i. Legal Status
A corporation is a considered to be a separate legal entity. It can sue, and be sued, in its own name. It pays tax on its profits and is subject to the provisions of the Alberta Business Corporations Act (the “ABCA”), if incorporated in Alberta, or the Canada Business Corporations Act, if the company is federally incorporated.
A corporation is ultimately owned by its shareholders, who purchase shares in the corporation. The number of shareholders in a private company is limited to between 1 and 50, under the ABCA.
The shareholders, at an annual meeting, elect the directors of the corporation who are then charged with overseeing the operation of the corporation. There must be at least 1 director of any corporation, and there is no maximum number mandated by the ABCA; however most small business corporations have a maximum of 5 to 9 directors.
The directors, in turn, appoint the officers of the corporation who are charged with carrying on the day to day business of the corporation.
The corporate officers are responsible to the Board of Directors for their actions; the Board of Directors is then responsible to the shareholders of the corporation.
A corporation is created by filing Articles of Incorporation, a Notice of Registered Office and a Notice of Directors with the Registrar of Corporations, and the payment of a filing fee.
The Articles of Incorporation sets out the name of the corporation, the number and classes of shares which the corporation is authorized to issue, and any particular limitations that might apply to its operations. The Articles of Incorporation may also include limits on the number of directors, and upon on the right to transfer shares to others.
The Notice of Registered Office sets out the formal address of the corporation for records purposes. The address must be in Alberta, and must be a street address rather than a post-office box. Any formal documents to be served on the corporation may be served at the Registered Office.
iii. Corporate Names
Care must be taken to ensure that the corporate name is not one that will be confused with any other corporation, partnership or trade name and that it does not create confusion with any other business name which may then be in existence.
As an alternative to a “named” corporation, many small businesses will register as a numbered Alberta corporation. In this case, Corporate Registries will assign a unique number to the new corporation.
iv. Powers and Limitations on the Powers of a Corporation
Under the ABCA, a corporation has all of the powers of an individual. In short, a corporation can do anything that an individual can do unless there is something in the Articles of Incorporation, or any internal corporate documents of the company, which restricts that ability.
v. Directors and Officers
The Board of Directors generally meets on a periodic basis and tends, in a larger corporation, to view policy matters more than it does the detailed running of the business. The directors are charged with the responsibility of overseeing the operation of the business.
Historically, personal obligations on directors have been steadily increasing which has resulted in the role of the director becoming a more onerous one. In times past, directors incurred no liabilities to third parties and could ignore conflicts of interest with impunity. Such is no longer the case.
Directors may face liability in the following areas:
a) Unpaid taxes or payroll remittances;
b) Environmental pollution or other damage;
c) Liability for wages on dissolution of the company;
d) Occupational health and safety issues; and
e) Accounting or other financial irregularities.
Being a director of a corporation is not a role to take on without consideration of the consequences, and legal advice should be obtained before agreeing to act as a director of any corporation.
vi. Diversity of Ownership of Corporation
The use of a corporation allows any number of individuals to participate in the ownership of the corporation without any liability. Corporations are also known as “limited corporations” because the shareholders’ liability is limited to the purchase price of their particular shares; the shareholder only stands to lose their investment in the corporation, and no more.
Because of the diversity of shareholders in a corporation, you may find a number of different types of shares, generally described as “common shares” or “preferred shares.” Common shares reflect the growth in value of the corporation, as their value increases with the value of the corporation. Preferred shares are usually of a fixed value, with ability to provide a return on the initial investment value.
The particular share structure for a specific corporation can be a complex discussion, reflecting shares purchased by spouses, children, or investors. It is highly recommended that you consult with both your tax advisors and the lawyers at Cameron Horne Law Office to discuss the share structure of the corporation, prior to incorporating the company.
vii. Annual Maintenance of Corporation
A corporation, to maintain its existence, must file an annual corporate summary with the Corporate Registry which lists the voting shareholders and the directors of the Corporation. Failure to do so will result in the corporation being struck off and deleted from the register of corporations 18 months after the annual return is due to be filed. The annual return is due to be filed on the anniversary of incorporation date of the corporation in each subsequent year.
viii. Annual General Meeting of Shareholders
It is also a requirement of the ABCA that each corporation shall have an annual general meeting at least once in each year and, in any event, not more that 18 months after the last annual general meeting (AGM).
AGM’s can be held in a variety of manners. If there are a significant number of shareholders, then a formal meeting is called with the normal rules applying to the conduct of the meeting. If the number of shareholders is quite small, the AGM is typically done by a written resolution rather than a formal meeting.
At the AGM, the shareholders will approve the financial statements, elect directors and deal with any matters of policy affecting the corporation, or give such instructions to the Board of Directors as the Shareholders may determine. Usually, immediately following the AGM, the directors will hold a meeting of the Board of Directors to elect officers.
ix. Terms of Office for Officers and Directors
The officers and directors of a corporation generally hold their offices until the end of the next AGM of the shareholders, thus the need for reappointment of directors and officers on an annual basis. Alternatively, the terms of officers may continue until such time as the board determines that they are to end, i.e., the officers hold their respective offices at the pleasure of the Board.
x. Tax Returns
In addition to preparing the minutes or resolutions relating to the annual general meeting, it is also important for the corporation to file the appropriate tax returns with both the federal government and with the Province of Alberta.
The directors of the corporation have personal liability for taxes that are payable by the corporation, in the event that the corporation does not file tax returns. It is incumbent on directors to ensure that the tax returns are both filed and any taxes are paid at the proper times.
xi. Minute Books
All of the official records of the corporation are kept in a minute book which is to be kept at the registered office of the corporation. Annual minutes need to be kept as well as accurate records of all share transactions.
xii. Internal Documentation
The internal rules which regulate a corporation are not always found in the ABCA. A corporation typically creates Bylaws and Unanimous Shareholders Agreements, in order to regulate the rights and procedures inside the corporation.
The Bylaws are detailed procedural rules which specify the number of officers and their duties, the rules relating to the calling of shareholder meetings, and the required quorum to constitute a valid meeting.
b. Unanimous Shareholders Agreements (“USA”)
The ABCA permits an agreement called a Unanimous Shareholders Agreement to come into existence to govern rights between shareholders. As the name implies, it must be unanimous, and binds all shareholders of the corporation. Typically, you will not find such an agreement in corporations with large numbers of shareholders because it is simply impractical to do so. In a small corporation with three or four shareholders, USA’s are relatively common.
A USA deals with the basic structure of the corporation. The USA also generally provides for shareholder loans to the corporation, how they will be repaid, whether there will be any interest paid on the loans, and what security will be given for the loans. It also provides how the profits of the corporation are to be used; i.e. to pay back the shareholders loans first, then dividends to the shareholders or retained as working capital. The USA may also provide for restrictions on the ability to issue new shares.
USA’s also provides the mechanism for the purchase of the shares from current shareholders in the event of:
- the death of a shareholder;
- the desire of a shareholder to sell their shares in the company; or
- buy-sell agreements such as “rights of first refusal” or “shotgun clauses” by which it is agreed that the individuals will sell their shares to other shareholders at certain times and on certain terms or in certain events.
Unanimous Shareholders Agreements must be negotiated and settled at the time the corporation is being organized, as it will be too late to do so when you actually need its provisions.
xiii. Income Tax Considerations
A corporation pays tax at the corporate tax rates on its profits which it has earned during the course of the year. Corporate rates tend to be roughly half of individual rates, and the corporation has some small business tax benefits which has the effect of further reducing the taxes paid by the corporation.
To the extent that a corporation earns a profit and the profit is left in the business, then there are tax savings to be made by using a corporation as opposed to a proprietorship or partnership. If a corporation elects to pay all of its profit out to the shareholders, then it does so by way of dividends and the dividends, in turn, are taxable in the hands of the individual shareholders.
There are numerous significant decisions that must be made when incorporating a company in Alberta. CAMERON HORNE LAW OFFICE has wide-ranging experience advising small business owners and shareholders with respect to corporate structures, liabilities and drafting corporate agreements, such as Unanimous Shareholder Agreements. We also have extensive expertise assisting with the annual maintenance of your corporation. We would be pleased to discuss your particular needs with you, in a professional and relaxed environment, whether you are considering incorporating a company, or you have an existing corporation. Please call Cameron Horne Law Office for a quotation for our services and to arrange an appointment to discuss your needs.