by: Peter Cusimano, B.Sc., LL.B.; Toronto Business Lawyer
Many people prefer to carry on business as a corporation. A corporation is a legal entity separate in law from its owners.
The corporation is owned by "shareholders" through their ownership of "shares" of the corporation. A corporation can have different types of shares, the most common being "common shares" and "preference shares". As the name implies, preference shares gives the holder certain rights or privileges that the common shareholders do not enjoy. For example, the preference shareholders may be entitled to receive profits from the corporation before any money is distributed to the common shareholders. However, in order for the preference shares to enjoy this preference, the preference shares may be structured such that preference shareholders are not entitled to any voice in the decisions of the business. The combination of rights and privileges that can be attached to the share types is unlimited.
When a corporation is created, the shareholders do not own the business or the property belonging to the corporation. The business and the property is owned by the corporation and the corporation in turn is owned by the shareholders. In addition, the rights and liabilities of the corporation are not also the rights and liabilities of the shareholders.
A corporation is managed by people who are called the "directors". The day-to-day operations of the corporation are carried out by people called the "officers" which can include a "president", "secretary", or "treasurer". It is possible, and very common in small corporations that the same person can be a shareholder, director, and officer at the same time.
Similar to a partnership agreement, the shareholders can enter into a "shareholders' agreement" among themselves outlining how the corporation is to be operated.
Profits of the corporation are distributed to the shareholders by way of "dividends" being paid to the shareholders. Generally, the amount of the dividend paid to a particular shareholder depends on the number of shares held by the shareholder.
(i) Advantages of a Corporation
- Limited liability of shareholders. People are more willing to invest money in a corporation when they know that they don't have to worry about being personally liable for the debts of the corporation. This concept is called "limited liability" for the shareholders. The shareholders' liability is limited to the value of the assets (or money) that they have transferred (or paid) to the corporation in exchange for shares in the corporation. The amount that the shareholders paid for their shares is all that they will lose. (However, directors and officers can be liable in certain circumstances.)
- Separate taxation of the corporation from its owners. Possible lower taxation rate.
- Estate and tax planning vehicles can be used to permit an "estate freeze". The use of a "discretionary family trust" can permit income splitting among different family members. The shares of the corporation can be set up such that one share type have voting control of the corporation (usually held by you and your spouse) and another share type obtains all increases in the value of the corporation (usually held by your children).
- The corporation can sue and be sued in the corporation name.
- More prestige with the public in doing business using a corporation.
- Perpetual existence of the corporation. The corporation can continue after the death of a shareholder or withdrawal of the shareholder by the sale of his/her shares.
(ii) Disadvantages of a Corporation
- Higher initial startup formalities and cost. A corporation requires articles of incorporation be filed, a head office designated, notice naming director(s) and officer(s), a record book (called a "minute book") must be maintained which contains among other information details of meetings of shareholders and directors.
- Requires annual maintenance by accountant and lawyer. A corporate tax return must be filed and the "minute book" must be updated.
- Losses incurred during the startup years cannot be used to offset income of the owner from other sources of income.
Previous topic (Partnership)
Revised: November 11, 2015.
©Peter Cusimano, 1995-2022. (www.cusimano.com)