The following is no substitute for advice provided by a lawyer specifically for you. It is intended only to help you understand that advice. No responsibility is taken for any problems arising except due to paid legal advice.
©1996 Jaques Law Office. All Rights Reserved.
Commercial law is the field of law relating to business. This touches many other fields of law, such as civil litigation, contracts, debtor-creditor, labour law, and so forth, but it is distinct in its function of creating and maintaining the legal structure under which business is carried.
In law, people are not the only people. The law also recognizes certain organizations as people too. These can include municipalities, provinces, states, countries, trusts, estates, banks, credit unions, professional organizations, and various types of corporations. These fictional people may enter into contracts, use the courts, and even be punished for criminal or regulatory offences, and in general enjoy the same rights and responsibilities as actual people.
This is the situation when somebody simply begins to operate a business. He or she is personally liable, and all of their assets are at risk. Any profit goes onto his or her tax return.
Registering a business name does not actually change the structure of the business. Indeed, a corporation may register a business name, just as an individual can. But once registered, the business can enter contracts in that name. However, it is just an alias. If the business is operated by an individual (a sole proprietorship), then the individual will be liable.
The registration of a business name will protect against use of the name by anybody else within the jurisdiction. It can be registered provincially and/or federally. A business may even want to register it in other countries. If there is a dispute about who is entitled to the name, a lawyer can obtain a decision for the appropriate body or court.
A Partnership can be created inadvertently. They need not be registered or approved. Whenever more than one person operate in common for profit, they are in a partnership. That entitles each partner to certain rights in deciding how the business is run, how the profits and property are divided, and even to ask a court to end the partnership and divide it up. Further, partners can become liable for acts and debts of the other partners.
Therefore, it is essential that there be a clear agreement between any people operating in common for profit. It should provide for what happens in the event of a partner's death, disappearance, insanity, insolvency, failure to participate, or desire to leave. It should control who can buy into the partnership. It should provide for a simple and fair way of getting rid of a bad Shareholder, without requiring great battles in court.
The law does permit Partnerships to register, and to register as Limited Partnerships. That permits people to invest in the Partnership as a Limited Partner, without the usual risks of being liable as a normal partner.
The law created corporations, also called companies, to protect business-people from exposing themselves to financial ruin if their business failed. By using a corporation, they can control how much of their assets are at risk. Then their financers and suppliers can decide how much credit to offer. This remains the primary legal advantage to incorporation, although in modern times, liability insurance may be desired in addition or instead.
The second advantage to operating a business through a corporation is that the various taxes generally operate with different rules on corporations than they do on individuals. For instance, an individual receives a minimum amount of income tax free, unlike a corporation, but an individual's tax rate will climb after that, while a corporation's tax rate remains steady. There are many differences, and a skilled accountant can take advantage of them.
The disadvantage of a corporation is administrative. There are costs and extra work required to create and maintain a corporation, including separate tax returns for it, registration of annual returns, regulation of ownership interests, and so forth.
It's useful to compare corporations to democratic municipalities. Shareholders are the citizens. However, the number of votes they get are determined by the number of voting shares they hold. Like citizens, they elect representatives, called Directors. These Directors then elect Officers, like Presidents, Secretaries, Treasurers, and so forth. Then the Officers will hire and supervise staff and generally operate the corporation.
A person can act in more than one capacity. For instance, many corporations are held by sole Shareholders, who then elect themselves the Director and President, and operate the corporation.
Shareholders may decide to keep power themselves and act directly. However, the power comes with responsibilities. Generally, Shareholders are not liable for acts of the corporation, while Directors and Officers can be liable for wrongful acts, though not for ordinary business activity. However, if the Shareholders assume the power, they can be liable.
The Articles of a Corporation are its constitution. They provide its basic structure such as the types of shares permitted, how many Directors are permitted, what types of business it can do. These must be registered with and approved by the government in order to create the corporation (incorporate).
The Articles will permit certain types of Shares. Shares can have different rights, such as voting, participating in dividends, having a fixed cash-in value, having first claim to the property of the corporation in the event of a liquidation, and so forth. The share structure must be flexible enough for financial planning yet simple enough for convenient operation. Since it is nearly as expensive to change the Articles as to incorporate, it is wise to have a lawyer prepare the Articles right from the start.
Once incorporated, the Shareholders must do things. Since the corporation exists only on paper, it can act only on paper. Anything it wants to do, it must do by a Resolution. The Shareholders meet, propose, vote, and record Resolutions. These can be specific, such as 'We will use Bank XYZ', or more commonly general, such as 'The President will choose our bank from time to time.'
Bylaws are like, well, laws. They are created by approval by Shareholder resolution. They will set out in one detailed document how to perform basic corporate tasks, such as calling a meeting, voting, entering a contract, dividing profits, and so forth. They require a tremendous amount of forethought and planning. However, your lawyer will have precedents for these which have been developed with the advantage of literally hundreds of years of experience.
Obviously the Shareholders can make an agreement between themselves. However, the law will treat a Unanimous Shareholder's Agreement ("USA"), which is registered, in a special way. Ordinarily of course, a contract is only effective on the people who make it (the parties). However, provided that the Share Certificates have a notice as to its existence, and it is registered with the government, any new Shareholders will also be bound by the agreement, and the corporation itself will be bound.
So, the Unanimous Shareholder's Agreement is the ideal place to include many essential elements controlling how Shareholders deal with each other and with their shares. It should provide for what happens in the event of a Shareholder's death, disappearance, insanity, insolvency, failure to participate, or desire to leave. It should control who can buy shares. It should provide for a simple and fair way of getting rid of a bad Shareholder, without requiring great battles in court.
In our opinion, an Unanimous Shareholder's Agreement is absolutely essential if there will be more than one Shareholder, and before there are more than one Shareholder. Further, it is a terrible mistake to try to write one without a lawyer's assistance. For more detail, see our page on Unanimous Shareholder's Agreements.
We have already indicated that the Articles, Bylaws, and Unanimous Shareholders Agreements should be drawn by a lawyer. Undoubtedly, the first sample Resolution should be drawn by a lawyer, though after that, simple ones may be drawn by the Shareholders themselves.
The corporation will enter contracts, to sell its own products, to employ its own staff, to obtain financing, and to purchase its needs. Obviously a lawyer should review or draw them.
The corporation has certain obligations in order to maintain its corporate status. These include filing annual returns to the government, and passing certain annual Shareholder and Director Resolutions, to handle requirements for things such as approving financial statements, electing Directors, appointing Officers, deciding on auditors, and so forth. A lawyer should draw up at least the first set of these annual documents.
The corporation must maintain a registered office. Since legal documents can be served at that office merely by mailing them or delivering them there, even if nobody actually receives them, it is essential that this office be stable and manned continuously by people who know how to respond to these very time-sensitive and important documents. A lawyer's office is generally the best choice.
Most areas of business operation now have their own regulatory requirements. A lawyer will generally not be aware of these except for common areas, but a lawyer has the research tools and resources, oftentimes exclusive access to such resources, to determine them.
Changing of corporate structure and ownership must comply with the existing documents of the corporation as well as by general law. A lawyer can offer reliable advice on how to understand the requirements.
A transaction regarding shares may qualify as a transaction regarding Securities, which are intensely regulated by the Securities Commission, unless the corporation carefully preserves its private corporation status. The Securities Commission's requirements are extremely expensive with onerous ongoing financial disclosure requirements. However, if the corporation wishes to use share issue and sale as a means of financing, then it must submit to these requirements. Avoiding them if possible or meeting them if necessary absolutely requires expert advice.
The page on capital gains (though oriented toward estates, may also be useful.
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