’ legal personality is separate from that of their shareholders, shareholders are typically not personally liable for the debts, obligations or acts of the corporation. This is one of the chief advantages of incorporation: this separate legal personality creates a barrier that shields shareholders from lawsuits. Only the corporation can be sued for its actions, unless the individuals
acting for the corporation — shareholders, employees, or others — are personally at fault. Disregarding the corporation’s separate legal personality in order to hold its shareholders liable in some way is referred to in law as “piercing the corporate veil” and occurs only in exceptional circumstances, e.g., to rectify situations of fraud.
Once set up and registered, corporations must meet certain initial and ongoing requirements. They must, among other things, keep corporate records including the articles and bylaws of the company, any unanimous shareholder agreements, meeting minutes and resolutions of shareholders and directors, a securities register (a list of issued shares and their holders), and other documents required by law.
Major Differences between Federal and Provincial Incorporation
The process of incorporating a business can be done at the federal or provincial/territorial level. Natural or legal persons (i.e., people or other corporations) can act as founders to incorporate a business; the relevant statutes are the Canada Business Corporations Act (CBCA; for federal corporations)and Québec’s Business Corporations Act(QBCA; for Québec provincial corporations). There are also registration (publicity) requirements under the Act respecting the legal publicity of enterprises (Québec). It may be useful to think of registration as a passport; it represents a license to do business in the jurisdiction where a business registers.
The most important considerations for incorporating a business are typically the location of head office and the territorial scope of operations: where and how does the company want to do
business?
The first key difference between federal and provincial incorporation is that federally incorporated companies can operate across the country and establish a head office in any province. Provincially incorporated companies must maintain a head office in the province where they are incorporated. Both types of corporations must still be registered in the province(s) where they maintain their head office or satellite offices.
Another important consideration is the choice of name: corporate names are heavily regulated in Canada. It is also possible to operate using a numbered company rather than a distinct name. Federally incorporated companies use the National Business Name Search (“NUANS”) system. Some provinces also use this system; Québec has its own name registration system that is maintained in the Enterprise Register. Note that federally incorporated businesses operating in Québec still have to register with the Enterprise Registrar and conform to Québec name requirements.
A business may only incorporate under a single statute (i.e., it must choose between the federal CBCA or a single provincial statute, such as the QBCA); however, it can still register to operate in other provinces. Note that the rules for registration will vary by province: this Government of Canada website provides helpful references for each one. Generally, registration is only required in places where a business has a “brick and mortar” presence (e.g., factory, offices, store) or “boots on the ground” (employees). In Québec, this includes having representatives with offices, a PO box, a phone line, or who carry out activities for the purpose of profit (see the Registrar website).
Finally, there are residency requirements for directors of federal corporations but no equivalent for QBCA corporations: at least ¼ of the directors for a federal corporation must be Canadian residents.
Practical Considerations
Doing business
If a business plans to generally operate in a single province, then provincial incorporation can suffice. This does not necessarily restrict businesses from selling goods or services in other provinces. However, establishing new offices, facilities or employees in another province will require registration.
If a business plans to operate nationally and/or internationally, particularly where offices will be established in multiple provinces, then federal incorporation may be preferable. Federal corporations must still register in at least one province (where the head office is located) and will also need to register in other provinces where offices and employees are maintained.
For example, a QBCA business that sells goods or services in Ontario, or a CBCA business with its head office in Québec that sells goods or services in Ontario, might not be required to register there as well. Specific advice in this regard should be sought from a lawyer.
Names
Name protection will vary by province. Québec has its own database that can be searched for free at Registraire d’entreprises (click FIND AN ENTERPRISE). A name registered in Québec will only be protected in the province.
Federal corporations, as well as some provinces, use the NUANS system mentioned above. This may offer increased name protection through harmonized use by different jurisdictions (i.e., a name can be protected at the federal and provincial level using this system). Federal corporations will still need to do a name search in jurisdictions that do not use NUANS (such as Québec).
Note that obtaining a corporate name does not, in and of itself,grant to the corporation the right to use the name as a trademark.
Directors
As mentioned above, at least ¼ of the directors of a federal corporation must be Canadian residents. If there are less than four directors, at least one must meet this criterion. Québec corporations have no such requirement.
Incorporation needs will vary from business to business. Answers to specific questions should be determined with the advice and assistance of a lawyer.