Filling Articles of Incorporation is Just the Tip of the Iceberg...
What Else is in your Minute Book?
Author: Lidia Imbrogno, BA, JD
At Lexcor Business Lawyers LLP, our trademark – Strictly Business® – means that our practice is restricted to business law. Oftentimes a business owner will engage our services at the outset of a transaction such as the sale of their business. In sending us the required documentation to assist in the transaction, we frequently hear that no shares in the corporation were ever issued. In other terms – after the business was incorporated, it was never legally organized. Unfortunately, not organizing a corporation can have legal, financial, and practical consequences.
What Does it Mean to Organize a Corporation?
Lawyers often refer to filing articles of incorporation as giving “life” to the corporation, as it creates a separate legal person in the eyes of the law. But much like taking home a new baby, the obligations have only just begun once an incorporator files articles of incorporation giving “birth” to the corporation.
Organizing a corporation involves:
Enacting By-laws of the corporation;
Issuing shares to shareholders;
Appointing an accountant or auditor;
Naming the corporation’s bank;
Filing applicable government forms; and
Setting the corporation’s fiscal year.
Implications of Not Organizing Your Corporation
Record Keeping Compliance
One of the implications of not organizing your business is that your corporation does not have a minute book as required under both the Business Corporations Act (Ontario) (OBCA) and the Canada Business Corporations Act (CBCA). For more about statutory requirements and practical recommendations around minute books visit our post "What's a Minute Book? and Why do I need one?".
Selling Your Business
A properly organized corporation will be essential if and when you want to sell your business. If the purchaser is purchasing the shares of your business (as opposed to the assets for example) consider this: if shares were never issued, what are you selling? Similarly, not having shares issued will impede your accountant’s ability to assist you in taking advantage of certain exemptions to capital gains tax in the Income Tax Act (Canada) on the sale of the business, as the sale of eligible shares might qualify for a lifetime capital gains exemption.
The sale of a business is only one of the many reasons to organize the corporation. Here are some additional considerations:
Liability Protection: One of the major benefits of incorporating is reducing personal liability for shareholders in the context of a lawsuit. If shares were not issued there may be an argument that the business owner’s limited liability under the OBCA or CBCA is in question.
Expanding Your Business: Access to capital may be limited if lenders or potential investors cannot make sense of exactly who they are lending to/investing in.
If you are an entrepreneur considering incorporation for your business, it’s important to know that filing articles of incorporation is only the first step of this process. For established corporations, it’s never too late to seek out a business lawyer to organize your corporation and get both you and your business up to speed.
If you require assistance with incorporating your business, organizing your corporation, updating your minute book, or any other business law matter, do not hesitate to contact a lawyer at Lexcor Business Lawyers LLP.