Articles of Incorporation 101
The purpose of this article is to help business owners understand what Articles of Incorporation are. Understanding what Articles of Incorporation are and how it impacts your business is essential to understanding corporate law and its direct impacts on your business.
This article is written specifically for entrepreneurs who are looking to incorporate their business for the first time. However, if you currently have an incorporated business and you completed the incorporation process either on your own or through a tech solution, you may also find that this article may benefit you.
Articles of Incorporation
Articles of Incorporation are part of a legal document that is submitted to either the provincial, territorial, or federal government which registers a business as a corporation within Canada. Having this type of business structure separates the business from its owners, creating a separate entity. This is important particularly if the business is being subject to any legal action or debt recovery. Most provinces in Canada require directors to be Canadian residents, which are referred to as Canadian-controlled private corporations (CCPC). Non-Canadian residents can also be directors of the corporation, however, in most instances, provinces will still require the company to have an attorney for service or someone in the province to be able to receive mail and more, on behalf of the corporation.
What is included in the Articles?
Articles of Incorporation include specific information for all corporations. They include the name of the business, head office location, and restrictions. An example of Articles of Incorporation for an Ontario corporation can be found here.
Business Name
A business name is always included in the Articles. Usually, the business name is a numbered company such as 1234567 Ontario Inc., 1234567 Canada Inc., etc., however, it is possible to have a named corporation, such as ABC Company Inc.
Directors and Citizenship
All directors names and their addresses must be included in the Articles. Most provinces will require directors to be Canadian residents. However, when this is not the case, most provinces will require an attorney for service or someone in the province to be listed. Residential addresses for all directors are required to confirm residency status. Next are the officers. In an owner-managed business, it is common for the shareholder(s), director(s), and officer(s) to be all the same. For example, Tom is the CEO of 123456 Ontario Inc. Tom is also listed as a director and a shareholder on the Articles. However, officers manage the operations of the business and therefore, the decision to select them should not be taken lightly.
Head Office
The Articles must include the corporation’s head office address. The head office of the corporation needs to be located in the province or territory in which the business is being registered.
Restrictions
Any restrictions that apply to the business must be included in the Articles. Restrictions generally relate to the company’s share structure and share transfers. Restrictions on share transfers allow shareholders to control who can become a shareholder in the corporation. Having this embedded in the Articles makes sure that changes cannot be made without updating the Articles with the government.
Incorporation
Incorporation refers to the process used to form a company or a corporate entity. It is how a business is formally organized. Incorporations are legal entities where the company’s assets and income are separate from its owners or investors. Corporations can be found all over the world and are usually identified by using “Inc.” or “Limited (Ltd.).”
Incorporation vs Sole Proprietorship
Incorporations are different from sole proprietorships in a few ways, particularly in their legal structure. In a sole proprietorship, the owner of the business does not differentiate between his or her earnings and the earnings of the business. Both incorporations and sole proprietorships can write off expenses to the business, however, in an incorporation, the company keeps the write-offs, whereas the write-offs are kept by the individual owner in a sole proprietorship. Sole proprietorships are the easiest type of businesses to form, and therefore, many businesses operate under this type of business structure. As already mentioned, incorporations, on the other hand, separate the business’ profits and assets from that of the owners or investors. By incorporating your business, you are registering your company with the government which allows you to benefit both financially and legally. For example, with an incorporated business, the owner’s assets are protected if the company is facing a lawsuit and from debt incurred by the company.
There are both pros and cons to either of these business structures, which are outlined below:
Incorporation
Pros
- Limited liability: a corporation is a separate entity from its owners/shareholders.
- Incorporating a business allows you to pay yourself in the most tax-efficient way
- Incorporating your business gives your business a certain amount of credibility. This is particularly true if you are applying for a grant or looking for investors.
Cons
- The cost of incorporating your business is more than registering as a sole proprietorship. The cost includes both the initial registration fee and the costs to file a separate tax return. This cost can also include hiring a lawyer.
- If your business loses money, the lost stays with the business. This means you are unable to claim these losses personally. You can only write off the amount you initially invested in the company.
- There is more paperwork involved if you incorporate your business. There is legal paperwork that is required to be filed each year including an annual return, a corporate tax return, and your minute book.
Sole Proprietorship
Pros
- Complete control and flexibility to run your business as you see fit
- Creditors are more likely to extend credit to you because of your unlimited liability
- You receive all of the business’ profits
Cons
- You are personally liable for all business debts
- Creditors can go after your personal property if your business’ assets are not enough
- Since the business is dependent upon one person, it is more difficult to raise capital on a longer-term basis
It is important to understand When Should You Incorporate Your Business?. Not all businesses benefit from being registered as a corporation.
Goodlawyer’s Legal Innovation Strategist, Amy Grubb further outlines the pros and cons of incorporating your business in our Dear Amy YouTube Series here.
How can a lawyer help?
Given that the process of incorporation is more costly than registering as a sole proprietor and you can incorporate your business on your own, it is fair to question why you would hire a lawyer to incorporate your business. Yes, choosing to incorporate your business without consulting a lawyer may prove to be cheaper at first, however, hiring a lawyer does have its benefits.
To start, the Articles of Incorporation is not an easily understood document and the process to obtain one is just as daunting. There are many factors to consider when incorporating your business, as we already discussed, and although some are quick simple, such as a shareholder’s address, other factors can prove to be more difficult, for example allocating shares and setting a fiscal year-end.
Often overlooked when an individual registers their corporation on their own, is the company’s share structure. Unless you have a simple business structure, there are different classes of shares which each have their own purpose. For example, some shares are set up for voting while other shares are used for receiving dividends. Also, some shares may be for family members and other shares could be used to be sold to investors. Each set of share classes should be set up with its special rights and restrictions which would be outlined in the Articles. However, when many people incorporate their business online without the advice of a lawyer, they only input one type of share, and changing your company’s share structure after it has been registered can be costly later on. Consulting a lawyer to discuss share structure will allow you to plan for your company’s future and will also allow you to save money in the long-term.
When you incorporate a business, an annual report is required. An annual report tells the government that the business is still operating. Failing to report even one annual report can result in your business falling out of good standing if you miss two, your business is dissolved (your business no longer exists). Although it is possible to have a dissolved company reinstated, it is a complicated process that is not only time-consuming but expensive. If you choose to incorporate your business with a lawyer, you have the option to have your company’s books kept with the lawyer, meaning that they will file your annual report, your company stays in good standings, and there is no interruption to your business.
Incorporation Options in Canada
There are three different ways in which you can incorporate a business. You can choose to incorporate your business on your own through the government, you can choose to use a tech-based solution, or you can hire a lawyer.
Do It Yourself
You can register your business as a corporation through the government. Usually, this is done on the government’s website following their instructions. Each province and territory and the federal government has their independent website for you to use. Remember the business needs to be registered in the location in which it will operate.
Tech-Based Solution
There are a variety of online incorporation options available. Some are web-based forms that make the application form into a step by step, guided questionnaire. This is a great way to save time if they operate in your region and support the corporate structure you’re looking for.
There are three main drawbacks to these solutions. First, they are not very flexible, meaning they only work for certain corporate structures in certain provinces. Second, they’re more expensive than DIY. Finally, it can be a risky move for a new business owner that doesn’t have a detailed understanding of the options available. If a change is needed to satisfy future investors or reduce reporting requirements, it might require dissolving the company and incorporating in a new structure.
Goodlawyer offers an in-between option that allows people to talk about the goals of their business with a corporate lawyer before setting up their structure. This allows business owners to use any corporate structure in any province with confidence that the structure won’t need to be dissolved in a year or two. Goodlawyer is more expensive than DIY but far less expensive than using a law firm.
Law Firms
Many law firms specialize in helping business owners with their business’ operations. Although sometimes more expensive, some business owners will seek the advice of a lawyer when incorporating their company. A lawyer can help you navigate the complexity of incorporating a business, ensuring it is done correctly the first time.
