A corporation is an artificial entity created by or under the laws of a Province. Corporation law (also referred to as company law) is the body of law that governs the formation, governance and dissolution of corporations. The corporation is the dominant form of business organization in Canada. Sole proprietorships and partnerships are other widely used non-corporate forms of business organizations. Although there are more partnerships and sole proprietorships than there are business corporations in Canada, the corporate form of organization is most often chosen for larger business operations, and the bulk of total business revenue is earned by incorporated businesses. Cities, universities, charitable organizations and other entities are often incorporated as well; however, corporation law is predominantly concerned with corporations that carry on business for profit.
The Nature of a Corporation
A corporation has 5 distinctive attributes: 1) a separate legal personality; 2) perpetual existence; 3) limited liability; 4) free transferability of an investor’s interest; and 5) centralized management. The pre-eminence of the business corporation is in large measure due to the presence of these desirable characteristics.
A corporation has separate legal personality in the sense that it is a legal person separate and distinct from its shareholders, directors and officers. A corporation may enter into contracts and own property in the same manner as a natural person. The corporation may also sue and be sued in its own name. Because a corporation is considered to be a separate legal entity, it may enter into contracts with its own shareholders. A corporation may also be convicted of a criminal offence provided that the criminal provision provides for a fine in lieu of imprisonment.
A corporation has perpetual existence in that it continues to exist until it is liquidated or dissolved. The death of a shareholder, even if he or she is the only shareholder, does not affect the existence of the corporation. Corporations therefore are a relatively stable form of business organization.
Shareholders who invest in a corporation enjoy limited liability in that they are not liable for the debts or other obligations incurred by the corporation. When a corporation goes insolvent, the shareholders will lose their investment (i.e., their shares in the corporation), but they will not be responsible for the debts of the corporation.
The corporate form of organization provides an ideal vehicle for investment by virtue of the free transferability of its shares. Unless a restriction is included in the corporate constitution, a shareholder may sell the shares without the consent of the directors, officers or other shareholders. The free transferability of shares in combination with the limited liability afforded to shareholders led to the creation of stock markets, where large volumes of shares are bought and sold. The existence of organized stock markets greatly enhances the liquidity of the shareholder’s investment. The business corporation therefore provides a mechanism for the accumulation of blocks of capital with which large projects can be financed, and a means through which the public can invest and participate in these projects.
Structure of Corporations
The structure of a corporation consists of shareholders, directors and officers. Corporations are subject to a centralized management structure in that the authority to manage the business is allocated to the directors. Directors are responsible for supervision of the business activities, the appointment of the officers and for broad policy decisions. Corporate officers are delegated responsibility for the day-to-day operations of the business.
Shareholders play a passive role in the management of a corporation. They are given no direct control over business decisions. They are, however, given the right to vote for directors at the annual general meeting of shareholders and have the right to vote on a limited number of extraordinary corporate transactions. Although the directors, officers and shareholders occupy distinct roles, an individual may act in more than one capacity. In the one-person corporation, all of these functions may be carried on by a single shareholder and director who is also the president of the organization.
Process of Incorporation
Under the Business Corporations Act model of incorporation statute, the incorporators must file with the registrar of corporations a statutory form called “Articles of Incorporation” together with a notice of registered office and a notice of directors. The Articles of Incorporation contain the corporate constitution. It must set out the name of the corporation, the classes of shares and the rights and restrictions pertaining to each class of shares, if there is more than one class, any restrictions on the transfer of shares and any restrictions on the business that the corporation may carry on.
Following the issuance of a certificate of incorporation by the registrar, the corporation comes into existence. The directors named in the notice of directors then hold an organizational meeting, issue the shares of the corporation and adopt by-laws to govern procedural matters and internal management.
Often the most difficult part of the incorporation process is obtaining clearance for the name of the proposed corporation. A corporate name must be unique and distinct from the name of all other existing corporations in the province of incorporation and may not conflict with the name of a federally incorporated corporation. The delay can be avoided if the incorporators choose to use a numbered corporation designation. The corporate name must include a suffix such as “Inc” or “Ltd” to alert third parties that the entity is subject to limited liability.
The primary source of information about the financial affairs of a corporation is the annual report containing the audited financial statements, which must be presented to the shareholders at each annual general meeting of shareholders. An auditor, who is an independent party who reviews and comments upon the financial information provided by the corporation, must also be appointed. To supervise the auditor’s work, to act as a channel of communication between the auditor and directors and to ensure the independence of the auditor, distributing corporations are required to have an audit committee of the directors, the majority of whom cannot be full-time employees of the corporation.
Notice of the annual meeting of shareholders of any distributing corporation must include an annual report and a proxy circular containing information about the corporation and the proposed slate of directors. The circular must contain sufficient information on any transaction which requires shareholder approval so as to enable a reasonably intelligent shareholder to assess the proposed changes. The provincial securities commissions must be notified of any sale or purchase of shares transacted by the directors and officers of a distributing corporation.