Incorporating a business is not a particularly complex process. However, incorporating a business optimally by setting up a solid structure is a whole other game that requires the intervention of experts. You will find this expertise with a business lawyer who works in the establishment of corporate structures and who is knowledgeable in commercial law.
However, whether you are a business owner or not, you may be confused about incorporation. Are not all businesses the same: the owner, managers, and employees working together for the benefit of the company? Far from it! The structure of a business greatly affects the way it is run, the rights of the owners, and has many legal consequences. So here are the reasons why you should consider incorporating your business with a lawyer who specializes in the field!
What is incorporation?
Incorporation is a way of carrying on a business by transforming it into a joint stock company. In doing so, the entity that was once owned by one person now belongs to a group of investors called shareholders. They invest in the company in return for shares which, as an advantage, offer the collection of dividends and certain other rights.
This is not the end of the story! By incorporating a business, you transform it into a company (synonymous with a joint stock company), which has the effect of conferring a distinct legal personality on the latter: it becomes what is called a “legal person”. The company therefore has its own rights and obligations which is not the case for a sole proprietorship. Indeed, if you are the owner of a so-called individual business, know that you are responsible for each of the actions taken by it.
Incorporation also involves the creation of a board of directors which will manage the operation of the company on behalf of the shareholders. This board of directors will have very specific powers provided for by convention and will be accountable to the shareholders. However, they are also protected by the corporate veil, meaning that their actions brought in the name of the company can only be brought against them if they are fraudulent or criminal in nature.
A joint stock company and a sole proprietorship are not the only business structures that can be formed. To make your task easier, here is a brief description of each of these structures:
Sole proprietorship: A single individual assumes ownership of the entire enterprise. He is a full owner which means that all decisions are his. This has the advantage of simplifying the decision-making and administration of small companies but it also poses a legal risk.
Indeed, since the owner and the business are one legal entity, each one is responsible for the actions of the other. This implies that a lawsuit against an unincorporated business will involve the owner of the business personally. This is all the more worrying knowing that the same is true for bankruptcy; if your business becomes insolvent, you will sink with it!
On the downside, there is also the financial aspect that works against sole proprietorship. As such, a structure requires the production of a single tax report (the profits of the company will be added to your personal report), you will pay more tax than if you had incorporated the business.
In short, sole proprietorship has the advantage of being exclusive in terms of profit sharing: there is none. You must, therefore, agree to accept losses as well as gains if you choose such a structure. Further, keep in mind that your civil liability is involve so think carefully of the risks that you take as these could cost you dearly!
Finally, your own death will also lead to the death of your company which is not the case for a joint stock company. It will also complicate any estate plans you may have had!
(Image title: Choose your business structure carefully to optimize the benefits to your company.)
A joint stock company: Quite simply, it is more commonly called a company. As mentioned earlier, the joint stock company is a business that has been transformed into a legal person with its own legal personality.
No longer owned by a single person, it now belongs to shareholders with the rights conferred on them by the shares they hold. Different types of shares give rise to different rights but there is always at least one of three rights: the right to dividends, the right to the residual assets, and the right to vote.
Although the shareholders are owners of the company, it is in the hands of the board of directors that the reins of the latter are left. Depending on the size of the company, the number of shareholders and officers on the board of directors will vary widely.
However, each joint-stock company must have a constituent law which has the effect of creating the company itself, a charter, a list of regulations and a shareholders’ agreement. As you can see, it is a much more demanding structure than that of a sole proprietorship or a partnership. We will talk a little more about the advantages that accompany a duly incorporated company later.
General partnership: This type of structure is in fact a partnership of people coming together in the pursuit of a common objective. In a way, it is a compromise between a joint stock company and a sole proprietorship because its constitution is simple to accomplish but its administration still requires the completion of some formalities.
One of the fundamental principles of general partnership is as follows: the partners share the financial profits and losses. This is why the law explicitly speaks of a “spirit of collaboration” when it qualifies the general partnership: one for all and all for one! Profits are distributed according to the proportion of shares established in the company contract. Nothing forces an equal distribution of the shares!
But how is a general partnership formed? By drafting, signing, and declaring a company contract. This document is of the utmost importance as it establishes the destination of the business (its purpose), the share of each partner in the business, and the extent of each person’s responsibility. Speaking of responsibility, unlike a legal person, a general partnership does not create a distinction between the legal personality of the partners and that of the company: each of the partners, therefore, is personally committed in its civil liability.
This, therefore, carries with it important responsibilities since a single partner can be held responsible for the actions of its partners who are party to the contract. For this reason, most professionals working under a company contract have personal liability insurance to cover this type of damage.
The steps to set up a corporate structure
Incorporation is an administrative process that takes only a few steps. However, each step requires making choices that have a significant impact on the future of the company. This is why it is better to be assisted by a legal expert throughout this process!
- Federal incorporation vs. Provincial: This decision is not the one that will have the greatest impact on the survival of your business. In fact, whether you incorporate at the federal or provincial level has only a minimal impact on the operation of the business.
The decision is mainly based on where the business will be conducted. If you plan to operate your company from coast to coast, it may be better to opt for a federal incorporation while a provincial incorporation is preferable if your activities are limited to the territory of Quebec province.
In either case, the company must be registered in the enterprise register in order to be able to operate legally in Quebec.
- Choice of structure: This is where you will make a choice from among a joint stock company (the company), a limited partnership, and a general partnership. It is best to receive expert advice at this stage since structure is of utmost importance to the proper function of your company.
- Choice and name registration: Any company must register its name with the Quebec Business Register. Although some choose to register a numbered company, the majority of entrepreneurs choose to find a name that represents the company.
You could also use the help of an expert in this aspect although those in the legal field will limit their advice to the “respect of copyright” aspect of the situation! It is rather on the marketing side that you should seek help if you lack inspiration!
- Preparation of documents: We are talking here about the initial declaration providing for the rights of each of the shareholders, the type of shares available, the quantity of shares issued and other information relating to the administration of the company.
Although basic stock models exist, it is often more beneficial to create titles that are company specific. But beware because shares give rights to their holders, therefore, it is important that you are assisted by a lawyer when planning the rights of shareholders. Otherwise, you might as well shoot yourself in the foot!
- Payment of administrative costs: Indeed, incorporation involves administrative costs, whether you choose provincial or federal incorporation. We are talking about a price of $330 to complete the incorporation process from A to Z. However, this does not include the many other related costs that accompany this process, as you can imagine!
- Obtaining the certificate: Once the documents have been sent in due form to the persons responsible, you will receive a certificate of incorporation which will confirm the existence of your joint-stock company as well as its rights as a legal person.
- Final organization: Once the structure is in place, it will be time to proceed with the internal paperwork which will provide for the regulations, the composition of the board of directors, as well as the rights and obligations of the directors.
What are the advantages?
Despite the legal and administrative requirements necessary for incorporating a business, there are many advantages that accompany such a structure. You will therefore see that hiring a lawyer to help you incorporate your business is far from being a step that is unnecessary.
Legal responsibility: In legal parlance, we use the “corporate veil” as a tool to separate the legal responsibility of the company and its managers. As previously mentioned, the actions of one do not involve the responsibility of the other, which means that leaders are immune from lawsuits that do not concern them personally. The only exception is, of course, the commission of an indictable offense committed in the course of the manager’s duties within the company.
In addition, the directors of the company will not be responsible for the debts of the company if the latter encounters solvency problems. The company is, therefore, an important protection for the directors of a company on several fronts!
Taxes: The owner of a sole proprietorship attaches his tax return to that of his business. This increases the annual income received which, of course, increases the tax bracket.
Companies, on the other hand, have their own tax schedules which are generally much lower than those offered to individuals earning large annual salaries.
It is, therefore, a sensible financial strategy for managers as well as for the company itself to incorporate: it is more money in the portfolio for everyone involved!
Financing and dividend sharing: Financial institutions are more willing to lend money to corporations than to sole proprietorships. The reason? Their ability to generate income (and therefore repay their debts) is much greater than that of individual business owners. In addition, the security that such companies are willing to offer is much more attractive to banks than that offered by small businesses.
In addition, one of the basic principles of a joint stock company is that of dividend sharing among shareholders on an annual basis. However, such a principle can be waived in some cases to allow the company to accumulate money in its coffers. Only shareholders with shares guaranteeing the payment of dividends each year will not be sidelined so easily.
Business sustainability: The advantage of a stock company is that its survival does not depend on that of its owners. As it is owned by shareholders, it survives the death of anyone holding security options.
As the shares belonging to their holder, they are transmitted as an inheritance to any person designated by its owner. The only thing that can end the existence of a joint stock company is its dissolution.
This can be caused by bankruptcy, a merger, an acquisition, or even by a voluntary cessation of any activity by joint decision of the shareholders.
Are there any drawbacks? Obviously, everything cannot be bright and sunny! Incorporation implies, as you now know, respect for a structure and a hierarchy that is demanding to say, the least. Not all companies, therefore, benefit equally.
In addition, it goes without saying that fees accompany the start-up of a joint stock company. You will have to pay government incorporation fees, much higher administration fees, and sometimes, very heavy legal fees.
However, incorporation is often a choice that forces itself on you by the size that your business has reached. At some point, your turnover and the scale of your activities will become too important to be supported by the structure of a sole proprietorship!
This is where you will want to do business with a professional incorporation lawyer!
How can a lawyer help you?
By advising you at a crucial time in the life of your business! We have said it and we say it again: the choice of structure of a company enormously affects its function. A business lawyer will advise you on aspects of incorporation that you hadn’t even thought of!
For example, part of the incorporation process will be to decide the size of your “share capital”. If this concept is completely foreign to you, you may realize why the services of a lawyer are important. Share capital is simply the number of shares that your company will issue.
As simple as it may be, the fact remains that if you have no knowledge of the legal or business world, you will not know what decision to make.
Not only will your company issue shares but it will issue different types which will confer different rights listed in a previous section of this same article. The creation of actions of different classes (ex: Type A, Type B, Type C, etc.) is a strategic process that requires certain knowledge that not all business managers have.
Even the name of the company is not as easy to choose as it seems! You must respect many constraints such as those imposed by the Charter of the French language, by Law 101, and by the laws surrounding copyright. To avoid breaking any law, you should go to a lawyer with your idea for your company name and get a green light.
What is the cost of getting legal assistance?
Lawyers are free to set their own prices for all types of services they offer. However, market standards still give a good idea of the price you can expect to pay for legal services related to incorporating a business:
- Provincial incorporation (Numbered company): $800- $900
- Provincial incorporation (Named company): $900-$1,000
- Provincial minute book: Approximately $100
- Federal incorporation (Numbered company): $1,100 to $1,200
- Federal incorporation (Named company): $1,200 to $ 1,300
But why will you have to pay such a price when the incorporation made by yourself costs slightly above $300? Because the latter price does not include the various additional costs that you may have to pay which the lawyer takes care of settling immediately.
In addition, the business lawyer not only charges you for his expertise but also for his advice which is invaluable to the prosperity and longevity of your company.
For these prices, however, you can expect a “turn-key” service from your lawyer. You will not have to worry about any legal or administrative aspect of the process, that’s for sure!
Hire a lawyer to incorporate your business!
Don’t jeopardize your financial security for a few hundred dollars. Sole proprietorship is definitely a simpler option than incorporation but it still presents significant risks in terms of your personal responsibility. You will certainly not save much money if you are sued for several thousand dollars for a fault you have committed.
The same could be said of corporate finances! You don’t have to sink with the ship just because you run the business. Separate yourself from this burden with incorporation!
If you are convinced of the merits of incorporation and the benefits it can bring to your business, you have knocked on the right door to be put in contact with the best experts in the field!
All you have to do is fill out the form at the bottom of the page and you will quickly get 3 free quotes from business lawyers!
They will be happy to assist you in your incorporation process. So what are you waiting for?