Incorporations

Startups typically choose to operate their business through a corporation. A corporation is the preferred form for startups as it provides owners with limited liability (owners are generally not responsible for the debts of the corporation), provides structural flexibility (the corporate structure can be used in a wide variety of circumstances, from solo operations to publicly traded corporations) and can benefit from favourable tax treatment(such the small business deduction and the capital gains exemption for its shareholders).

It is important to understand the three key roles within a corporation:

1. Shareholders are the owners of the corporation and have the right to elect the directors and to receive dividends (which are profit distributions). Shareholders also have the right to share in the assets of the corporation if the corporation is dissolved (after creditors are paid).
2. Directors are responsible for the overall management of the corporation. They approve major corporate action and are personally liable for some corporate debts including HST, employee source deductions and employee wages.
3. Officers are the senior employees of a corporation and hold positions such as president, secretary, treasurer and vice-president. They are appointed by the board of directors.

There are two main steps to the incorporation process - the incorporation and organization. The corporation is incorporated by filing articles of incorporation with the appropriate government office. The articles contain information about the incorporation including its name, the names of the incorporator and initial directors, registered address and share provisions.

When incorporating a corporation, the following are the two main considerations:

• Jurisdiction: Should the corporation be incorporated federally (under the laws of Canada) or provincially (under the laws of Ontario). In general, startups typically opt for a federal corporation because of the stronger name protection - names are protected across Canada, rather than just in Ontario. This is the main difference between the two jurisdictions. In addition, it is about $150 less expensive to incorporate federally (although federal corporations are required to pay a $12 annual filing fee). Finally, federal corporations have the right to carry on business across Canada, although Ontario corporations can generally register or apply in other provinces.
• Share Structure: The corporation's articles of incorporation will set out the classes and number of shares the corporation is authorized to issue. The articles of incorporation will also set out rights, privileges, restrictions and conditions which attach to each class of shares. These may include preferred rights to dividends, liquidation preferences, additional or no voting rights, conversion rights, etc. Unless there is a specific need for additional classes of shares when the corporation is incorporated, in my view, it is preferable to keep the share structure simple and only create classes of shares that a corporation is likely to use, often just common shares or a class of common voting shares and common non-voting shares. Where investors will want a class of preferred shares, the share provisions are typically negotiated by the parties. If a preferred class of shares is required at a later date, the articles can be amended to add the new class of shares (for a fee).

Once the corporation is incorporated, the corporation is then organized - by-laws are enacted and resolutions are made issuing shares to the shareholders, electing the directors, appointing officers and providing other corporate approvals. These documents, as well as others, are assembled in the corporation's minute book.

A minute book can be kept in physical or electronic form. It is a collection of the corporate records that a corporation is required to keep - articles of incorporation (including any amendments), by-laws, minutes and resolutions of directors, registers of shareholders and directors, registers of ownership interests in land (Ontario) and registers of individuals with significant control (Canada) and copies of any shareholder agreements. For convenience, share certificates are often kept in the minute book.