Introduction to Canadian Business Vehicles and Corporations

Corporation

A corporation is a more complex vehicle created through a formal incorporation process. It is the most common business vehicle for larger or more risk-averse ventures because it offers liability protection and various tax advantages.

The Concept of the Separate Legal Entity

The defining characteristic of a corporation is that it is a separate legal entity. In the eyes of the law, a corporation is a "legal fiction"—it is a person in its own right, separate from the people who own or manage it.

This distinction leads to several critical legal implications:

1. Asset Ownership: Shareholders do not actually own the assets of the business; they own shares in the company, which in turn owns the assets.
2. Succession: Because the corporation is a separate entity, it can theoretically exist forever. If a shareholder passes away, the corporation continues to exist, and their shares can be transferred to others.
3. Limited Liability: This is the "shield" that protects shareholders. If a corporation goes bankrupt, creditors generally cannot seize the personal assets of the shareholders.

Exam Tip: Remember that limited liability is not absolute. It can be lost if a director or officer provides a personal guarantee for a corporate loan, or if a court decides to "pierce the veil".

Lifting the Corporate Veil

While the "corporate veil" protects shareholders, the courts have the power to lift the corporate veil. This is a rare and difficult legal maneuver, but it occurs when the court decides to hold individuals personally liable for corporate obligations—typically in cases involving fraud or when individuals use the corporation to evade legal regulations.

Corporate Structure and Governance

A corporation is organized into specific roles to manage its finances, strategy, and daily operations.

Shareholders: The Owners

Shareholders are the financiers and beneficiaries of the corporation. They hold different classes of shares, which dictate their rights:

• Class A Common Shares: These typically grant voting rights, allowing shareholders to participate in major corporate decisions.
• Class C Preferred Shares: These are often non-voting but provide a preference regarding dividends (the distribution of profits).

Shareholders have certain rights, such as receiving notice of annual meetings and accessing financial reports. However, minority shareholders often have a weaker position and may need to pursue "derivative actions" (suing for a wrong done to the corporation) or "oppression actions" (suing for a wrong done to them personally) to protect their interests.

Directors and Officers: The Managers

While shareholders own the company, they do not necessarily run it. Management is split between two groups:

• Directors: Elected by the shareholders, directors are responsible for high-level governance and strategy. They owe a fiduciary duty to the corporation and must act with the care, diligence, and skill of a reasonably prudent person.
• Officers: Appointed to handle day-to-day operations, such as bookkeeping, scheduling, or technical services.

Warning for Directors: Directors can be held personally liable for specific failures, including unpaid wages, unpaid taxes, environmental damage, or breaches of human rights and consumer protection laws.

Agency and Authority

Because a corporation is an artificial entity, it cannot act on its own; it must act through agents. These agents (such as employees or officers) must have the authority to bind the corporation to contracts or obligations. This authority can be:

• Actual Authority: Explicitly granted through an employment contract or direct delegation.
• Apparent Authority: Authority that a third party reasonably believes an agent possesses based on the corporation's actions or representations.

The Incorporation Process

To create a corporation, one must undergo the incorporation process, which involves filing specific documents with a government agency. While the specific requirements vary by province, the general components include:

• Articles of Incorporation: These define the company's name, its authorized share capital (the types and number of shares it can issue), and its objects (the purpose of the business).
• Bylaws: These are the internal procedural regulations that govern how the company is operated.

For example, in British Columbia, one files "Notice of Articles," whereas in other provinces or federally, one files "Articles of Incorporation".

Summary Table of Business Vehicles