Toronto Lawyer - Legal Aspects of Incorporation - Notes

These speaking notes are intended to provide general information only. These notes do not in any way constitute the provision of legal advice and do not in any way create any lawyer-client relationship. If you require legal advice, you are urged to contact directly a qualified licensed legal professional to assist you.

Dear Entrepreneur:

The following are my presentation notes from the first ever Toronto Business Development Centre Networking Event on November 19, 2003. The event brought entrepreneurs together with like-minded professionals to exchange ideas and network. I understand that over 70 entrepreneurs participated in the event! I presented on the legal aspects of incorporation to a very enthusiastic audience who asked some great questions. I hope you find my notes to be educational.

Regards,

Albert



1. The Implications of Incorporation

* The act of incorporation creates a new and distinct legal entity separate from the incorporator; the company is a legally different entity than its shareholders and directors.

* Incorporation is analogous to the act of giving birth. Your “child” is a distinct legal person with the ability to do the following in its own name:

o Buy and sell assets;

o Acquire debt;

o Enter into contracts;

o Sue or be sued; and

o Be charged with a criminal offence (most commonly environmental offences)

* To continue the company as a child analogy, this child has two types of “parents”:

o As a shareholder, you “own” the child;

o As a director, you “control” the child; and

o Being a shareholder and being a director are legally different concepts. Shareholders are owners of the company and directors control the company. There are also different tax consequences to being a shareholder versus a director. Please consult a qualified licensed accountant for more information.

* The company has a continuous existence and continues to exist even after its original incorporators and shareholders have passed away.

* Business owners refer to a company as “my company” but, legally, it is a distinct legal entity, which presents many advantages and disadvantages not otherwise found in sole proprietorship or partnership structures.

2. Why Should I incorporate?

* Liability protection

o It has been estimated that Wal-Mart is sued every 90 seconds in the United States! If Wal-Mart were not incorporated, these suits would bankrupt its owners quite quickly;

o As a general rule, shareholders and directors are not liable for the company’s debts and liabilities. To continue the company as a child analogy, if a child broke vases in a China shop, his parents would be liable in the “real world.” However, legally speaking, a company’s shareholders and directors are not generally liable for the debts and liabilities a company incurs;

o Generally, as a shareholder/owner of the company, one is not personally liable for the company’s debts, provided the shareholders did not personally guarantee the company’s debt. If a company is petitioned into bankruptcy, and the shareholders did not personally guarantee any debts or liabilities, the shareholder’s loss is limited to the value of his investment; and

o Please be aware that shareholders are NOT completely protected against a company’s debts and liability- directors are liable for certain debts especially those pertaining to unpaid taxes.

* It may be tax advantageous to incorporate. Please consult a qualified licensed accountant for more information.

* Incorporation provides greater options to raise capital:

o Shareholders purchase company shares based on the company’s future earnings potential;

o Parties buy debentures secured against the company’s assets; and

o Banks will loan money against the company’s collateral such as cash flows (receivables), real estate and intellectual property.

3. What are the disadvantages to incorporation?

* Higher start-up costs: it costs approximately $500 in filing fees to incorporate; and

* Incorporation requires additional paperwork and annual filing/professional fees.