Business Law

The Corporation

Separate Corporation personality

 A key characteristic of a corporation is that it is a separate legal entity from its owners. The owners of a corporation referred to as the "shareholders", own the corporation through share ownership. Share ownership does not create ownership of the rights and liabilities of the business. Instead, the business rights and liabilities remain the responsibility and property of the corporation itself.

To further affirm the corporation is a separate entity the case Macaura v. Northern Assurance Company established, neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which a company holds. 

Powers of a Natural Person — A corporation is considered to be a "person" under the OBCA and has the powers, rights and privileges of a natural person, ranging from owning property to incurring liabilities. The articles of a corporation may, but need not, set out prohibitions and restrictions on the exercise of corporate powers. A corporation may not carry on any business or exercise any power restricted by its articles.

Limited Liability of Shareholders

Since the corporation remains responsible for liabilities, a shareholder's liability is limited to the value invested in or transferred to the corporation by the shareholder as consideration for its shares. Therefore, creditors cannot seek repayment from shareholders for any debts owed by the corporation.

Separate Ownership and Management

As a rule, the actual involvement of shareholders in day-to-day management of a corporation is limited. It is the statutory responsibility of the directors to manage or to supervise the management of the business and affairs of the corporation. Generally speaking, the directors of a corporation are the body of individuals elected to manage as a collective the business and affairs of the corporation for the benefit of the shareholders. The first directors of a corporation are the persons named in that capacity in the articles of incorporation. The power to appoint or elect directors is a right that is reserved to the shareholders, and exercised in accordance with the corporate constitution.

What extent can a corporations actions be attributed to its dominant shareholders, officers etc.?

Lee v. Lee’s Air Farming Ltd. [1961] established that unlike a partnership because a corporation is a separate legal entity, a shareholder may be an employee (or secured creditor) of the corporation. A person can act in different capacities within a company it depends what capacity he is acting in when the event transpires.

Determine what hat one is wearing

Assume that an individual X creates a CBCA corporation but keeps it a secret.  X carries on a business in his own name, never making any mention of the corporation in any of his business dealings.  When faced with some unfortunate business outcome involving large liabilities X cannot spring out the corporation and deny that any of the liabilities accrue to X. X would be misrepresenting to other parties that he was in fact dealing with them through a corporation. Thus CBCA s. 10(5) requires a corporation set out its name on all contracts made on behalf of the corporation.

Corporations and Agents and Partners

In addition to relying on agents to do business, corporations are free to act as agents as can any other legal person. Agency may arise by an express agreement between a principal and agent or by implication from their dealings. An agent has the authority to bind their principal to a contract, and a principal is liable for torts that are committed by their agent (the corporation) within the scope of the agency.  One of the questions that needs to be resolved is in what situation is an individual acting as an agent and when are they acting in their personal capacity.   A corporation can avoid liability if the agent is acting outside the scope of agency.

Corporate Purpose

The purpose and Function of a corporation is to provide a vehicle for investment that insulates investors from the form of liability incurred by sole proprietors and partners in partnerships.

The directors of a corporation owe fiduciary duties to their shareholders, business community, and in some circumstance to the interest of “stakeholders” for example the community at large.

In BCE INC. v. 1976 Debenture Holders [2008] 3 SCR 560 the Court affirmed that directors must act in the best interests of the corporation, and in doing so, may consider the interests of various affected groups, including shareholders and debenture holders, but are not required to do so. Ultimately, the directors must act in the best interests of the corporation and its operations. The role of the court is not to second guess the business decisions of the directors, who are expert business persons, but rather to ensure that a legally sound decision making process was followed. 

Corporate Management

Every corporation must have a board of directors.  Most but not all have officers as well.  The position of director tends to be defined under various corporations’ statutes, whereas the statutory coverage of officers tends to be haphazard. Directors and officers that collectively make up corporate management are constrained by statutory standards of behaviour.  Some of these duties also arise by the operation of case law through both legal and equitable duties.  Statutory duties are designed to fill in the gaps left by legal and equitable standards. 

For the past few decades, Canadian corporate reforms have sought to organize all three of these standards under the rubric of statutory codes of minimum standards. With respect to the statutory standard of care required, this is set out in s. 122 (1)(b) of the CBCA. This section establishes a duty of care for directors and officers.

These duties include;

a. to act honestly and in good faith with a view to the best interest of the corporation;
b. to exercise care, diligence and skill

Case law has defined the duty of directors is owed to the corporation not the shareholders. In Peoples Department Stores Inc. (Trustee of) v. Wise [2004] 244 DLR (4th) 546 the duty of directors is not to shareholders, but to the corporation per the CBCA and a corporation is independent from any one of its individual stakeholders; the director must act in the best interest of all of the stakeholders.

Unlike the statement of the fiduciary duty, the statement of the duty of care in s. 122 (1) (b) of the CBCA does not specifically refer to an identifiable party as the beneficiary of the duty.  Instead, it provides that every director exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.  Thus the identity of the beneficiary of that duty of care is much more open-ended, and it appears obvious that it must include creditors.  

The Corporate Name and other features of Corporations

The use of the corporate name is regulated by the general law of trademarks as well as the common law of “passing off.”  In addition, there are also provisions in incorporating statutes that impose certain requirements for the names of corporations that each statute applies.

• A search of Ontario or all of Canada will be required depending on jurisdiction of incorporation. The type of corporation will protect the name in their respective jurisdiction. 
• A federal corporation will require an office in Canada whereas a provincial corporation will require an office in Ontario.
• 25% of directors must be Canadian residents. If there are less than four directors at least one must be Canadian.

Summary

The corporation has four key features: a separate legal entity, powers of a natural person, limited liability of shareholders and, separate Ownership and Management. Their drawback is the fact that carrying on business through a corporation relate to the increased cost and complexity of establishment and maintenance.

Incorporation is initially more expensive and cost more administratively to maintain it seems to fit with the criteria of attracting future investors, employees while both being active in the business. The cost is offset by; the benefit of limited liability, a national market, greater chance to attract experienced sales and management force, valuable investors and, maintain active control of their business.

Acting For You

You depend on us to provide you with timely, efficient and excellent service. The start of your business is a crucial time and its well-being hinges on our ability to guide you through the ins and outs of setting up and maintaining a corporation. Whether the corporation involves a business, a commercial property, or something bigger,  you can rely on us for expert advice.

GENERAL INFORMATION

Please fill out the Incorporation Intake Form ▸

The preceding information will be used to produce the articles of incorporation, organizational resolutions, reporting letter (unless otherwise instructed) and entries for the corporate records system.  Please ensure that all the information is completed legibly and thoroughly.  If any of the foregoing information is not applicable to your client please indicate:  leaving it blank will require further enquiry on our part.

Following are a list of disbursements used in our standard incorporation and organization:

BACK TO BUSINESS LAW▸