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What does “Incorporation” mean? What is a Corporation? How do Incorporations work?
Updated: Jan 29
What does “Incorporated” mean?
Finding yourself with idea for a business—or maybe you’ve already taken steps to start one. Many future entrepreneurs wonder ‘do you need to incorporate a company to start your own business?’ The short answer is No – you do not ‘need’ to incorporate a company in order to start or run your own business. There are many advantages to conducting a business as an incorporated company but it is not a requirement by any government authority in Canada to do so. Many businesses may start as a sole proprietorship and once the business has proved to be viable or successful the business is converted and rolled into a corporation structure (to be discussed in a future blog).
What does “Incorporation” mean? How do Incorporations work?
Being Incorporated means that your business is registered with the government (Federally or Provincially) so that it becomes a separate legal entity. In Canada (and specifically in the Province of Ontario) an incorporation is considered to be a separate and unique ‘legal person’ under the law. This means that the corporation is separate from its owner(s) and is its own legal person with all the rights and privileges of an individual (excluding the protections of the Charter of Rights and Freedoms ie. no right to vote, no freedom of religion, sexual orientation, etc). Being a separate legal person means the Corporation forms its own legal relationships on behalf of itself. Therefore, any contract that it signs or debt it incurs (assuming that no individual has guaranteed such amounts) is the corporation’s responsibility alone.
What is limited liability? What is a ‘corporate shield’?
Any debt incurred by the Corporation (unless it’s guaranteed by an individual) is the sole responsibility of the corporation alone. There is no responsibility of shareholders to further contribute additional funds should the Corporation be unable to pay its own bills. This notion raises the idea commonly known as the ‘corporate shield’ - In a corporation business structure the shareholder is shielde
d from the debts/liability of the company. It is rather the Corporation entity itself that bears the sole responsibility for its debts/liabilities. Hence if the Corporation has in sufficient assets, the corporation may go bankrupt while the shareholder bears no responsibility or obligation for any shortfall (unless guarantees are signed on behalf of the Corporation).
Is incorporation necessary?
You don’t have to incorporate to run a business. If you don’t, your business would be a “sole proprietorship” by default, meaning that you’re signing contracts and doing business as an extension of yourself. Also, all revenues, expenses and taxes will flow through and be intermingled with the individuals’ financials and be the responsibility of the individual. As a sole proprietor, you will be personally liable for all contracts and debts you incur while doing business. That’s a downside for you as the owner. The same goes for general partnerships - if you bring on a partner without incorporating, you and your partner(s) would share the personal liability and any profits for all parts of the business.
The upside of a sole proprietorship or gen
eral partnership is that they are very easy and inexpensive to start up. There are little to no up-front registration or formation costs. You typically just start conducting business - although you may need a business operation licence/permit from the applicable government (Provincial or municipal) depending on the nature of the business you undertake.
Do I need an “Inc.” in your company’s title?
If a company is incorporated it will require a legal ending. There are six (6) choices of legal ending are Incorporated, Corporation and Limited and their abbreviated short forms Inc., Corp. and Ltd. You can also use the French equivalents of each. Each of the legal endings mean the same thing, there is no legal difference between using any of them - they merely denote to the public that the business is an incorporated entity. The choice of the legal ending is more stylistic. You would need to consider the full name being used and which ending suits/fits with the corporation’s name and your stylistic preference.
What is a numbered corporation? Does my corporation need a name?
A corporation does not require a specific name. Very often business operators may use a numbered company (eg. 123456 Ontario Inc.) to operate their business through. A numbered company is a legal corporation but is created
without specifying a specific name prior to incorporation. Names can be amended later or businesses can choose a less permanent option and make use of a time licenced operating name for the numbered corporation (There are pros and cons to these approaches that will be discussed in future blog articles). Accordingly, these companies are simply assigned a generic name by the provincial government (ie. the next available number) that typically takes the form of a number followed by a jurisdiction and the company's legal ending (one of those outlined above).
Alternatively, entrepreneurs can select an operating name for the corporation. Before using/registering a name for the corporation, a legal name search (a NUANS search - Newly Upgraded Automated Name Search) must be conducted to determine if the name is available for use (one of the advantages of using a numbered company is that a name search doesn’t need to occur, saving time and costs). If there is determined to be no conflict in a name with that of a pre-existing company (ie. exact match, confusingly similar, territory, industry etc) then the name can be used. If there is a conflict in the name you may wish to select a second name choice. In determining what name to use availability is one factor, but entrepreneurs should consider the future marketing surrounding such business. The selecting of the corporation’s name is the first step to building and protecting a business’s future brand. Items such as availability of website urls, competitors names, marketing materials, abbreviations, logos should also be considered prior to selecting a corporation’s name as they may have an influence in
the name selection. However, rest easy knowing that a corporation’s name can be amended/changed at anytime in the future – your initial selection of name is not cast in stone.
How do I incorporate a company?
Contact us - Lawson, Clark & Oldman is pleased to offer a choice of affordable incorporation packages. Kindly click here to review our currently available promotions and packages.
Alternatively, if you are not ready to incorporate yet, please review more corporate materials within our blog to aide you in your business journey.