Wednesday, July 2, 2014

How to Incorporate in Ontario; How to Federally Incorporate

How to Incorporate in Ontario; How to Federally Incorporate
PLEASE NOTE: The following is not meant as specific legal advice but rather general information. This article considers businesses that sell goods or services in Canada only.
5 Basic Steps
   Ø  Step 1 – INTRO: Consider general incorporation issues
   Ø  Step 2 – NAME & NUANS SEARCH: Establish that the desired name is permitted
   Ø  Step 3 – PREPARE & FILE Corporate documents and the Articles of Incorporation
   Ø  Step 4 – ORGANIZATION: Corporate organization (By-Laws, etc.)

Congratulations! You’ve decided to start a for-profit business. Are you going to incorporate your business? When you incorporate your business, it’s considered to be a legal entity that’s separate from the owners (and shareholders). As an owner of a corporation, you will not be personally liable for its acts, debts, or obligations.  Incorporation is not necessary for every business or company. Alternative corporate vehicles such as a sole proprietorship or partnership may be appropriate, given the circumstances.
Accordingly, your first step is to actually think about the best vehicle for your business. Next, you need to name your business. You will then have to prepare the relevant applications and other required forms and documents. Lastly, you will need to prepare your company’s by-laws and other corporate documents.
The first table below lists some of the main advantages and disadvantages of incorporation, both pro and con. The table that follows compares federal vs. provincial incorporation.

-  Limited liability;
-  Transferable ownership;
-  Continuous existence;
-  Separate legal entity;
-  Easier to raise capital;
-  Possibly lower taxes for incorporated businesses, which could translate to tax advantages.
-   Corporations are closely regulated;
-   Costlier than a partnership or sole proprietorship;
-   Extensive corporate records required (e.g. shareholder and director meetings, annual government filings, etc.);
- Risk of conflict between shareholders & directors;
-   *Residency requirements for directors (25% of directors must be Canadian residents).



-   The corporation may carry on business in all provinces & territories (requires additional  provincial registration)
-   Able to use the same corporate name in each province or territory, even if another company is already doing business under a similar name.
-   Enhanced corporate name protection, second only to trademark protection. The corporate name is generally reserved for use anywhere in Canada (excepting Quebec).
-   Can operate cross-country as of right, subject to provincial extra-provincial filing requirements.
-   Incorporator's responsibility to ensure that proposed corporate name is available for use.
-   Names not usually rejected, unless they conflict with another confusingly similar name already in use.

-   Higher initial set-up costs (federal incorporation costs and extra-provincial registration fee(s)). Federal corporations in Ontario & Prince Edward Island may register for free;
-   Much more annual paperwork: filings required by Federal Director, plus all provincially required filings.
-   Federal Name Granting Guidelines are very strict and many proposed names are rejected.
-   Incorporation Fee: $200.00
- Corporate name only protected in province or territory of incorporation
-   Can only operate within the province of incorporation as of right.
-   Must register extra-provincially if operating in other provinces.
-   Incorporation Fee (varies; ON $300.00)

Choosing a corporate or business name is more difficult than choosing a name for a sole proprietorship or partnership because incorporation calls for stricter name requirements. A corporate or business name must identify the corporation and its activities, and include a title such as “Ltd.”, “Inc.”, or “Corp.”

In Canada, corporate names can be in English, French or both. You may also use a separate, equivalent English and French name. For example, "Target Market Inc." (English form)/"Marché Cible Inc." (French form). Before it grants approval, the Provincial Registrar (or federal Corporations Directorate) must decide whether your proposed corporate name is not identical or similar to any other existing company names.

When choosing a corporate name you cannot use words or phrases that are vulgar, obscene or objectionable (in any language). Also prohibited are words with restricted use under federal or provincial laws (think copyright or trademark). You can’t use a person’s name unless that person has or had a material interest in the business and has given written permission. If the person is not living and the name is used within 30 years of the date of death, written consent of the estate is required.

You cannot use words that imply your business is associated with the Crown or government – federal, provincial, or municipal – without its written consent.  Likewise, a private post-secondary institution cannot use the words "college," "institute" or "university" without the written consent of the Ministry of Education.

Business names must be registered in the Roman alphabet (e.g. English, French, Spanish, Italian, Latin, etc.) but may contain numerals. Other alphabets must be translated and registered in a language using the Roman alphabet. If you wish to market or advertise in a foreign language or alphabet, you may do so as long as you display your business name in a Roman alphabet (i.e., English or French).  Interestingly enough, the following marks may be used in the name, but not as the first character:
! " # $ % & ' ( ) * + , - . / : ; > = < ? [ ] \ ^ ` .

As a final note, if the corporation intends to carry on business using a name other than its actual corporate name, the business name must be registered under the Business Names Act.

No matter where in Canada you incorporate, a name search needs to be done. A name search is a report required by the federal and most provincial/territorial governments when granting new corporate names for use. The report lists similar and existing corporate names, trademarks, and the availability of the proposed name. This search is known as a NUANS (Newly Updated Automated Name Search) report. It is a computer-printed search report that shows existing corporate names, business names, and trademarks that are similar to your proposed corporate name. The NUANS report is valid for 90 days from the date it was obtained. This is a link to a list of vendors that provide NUANS searches in Ontario.

The NUANS report is not necessary if you are incorporating a numbered company. Note that the number is automatically selected by the government. The incorporation process for a numbered company is quicker than that for a named one; it’s also possible to first incorporate a numbered company quickly, and then later apply for a NUANS report and change the status of the company from a numbered to a named corporation.

In some provinces, such as British Columbia and Nova Scotia, a name search is performed after you’ve submitted a Name Approval Request or Name Reservation Request Form. If the results of the search are acceptable and your name is approved, it is then reserved for a set number of days during which you must complete the incorporation process or restart the procedure all over again.

STEP 3 – PREPARE AND FILE YOUR CORPORATE DOCUMENTS (i.e., Articles of Incorporation)
Be careful when completing this step! Preparing your corporate documents requires a little attention to detail, as a corporation’s ability to exercise power and carry on business is limited by it articles of incorporation. Your documents should address the following:
  • *The minimum and maximum number of directors;
  • The nature of the corporation's business;
  • The issuance of shares, including any attached rights, privileges, conditions and restrictions;
  • Shareholder rights, including voting rights;
  • Borrowing and mortgaging powers.

Most people usually find this step to be confusing and complicated. Generally, to incorporate your business in Ontario, you’ll need to prepare the following documents:
      ·         The Memorandum (sets out the Company’s rules of conduct);
      ·         The Articles of Incorporation (sets out the rules and regulations that will govern the conduct of the          
             company’s members and directors);
      ·         The Notice of Directors (states required information on directors. You must also submit a federally-
             based NUANS report) (federal incorporation only).
You may be able to find sample templates of these documents online, or visit the business section of your local library.

You can now incorporate your business on the websites of the Federal Corporations Directorate and most provincial registries. You may also submit your application (forms and fees) for incorporation by snail-mail to the Registrar. You’ll receive a Certificate of Incorporation after you’ve successfully registered your new corporation. There are many obvious advantages to filing online, such as convenience and speed. You will receive an immediate acknowledgement when you file online – it’s also $50 cheaper.

If the corporation will have a word name rather than a number name, a NUANS name search report must be submitted with the articles of incorporation. The NUANS name search report is a seven-page, computer-printed search report consisting of existing corporate names, business names and trademarks that are similar to the proposed corporate name. The NUANS name search is valid for 90 days from the date on which it was obtained. The NUANS name search report is not necessary if incorporating a corporation with a number name.

Federal incorporation online
To federally incorporate online, file the following documents in the prescribed form with Corporations Canada using its Online Filing Centre:
·         Form 1, Articles of Incorporation (Original signatures of the incorporator(s) are not required. However, retain signed copies of the original documents in the corporate records).
·         *Form 2, Initial Registered Office Address and First Board of Directors (Original signatures of the incorporator(s) are not required. However, retain signed copies of the original documents in the corporate records).

In this step, you’ll take care of a number of corporate house-keeping matters. You will prepare “By-Law No. 1”, which deals with general operating matters (e.g. meetings, notice, quorum, officers, proxies, execution of documents, etc.). You will also need to prepare any other required by-law, such as by-law No. 2 (addresses the borrowing and pledging of a corporation’s assets as security).

You may also need to draft the initial written resolutions of the directors (or minutes for any meeting held), which addresses how to pass by-laws, allot and issue shares, appoint officers, approve a sample share certificate, approve the corporate seal (if any), determine the fiscal year end, and pass any other necessary or appropriate resolutions. Also, you may have to draft the initial written resolutions of the shareholders (or prepare minutes if a meeting is held) to ratify by-laws, elect permanent directors, appoint auditors or accountants (as the case may be) and pass any other shareholder's resolutions that may be necessary or appropriate.

If you incorporate in Ontario, you must file a Form 1 (Initial Return) with the Ministry of Government Services. If a federal corporation is formed, you must register in any province where the corporation will carry on business.

I hope this helps you get started! As always, feel free to post any comments or questions.

*A Note on Directors and Officers

There are a few important requirements to mention. Firstly, there must be at least 1 director (over the age of 18). You can choose a set number or range for the number of Directors, who can only be individuals. You must provide the details of each Director's residential address and their Canadian residency status (25% of directors must be Canadian, or if less than 4 directors, at least one must be a Canadian resident). Directors can also be shareholders and officers of the same company. The Officers consist of a company's senior management (e.g. President, Secretary and Treasurer). Each company must appoint a President and a Secretary. You must provide the date on which the officer or officers were elected and appointed. One person can be President/Secretary/shareholder/Director of the company. Officers need not be Canadian residents.

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