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Can a Founder Legally Promise Equity in a Company that Doesn’t Yet Exist?

Serial entrepreneurs are constantly coming up with the ‘next big idea’. During the excitement of starting the process of building a business, incorporating might not be the first thing on an entrepreneur’s mind. Employees might be promised shares in a corporation that doesn’t even exist. Can the employees enforce this promise?

 

Contractual Promises Made Pre-Incorporation

 

An oral or written agreement promising to provide equity in a company that has not yet been incorporated can be considered a valid agreement.

 

In Fedel v Tan, Tan entered into an oral agreement to provide 40% equity to Fedel in their new seaweed derivative company that had yet to be incorporated. The company was incorporated one year later, with Fedel and Tan as directors of the company. 100% of the shares were issued to Tan, however, Tan had promised that Fedel would still receive 40% of the equity. Fedel continued to work as vice-president of the parties’ company. 10 years later Fedel argued that he was entitled to the 40% ownership interest promised by Tan. The court held that the oral agreement made pre-incorporation was a valid agreement, as the parties’ actions proved that the parties intended to be partners in their company, each holding equity in the company.

 

Source

 

Benefits of Incorporating Immediately

 

Although parties can create binding vesting contracts prior to incorporation, there are a number of benefits to incorporating a business immediately:


Investors: When searching for investors to invest in your next big idea, they will be looking to invest in a legal entity, rather than financing individual founders. It is a good idea to have the company incorporated before looking for investors and funding.

 

Employees: Founders may decide to pay new employees out of their pocket prior to incorporation. However, hiring employees by a legal entity can result in tax benefits, and IP assignment from the employee to the company. Furthermore, it eliminates the additional step of entering into a second employment agreement after incorporation.

 

Intellectual Property: If you are coming up with the ‘next big idea’, it is likely that you will have some IP to protect. It is also likely that you will want the IP to be the property of the company, and not individual founders. Incorporating the business will protect the IP of the company and will ensure that IP is assigned to the legal entity. Incorporating early is also a good idea where founders want to protect their unique company name.

 

Check out Clausehound’s Small Business Law Library for standard incorporation documents, such as Articles of Incorporation!

 

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Let Clausehound.com help you incorporate your startup!

Are you interested in incorporating your business? Let Clausehound.com usher you through the process and ensure that you and your business are properly protected!

 

 

Step 1. Things you should consider before beginning the incorporation process:

1.1. Naming your business: Will you use a numbered company (i.e. 1234567 Ontario Inc.) or a named company (i.e. Clausehound Inc.)?

1.2. Jurisdiction: Will you be incorporating your business provincially or federally?

1.3. Corporate address: Have you chosen what your corporate address will be? Note, it cannot be a P.O. box.

1.4 Business organization: Have you thought about how many directors, officers, and shares the company will have?

1.5 Year end: Have you chosen a year end for accounting purposes?

 

Step 2. Create your Articles of Incorporation:

On Clausehound.com, you will be able to find a number of Articles of Incorporation templates which can be inputted into the incorporation software. Choose the one that is fitting for your organization, fill it out using the decision making criteria outlined in Step 1, and have it ready to be copied into the incorporation software.

 

Example: A simple, 2 share class Articles of Incorporation that provides for an unlimited number of Class A (voting) shares, and an unlimited number of Class B (non-voting) shares.

 

Step 3. It’s time to begin the incorporation

Using our partner, Cyberbahn, do-it-yourself incorporations are as easy as ever! Click the Cyberbahn logo below, and begin the registration process.


3.1. To start: Sign up for Cyberbahn, change your password, and log in.

3.2. Naming your business: If you want to create a named corporation, rather than a numbered one, click ‘Start a Business’ in the menu bar, click ‘Name Searches’, and proceed from there.

3.3. Incorporating your business: Click ‘Start a Business’ in the menu bar, click ‘Incorporations’, and carefully bring over the information that was decided on in Steps 1 & 2 into Cyberbahn’s system.

3.4. Initial Filing: An Ontario corporation must file an Annual Return (which is not related to taxation, just registration of the business) within 60 days of incorporation. This can also be completed through Cyberbahn, or may alternatively be completed directly through the Ontario government.

 

Incorporating a business is a crucial step in starting your business pursuits on the right foot. If you require help or guidance on incorporating your business, email info@clausehound.com and let Clausehound.com connect you with one of our affiliate lawyers to help usher you through the process!

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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What legal steps do you need to go through in order to start a business?

 

A while ago Forbes published an article titled, “10 Big Legal Mistakes Made By Startups.” It’s quite informative about what you need to do to start a business, but also quite long. We took the liberty of reading it for you and boiling it down to a few of its most important points, and they all come down to one thing: making sure you have the right contracts in place.

 

Don’t hesitate to incorporate.

In the words of Chris Griffiths from The Globe and Mail, “For most businesses, the question is not if, but when to incorporate.” Be sure to consult a lawyer to help you draft articles of incorporation that are suited to your needs. Standard incorporation documents, such as corporate by-laws, can also be found in Clausehound.com’s Small Business Law Library! Check out a sample here:

 

It’s not as taxing as you think.

The way you structure your business can impact the amount of taxes you pay. If done right, you can come away with more money and less worry, especially if your company qualifies as a Canadian Controlled Private Corporation (CCPC). This is because corporate tax rates are lower than personal tax rates, so keeping excess money in the company can be highly advantageous. Keep in mind that these more specific issues of taxation and tax registration should be explored thoroughly with an accountant before making any decisions.

 

There’s tons of ways you can get qualified advisors involved!

How you structure your business can also determine the amount of liability that rests on your shoulders.

In smaller businesses, shareholders often play a bigger role. By using a unanimous shareholders’ agreement, they can place restrictions upon the powers of the board of directors, though in the process shareholders can take on more liability. Another way to get good people involved if liability is a concern for someone wanting to be on the board is to have them take an advisory role.

Source

 

If you like it, put a contract on it.

Once the company is established, it’s a field day in terms of hiring. If you find someone you really want you should treat them right and get them settled into the workplace with a proper employment agreement. Businesses have been wrecked in the past over ambiguity about employment status and wages, so sorting that out through highly specific offer letters, stock option grants, and employee handbooks should offer good protection and build better work relationships.

 

Have standards.

When jumping headfirst into a new business, it’s a good idea to have a standard sales contract or customer agreement to shop around. A sound contract will streamline negotiations with customers—you’ll know exactly what points you’re willing to budge on or not. You don’t have to start from scratch. Find one already in circulation and modify it to make it your own. Consult a lawyer to be sure you have covered the essentials.

 

These should all be on your checklist. A new business starts in a very turbulent environment, and setting up solid contracts will help make the whole process easier to navigate.

 

To see some standard versions of the contracts discussed in this article, visit our Small Business Law Library!

 

This post was co-authored by Alina Butt.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Canadian Articles of Incorporation – Part 4 of 8: What to consider when selecting Directors for my business?

Canadian Articles of Incorporation – Part 4 of 8:
What to consider when selecting Directors for my business?

Introduction-
Firstly, this post will outline exactly what a Director is responsible for in a business, and subsequently, the importance of strategically selecting the number and attributes of your business’ director(s).

What is a Director?
A Director of a corporation is an individual that belongs to the corporation’s Board of Directors. The Directors of a corporation are accountable to the corporation’s members/shareholders. The Board and its Directors are responsible for supervising and managing the activities of the corporation. Typically, Directors are appointed by shareholders of the corporation, and this process is governed by the Articles of Incorporation.

Directors are required to act in the interest of the corporation and its shareholders. Directors have both a duty of care and a fiduciary duty towards the corporation. The Director’s duty of care includes exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Similarly, the Director’s fiduciary duty amounts to ensuring that the corporation’s interests are paramount in the Director’s decision making.

A Director’s failure to meet these two standards may result in liability on behalf of said Director. Additionally, a Director may be liable to the corporation for specific employment, tax, environmental and other legislative impositions of personal liability on Directors in specific circumstances. One should strongly consider the risks if being offered a Director position with a corporation, and should seek legal advice prior to accepting such a position. There are certain steps a potential Director may take to mitigate their risk, such as acquiring Directors Liability Insurance.

Can I be both a Director and the business’ Founder/CEO?
Absolutely! One can be the sole shareholder, Director and Officer in a corporation.

Requirements for Directors-
(1) Number of Directors:
A corporation in Canada must have at least one director. Typically with a startup business, the founder will fill the business’ Director, Officer(s), and Shareholder roles. As the company grows and the startup takes on more investors, these investors may demand a position on the Board as a condition for their investment. The founder/majority shareholder should try to ensure that they maintain control over the Board in order to preserve their autonomy and self-direction in operating and growing the business.
(2) Quorum:
Quorum is the minimum number of Directors that the Board of Directors must have present in order to pass a resolution. A Board of Directors can continue to govern when Directors are missing, so long as quorum is achieved. When quorum is not achieved, the Board of Directors can continue to govern the business in limited ways, but may not pass resolutions that are required for many of the Board’s most crucial responsibilities. (fix this part up!)
(3) Other Director Requirements:
(a) To be a Director in Canada, an individual must:
• be at least 18 years old;
• not have been declared incapable by a court in Canada or in another country; • be an individual (a corporation cannot be a director); and
• not be in bankrupt status.
(b) Residency of Directors:
When selecting Directors for a corporation, the controlling shareholder(s) (whom will usually be the Founder in the context of a startup) should ensure that the business meets the definition of a Canadian Controlled Private Corporation in order to eligible for reduced tax rates on active income, have the ability to utilize the Small Business Dividend Tax Credit when withdrawing profits from the business, and have the ability to depend on the Lifetime Capital Gains Exemption up to $800,000+ per individual.

In order to be eligible for these benefits, at least 25% of Directors must be resident in Canada. If a corporation has less than four Directors, at least one must be resident in Canada. To see the factors that determine residency, please click here.
(c) End of Director’s term:
Directors may leave or be removed from the Board of Directors for various reasons. A corporation must have at least one active Director, otherwise it may be dissolved by Corporations Canada as per subsection 212(1) of the Canada Business Corporations Act. Directors may leave or be removed from the Board of Directors by means of:
• Removal by the shareholders
• Disqualification (such as entering bankrupt status)
• Resignation
• Death

 

Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter. You can use Clausehound.com‘s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!

 

When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:

Currently Live!
1 of 8 – Introduction to Incorporating a business
2 of 8 – Which Articles of Incorporation should my company use?
3 of 8 – Selecting and protecting your company’s name
4 of 8 – What to consider when selecting Directors for my business?

Coming Soon!
5 of 8 – What to consider when selecting the corporation’s share attributes?
6 of 8 – What type of restrictions should be in place?
7 of 8 – Other Important Information
8 of 8 – What’s else should I consider before developing my business?

For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.

Draft on!

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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Read more...

Canadian Articles of Incorporation – Part 3 of 8: Selecting and Protecting Your Corporation’s Name

Canadian Articles of Incorporation – Part 3 of 8:
Selecting and Protecting Your Corporation’s Name

Introduction-
Choosing a business’ name is an extremely important decision that an entrepreneur may be forced to make even before their products or customers are really established. There are multiple considerations that an entrepreneur must take when selecting their business’ official name in the Articles of Incorporation.

In addition to the requirements outlined in the provincial and federal Business Corporations Acts, businesses must consider whether other businesses have already trademarked their desired name in the jurisdiction(s) where the business may operate. You may want to check out Clausehound’s blog on this topic for further insight.

All corporate names must meet certain requirements in order to be used in the Articles of Incorporation. An entrepreneur can defer this decision by using a numbered company name provided by the jurisdiction (e.g. 123456789 Ontario Inc.). The corporation can subsequently change its name or continue to operate as a numbered company. This is a slightly cheaper option and enables an entrepreneur to establish a corporation before some of the more intricate details of the business are worked out. Additionally, a business may continue to officially operate as a numbered company but have an “operating as” name as well, such as 123456789 Ontario Inc. O/A HoundCo.

Now that we know the difference between numbered and named companies, it is crucial to understand the limitations one has when selecting an appropriate name for their business. The primary guidelines one must follow include:
(1) The name must be distinctive-
Your business must be able to be distinguished from other companies in your space. Therefore, you must select a non-generic name for your venture. If you are opening a window distribution company, your company should not be named “The Window Company” or “Windows Inc.”, but rather should be more descriptive like “John’s Window Store” or “North Toronto Windows”, etc. An easy way to develop a distinct name is to have a novel word in your business name, such as “NorTo Windows” or “ShinyClean Windows”.
(2) The name must not cause confusion with any existing name or trademark-
This step is crucial if you want to ensure that you will not have to change your brand’s established name down the road or worse off, face an injunction or legal suit for violation of this rule. The most effective way to ensure that you are not encroaching on any other corporation’s name in the same industry is to utilize a Nuans search, which is also required to be submitted alongside your Articles of Incorporation. A Nuans search compares your proposed name with a federal database of names that includes trade-marks, provincial and federal corporate names and most provincially registered business names – except those located in the Province of Quebec.
(3) The name must include a legal element-
The suffix of the business’ name must represent its legal status with either the Provincial or Federal government. This includes adding suffixes to the business’ name, such as “NorTo Windows Inc.”, “NorTo Windows Corp.”, and “Norto Windows Ltd.”. This suffix must correspond with the business’ legal status, and may not be arbitrarily selected. Certain Provinces have unique legal elements compared to the rest of the Provinces, including Alberta and Nova Scotia’s Unlimited Liability Companies (“ULC’s”).
(4) The name must not include unacceptable terms-
In selecting a name for either a Provincial or Federal corporation, the first consideration is to ensure that the name does not (i) imply that the business is something that it’s not.

An example of this would be a company that implies it is a federally regulated business when it is in fact not that, such as an insurance broker, banking institution, or university. Secondly, a business cannot (ii) imply they operate in a private sector industry that they do not, such as calling a business “NorTo Windows” when in fact the business only sells doors. Thirdly, obscene terms may not be used in the business name and the business name may not promote obscene, scandalous or immoral services.

A Bit More About Name Searching-
Using a government or private industry provided name-searching tool is the best way to select a fitting name, and results of the search must be provided alongside your Articles to either the Federal or Provincial body.

You can get pre-approval for your desired business name before submitting your Articles of Incorporation, which is useful to know ahead of time that your name will be approved, but also because your whole application will be rejected if your proposed name is not approved. A pre-approval may be completed by fax or online, and there is no fee for this service.

 

Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter. You can use Clausehound.com‘s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!

 

When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:

Currently Live!
1 of 8 – Introduction to Incorporating a business
2 of 8 – Which Articles of Incorporation should my company use?
3 of 8 – Selecting and protecting your company’s name
4 of 8 – What to consider when selecting Directors for my business?

Coming Soon!
5 of 8 – What to consider when selecting the corporation’s share attributes?
6 of 8 – What type of restrictions should be in place?
7 of 8 – Other Important Information
8 of 8 – What’s else should I consider before developing my business?

For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.

Draft on!

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

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Read more...

Canadian Articles of Incorporation – Part 2 of 8: Which Articles of Incorporation Should My Company Use?

Canadian Articles of Incorporation – Part 2 of 8:
Which Articles of Incorporation Should My Company Use?

Introduction-
Upon considering whether one wants to incorporate their business federally or provincially, the next factor to consider is what the entrepreneur wants to achieve through their articles of incorporation. In order to determine this, it is crucial to consider who will be running the business, where will the business obtain its funding, whether there are any concerns that need to be mitigated, whether the individual is selling a product or performing services, etc.

Clausehound.com has made this process a bit easier for you! You can see the various Articles of Incorporation documents available through Clausehound, each of which addresses diverse circumstances your startup may face. To simplify the selection for this introductory lesson on incorporation, Clausehound has narrowed the variety of Articles of Incorporation for this blog to those that address the needs of the following types of newly formed ventures:
(A) For Simple Startups:
• Early stage business, one class of shares
• Uncertain future for the business
• Limited number of initial investors and partners

(B) For High Growth Startups:
• Early Stage business, two classes of shares
• Business may take on new partners or raise capital
• Anticipation of changing needs of business

(C) To Convert Articles to Multiple Classes of Shares:
• Founder may wish to expand fundraising options
• Initial one or two classes of shares insufficient for business needs
• Reacting to growth and changing business needs

(D) Articles of Amendment for Startups with Investment Oversight Concerns:
• Founder is looking to improve comprehensiveness of Articles of Incorporation
• Assist in changing the business’ form to meet future needs
• Managing risk and liability related to raising capital from outside investors

 

Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter.

You can use Clausehound.com‘s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!

 

When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:

Currently Live!
1 of 8 – Introduction to Incorporating a business
2 of 8 – Which Articles of Incorporation should my company use?
3 of 8 – Selecting and protecting your company’s name
4 of 8 – What to consider when selecting Directors for my business?

Coming Soon!
5 of 8 – What to consider when selecting the corporation’s share attributes?
6 of 8 – What type of restrictions should be in place?
7 of 8 – Other Important Information
8 of 8 – What’s else should I consider before developing my business?

For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.

Draft on!

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.

Read more...

Canadian Articles of Incorporation – Part 1 of 8: Introduction to Incorporation

Canadian Articles of Incorporation – Part 1 of 8:
Introduction to Incorporation

Introduction-
Incorporating a business can be one of the most important decisions any entrepreneur makes in establishing their business and it is usually one of the first decisions they have to make. When at the earliest stages of business development, cost is often a factor that deters entrepreneurs from incorporating immediately, as hiring legal counsel can be both expensive and intimidating. Lucky for you, this process can be completed at a fraction of the price when you utilize the tools and resources provided by Clausehound.com.

What is Incorporation?
The incorporation process enables a business entity to operate independently from the individual. In the context of new venture formation, the incorporation process will usually convert a sole proprietorship into a corporation – providing both the business and its owner(s) many crucial benefits at a reasonable and proportional cost. A corporation (the end result of the incorporation process) is effectively recognized as a person under the law. An incorporated entity may come in many forms including for profit, not for profit, cooperative and governmental corporation.

How much does incorporating cost?
If you were to incorporate your business either Provincially or Federally without the use of private incorporation portal, it would be $360 to mail or submit your Articles in person in Ontario, and $250 for a Federal incorporation complete by mail or in person. Therefore, it is not just cheaper, but much more convenient to use a private portal!

For Federal incorporations, the governmental fee amounts to approximately $200, while the Provincial fee in Ontario amounts to approximately $300. If you use a private incorporation portal to register your business, like the one offered by Cyberbahn, it will cost you slightly less than incorporating directly through the government. Additionally, companies like Cyberbahn make the incorporation process much easier!

It is important to keep in mind that there are additional fees required to operate a Federally incorporated business, so it is not necessarily less expensive than a Provincial incorporation.

Benefits of incorporating-
(A) Separate legal entity: Incorporating a business provides the newly formed corporation with rights similar to those possessed by a person under Canadian law. The corporation (compared to the sole proprietor/individual prior to incorporation process) can acquire assets, take on debt, enter into contracts, be found guilty of a crime and sue or be sued. Prior to incorporating, the entrepreneur often has to fulfill these various roles and obligations under their own personal identity, adding significant risk to the individual.
(B) Limitation of liability: Shareholder(s) of a corporation are not typically obligated to pay the corporation’s debts or judgments should the corporation become insolvent. If bankruptcy occurs, the shareholder(s) will not lose more than what they had already invested into the corporation. These financial protection, especially in the case of higher-risk ventures or if sued by a stakeholder, are especially important at all stages of the business, but especially in the venture’s early years.
(C) Tax efficiency: Since corporations are taxed separately from the shareholders, corporations will typically pay lower tax rates than unincorporated entities. If a business entity is earning more money than the owners require for their lives, then incorporation offers the business tax advantageous methods to hold capital compared to the options available to an unincorporated business. In addition to the tax efficiency achieved for the earnings of the corporation, other opportunities for tax efficiency exist as a result of incorporating including: (i) issuing dividends (control over amount, timing, etc.), (ii) income splitting within a family unit, (iii) carry-forward of losses for future taxation reduction, (iv) flexibility in selling the business, among many other taxation and disbursement advantages.

It is evident that incorporation offers many advantages at every stage of operation and in both successful and less successful scenarios. Should your business become very successful, incorporation allows for reduced taxation through dividends instead of salary. If your business fails, incorporation enables the shareholder(s) to limit their losses to the funds invested into the corporation, and protects their personal bank accounts and assets.

Detriments of Incorporating-
(A) Inconvenience at time of growth: When an entrepreneur is grinding away at creating a successful business model, petty legal concerns are often at the back of their mind. Although the timing is rarely good for the costs and effort of incorporating a business, the early stages of the business are often the best time to set up these processes so that all decisions made later on conform to the standards established in the constating documents.
(B) Added costs: The setup and administrative costs of operating a business rise when the business becomes incorporated. The corporation must file annual reports, corporate registry, separate corporate tax returns, etc. When a venture has limited available funds or available time, such considerations are sometimes deemed to be overwhelming and cost prohibitive. This is likely the main drawback that entrepreneurs consider when weighing against the obtainable benefits.
(C) No business loss offset: The shareholder(s) cannot offset business loses to their personal gains.

Should the company not be successful, the business losses must remain within the corporate entity. Comparatively, if the entrepreneur is operating a sole proprietorship (business without corporate classification), they can in fact offset their losses with other income generated.
(D) Liability may be less limited than you thought: Although incorporated businesses are protected by a limitation of liability, this limitation is often mitigated by (i) exemptions to the limitation, or more often through (ii) personal guarantees for debt. There are multiple circumstances when a director of a corporation is not protected by the ‘corporate veil’ including issues relating to: environment, tortious actions of a director, entering into a contract without proper authority, breach of trustee duties, and other statutory liabilities (under both federal and provincial law). A situation experienced more often by entrepreneurs is the need to provide a personal guarantee for debt financing. As new ventures usually have limited finances, lenders often require the shareholder(s) to provide a personal guarantee for the debt. Should the business fail or be unable to meet its debt obligations, the lender can then go after the individual for the funds.

Federal vs. Provincial Incorporation-
In Canada, entrepreneurs have the choice of incorporating their business either federally (according to the Canada Business Corporations Act) or provincially (In Ontario, under the Ontario Business Corporations Act). To determine which jurisdiction is preferred for the incorporation, the shareholder(s) must establish where the corporation will conduct its business, the importance of name protection across multiple provincial jurisdictions, and the cost implications of choosing an incorporating jurisdiction.

Based on the above description, one may wonder why someone would incorporate provincially in the first place when all of the benefits, plus more, are offered through federal incorporation. Firstly, a business must still register in any province they are operating in even if they are federally incorporating, reducing much of the advantage obtained through federal incorporation. Secondly, the filing requirements are greater for a federally incorporated business. The business must comply with federal corporate filing requirements in addition to the requirements from each province that the business is registered in. Thirdly, the costs of registering are slightly higher for a federal incorporation as the fee to incorporate, the added fees of registering in provinces, and the use of the NUANS system (to be discussed next) add up.

 

Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter. You can use Clausehound.com‘s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!

 

When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:

Currently Live!
1 of 8 – Introduction to Incorporating a business

2 of 8 – Which Articles of Incorporation should my company use?
3 of 8 – Selecting and protecting your company’s name
4 of 8 – What to consider when selecting Directors for my business?

Coming Soon!
5 of 8 – What to consider when selecting the corporation’s share attributes?
6 of 8 – What type of restrictions should be in place?
7 of 8 – Other Important Information
8 of 8 – What’s else should I consider before developing my business?

For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.

Draft on!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Non Profit Organizations May need to Register before Collecting Funds in a Jurisdiction

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Read the article here.

Many jurisdictions require not for profit corporations to register before fundraising in the jurisdiction. One important element is the registered address of the corporation, and whether it has an office in the jurisdiction. A legitimate address is important for such registration.

In the first half of 2015, the Tennessee Department of State, Division of Charitable Solicitations and Gaming filed several lawsuits against non-profit organizations doing business in Tennessee. Each non-profit solicited contributions in Tennessee without registering with the Division, as required by Tennessee’s Charitable Solicitations Act. Under the Act, non-profits which solicit funds must register on forms provided by the Division. The article outlines the requirements for registration as well as the penalties for not registering. The registration requires disclosure of an extensive list of information, including tax status number, address, financial statements, names and addresses of directors and officers, corporate address etc.

Read the article here.

Take away:

  • Non profit organizations should determine whether they have to register in the jurisdiction they are conducting business in. Failure to do so may attract charges and fines.

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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