Corporations are the leading business vehicle in modern commerce. For start-ups, properly structuring and incorporating now is critical to avoid disputes, protect the corporation (and the founders) if they do come up and avoid the time and expense of doing it over later. Doing it right means thinking and planning ahead.
Here are five key considerations you should think about before you incorporate.
The three main ways to structure a business are sole proprietorship, partnership and incorporation. Of these, incorporation is the most complex and expensive to create and to operate. So most businesses kick off as a sole proprietorship: one owner/operator responsible for all aspects – and risks and liabilities – of the business. But as the business grows to include more than one “owner” (or begins that way), the time is right to look at incorporation and its benefits. A corporation is a legal entity separate from its owners (the shareholders). It alone is responsible for its debts, obligations, and actions – and if it fails to make good on them, generally the shareholders aren’t personally responsible. There are also several tax advantages to incorporation, especially after a business is profitable.
A company can incorporate provincially or federally. There are differences between them and between provinces, and each has pros and cons. The right choice depends on your objectives. Discuss these key considerations with your legal team to help you make that decision:
A corporate name must be distinctive. It must not cause confusion with an existing name or trademark, include a legal element (e.g. Ltd., Corp., Inc.) and must not include any unacceptable terms. A NUANS report determines whether the proposed name has already been registered as a company name or trademark. But remember: obtaining the name doesn’t alone give the corporation the right to use the name as a trademark.
Start-ups need to decide what type of shares to create, what rights to give shareholders and how many shares to issue.
The choice of Directors is critical to building a strong, qualified Board of Directors to help you run your business and meet your goals. The voting shareholders manage the corporation through the election of Directors, but aren’t otherwise entitled to participate in its business. The Directors run the day-to-day operations, so shareholders want to be Directors in many start-ups. The majority of your Directors should be independent. They should not be a member of management or have any direct or indirect material relationship that could interfere with their judgment. When choosing Directors, particularly your first ones, look for people with these key traits:
To discuss this or any other legal issue, contact any member of McInnes Cooper’s Entrepreneurial Services Team. Read more McInnes Cooper Legal Publications and subscribe to receive those relevant to your business.
McInnes Cooper prepared this article for information; it is not legal advice. Consult McInnes Cooper before acting on it. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2017. All rights reserved.
About the authors:
Beth McGrath is a member of the Corporate & Business Team @ McInnes Cooper. Her practice focuses on corporate & business law and corporate finance & securities. Beth has extensive experience drafting commercial agreements including contracts, shareholder arrangements and financial security documentation and advises clients on corporate procedures and day-to-day business operations. You can reach Beth at firstname.lastname@example.org.
Trent Skanes is a member of the Entrepreneurial Services Team @ McInnes Cooper and brings a highly analytical approach to transform client concerns into practical, valuable and effective legal solutions. You can reach Trent at email@example.com.