WHAT YOU SHOULD KNOW ABOUT CANADIAN CORPORATE LAW
Among the definitions of business, the Concise Oxford Dictionary lists it as a person’s regular occupation or trade and then further elaborates it as commercial activity. The point to be noted here is that the word corporate has not been used, though it generally means a large company or group usually engaged in commercial activity. That is not, however, necessarily true: There are corporate bodies engaged in philanthropic work, improving the conditions of north-sea whales and so on without making any profit. Another distinguishing feature of a corporate body is that it is authorized to act as a single entity — in the eyes of law, it is similarly regarded as a person with the corresponding duties, obligations, privileges and rights.
It would not be wrong to assume that the first impression of a business people mostly have are those small corner shops where they went holding their parent’s hands to get candies in the fog of childhood. A friendly person stood behind the counter (usually, a neighbour). Money was paid, candy was taken and business was done. Those are known as family businesses, a business in which one or more members of one or more families own the business and look after its day to day functions and make efforts to enlarge its operations. So, it happens that in some countries, many of the largest publicly listed firms are family-owned. Thus, a firm is regarded as family-owned, if a person is the controlling shareholder; meaning an individual natural person (and not a state, corporation, management trust, or mutual fund) can command enough shares forming at least 20% of the votes, which should be the highest percentage of votes as opposed to other shareholders.
Now that we have discussed shares, we have stepped into the area of corporate business. Corporate, derived from the word corporation, is a group, has a separate legal entity and has its own rights, privileges, and liabilities, which have nothing to do with those of its members. Diverse are the forms of corporation, and in general they are engaged in businesses like banking, manufacturing, trading and so on. It is possible for an individual or the members of a family to carry out quite a number of distinct business activities, yet there are corporates, which began as a family business. The question then arises, why do they incorporate? Generally, the answer would be, it depends on their particular needs and situations. Anyway, there are distinct advantages of incorporating a business instead of carrying on as a sole proprietorship or partnership. An important factor in this regard is that to incorporate has to be either Canadian federal incorporation or provincial incorporation such as that of the province of Ontario.
Incorporation would result in the creation of a legal entity usually called a company, and which has the same rights and responsibilities under Canadian law as a natural person. Leaving aside the details, it can be said that this act (incorporation) enables the company to get assets, raise loans, and enter into contracts. The company has also the authority to sue (and, in turn can be sued and can even be found guilty of committing a crime). Naturally, the money and other assets of the company belongs to itself and not to those holding shares of the company. It also follows that with incorporation, the company retains, till the time it is dissolved, its separate legal identity and assets along with its rights and responsibilities. There is no change in that status in the event of one or many shareholders/directors selling off their shares, dying or resigning from the company. A crucial advantage is that the liabilities of the share holders are limited, which means they are not required to pay back the loans the company has taken. In the event of bankruptcy, the shareholder stands to lose only the money she invested in the company, excepting the instance where the shareholder is a personal guarantor of the loan taken by the company. Although the shareholders own the company, there is no way the company’s lenders can recover the money from them. However, in case of a special relationship, say, that of a director, the shareholder could be held responsible for the loans or other obligations taken by the company. It is necessary to note here that the Canada Business Corporations Act or reciprocally the Ontario Business Corporations Act, lays down a number of obligations on directors. One more benefit is the reduction of taxes to pay. As the corporate tax structure is more kind to companies than that applicable to individuals and considering that companies are taxed separately from their owners, there is generally some monetary relief due to incorporation.
Incorporation usually makes it less difficult for a business venture to raise money than what the others face while doing so. Such difficulties limit the growth of other businesses, while companies have the option to issue shares and release bonds. As financial lending institutions regard companies less risky and failure prone, they get money at relatively low interest rates.
A company remains in business even after all the founders (shareholders and directors) are dead and gone, unlike the business of a lone owner or a few partners. The ownership of the company is inherited by the heirs of the shareholders. Admittedly, this can happen to the successors of other kinds of businesses as well provided they are not squabbling amongst themselves.