Incorporating your business without the help of a professionnel seems easy to do since many websites provide a lot of information about the incorporation process. However, many issues and risks are involved. In this article, we will discuss these issues and risks.
What are the difficulties to overcome when you incorporate on your own ?
THE LAW OF INCORPORATION : FEDERAL OR PROVINCIAL ?
First of all, any entrepreneur who wants to incorporate his or her business must determine the law that will regulate the corporation. Thus, the entrepreneur must be able to distinguish between a “federal” corporation, that is one incorporated under the Canada Business Corporations Act, from a “provincial” corporation, that is one incorporated under the law of incorporation of a Canadian province or territory. To learn more about this subject, we invite you to read our articles.
When you incorporate your business under a law unfit for the corporation’s needs it has compelling consequences. For example, if you want to carry on business in Quebec, but the corporation is not incorporated or registered in this province, you cannot carry on business in Quebec until you complete that registration. Similarly, if you incorporate under the federal Act, you are not exempt from your obligation to register the corporation in the provinces in which it operates.
THE CORPORATE NAME
Before incorporating, you must ensure that your corporate name is free of rights. In other words, you must verify that your proposed name is not already being used by another company as a business name or trademark. Most entrepreneurs who incorporate without the assistance of a lawyer do not perform these checks beforehand. As a result, they are denied incorporation as their proposed business name is already in use.
In fact, even if the proposed business name is accepted by the government authorities, the registration does not grant ownership of the name. In fact, a trademark could be owned on that name. This means that the name belongs to the trademark holder and that you cannot use it under penalty of severe legal sanctions. Note that government services do not conduct a trademark research when they accept a proposed business name, hence the importance of undertaking all the preliminary verifications when choosing your business name. For more information on how to choose your business name, you can read the following articles:
SPECIALS LAWS APPLICABLE TO THE BUSINESS NAME
If you incorporate or register your corporation with the Registraire des Entreprises du Québec, the corporate name must comply with the Charter of the French Language. In fact, all business names must comply with this law. In practice, many entrepreneurs are unaware of the existence of this obligation and have their incorporation or registration refused on the grounds that it does not comply with the provisions of this law. Therefore, you are prohibited to use a business name violating the Charter, and forced to change it if you are already operating under that name!
If you incorporate or register a corporation with the Ontario Ministry of Government and Consumer Services, you can operate under an assumed name. To do so, the Business Names Act sets out the rules and registration requirements. However, as in Quebec, Ontario entrepreneurs who do not comply with the law can face fines for failing to register or registering false or misleading information about their assumed name.
THE MINUTE BOOK AND BY-LAWS
Although any federal or provincial corporate registration authority allows you to register a corporation without the assistance of a lawyer, they do not provide you with the documents that establish the corporation: articles of incorporation, by-laws and minute book.
It is essential to have all these documents, and a legal requirement. The documents must be signed, kept up to date, and available at all times at your corporation’s head office. It is common practice for banks and investors to request these documents before providing a loan or financing to a corporation.
Since the drafting of these documents remains technical, they should be produced with the assistance of a lawyer. Above all, it is important to draft these documents in a timely fashion to avoid multiplying legal irregularities.
CLASSES OF SHARES
At the registration stage, you may submit schedules that describe the corporation’s share capital. These schedules set out the corporation’s types of shares, and the rights and obligations that accompany them. In practice, most entrepreneurs who incorporate on their own do not file a share capital schedule upon registration.
Unfortunately, without these schedules, a corporation can only issue and sell “ordinary” shares, which does not necessarily tie in to your business reality or objectives. Omitting to file this schedule is not without consequences because the laws of incorporation provide that any new shareholder of your corporation has the right to vote with the purchase of “ordinary” shares. Thus, it is fundamental to have such a document otherwise you may lose control of your corporation.
Becoming a director of a corporation is not risk-free. Whether or not you hold this position yourself, these risks are best managed with the help of a lawyer.
For example, the by-laws may provide for situations in which a director must or may be indemnified when an action is brought against him or her for an act committed as a director of the corporation. Similarly, an indemnity agreement may be drafted between the corporation and a director. This agreement will provide when and how your corporation will indemnify a director for a claim brought against him or her while acting on behalf of the corporation. Although the agreement cannot go beyond what is provided for in the corporation’s by-laws, it may clarify or specify the scope of this protection.
Although these 2 documents are complementary to the registration of your corporation, they help you plan ahead and prevent future conflicts. The same is true for shareholders’ agreements, which prove to be an invaluable tool for good governance practices, when more than 1 shareholder holds a right or an interest in the same corporation.
For more information about the documents that may or must complete your incorporation, you may refer to our Lex Start Academy section that contains multiple articles and explanatory videos on several topics related to the incorporation process.
To conclude, remember that:
- To incorporate with the help of a profesionnal is to give yourself the means to achieve your objectives, and
- Above all, to limit the pitfalls of your entrepreneurial journey.
If you have any questions regarding your incorporation, do not hesitate to book a free phone call appointment with a member of our team. It will be our pleasure to discuss with you!