Corporation Basics

For a person operating a business, forming a corporation provides several advantages. What is often considered the primary benefit is that for legal purposes, a corporation is considered to be a separate and distinct entity from its shareholders. This means that the liability of any shareholders is limited to whatever equity they have invested in the corporation. Shareholders cannot be held personally liable for any debts or obligations that the corporation accumulates (there are exceptions to this rule, including if a corporation was formed with the intention of engaging in fraudulent activity on behalf of its shareholders). This is in obvious contrast to simply operating a business in one's personal name.

Keeping in mind the benefits of incorporation, there is also a distinct disadvantage to forming a corporation: profits from a corporation must go through two levels of taxation before reaching a shareholder. Firstly, as a "distinct person" under the Federal Income Tax Act, the corporation itself is subject to taxation. The shareholders can then receive their share of a corporation profits through the payment of dividends. These dividends are also taxed as they constitute a part of the income of the shareholder (who is a distinct person from the corporation). The tax on these dividends need not be paid until the year corporation actually pays out the dividends.

A corporation must be incorporated through a government and registered under an official corporate name. When incorporating a corporation, you may choose either a Numbered Corporation or a Named Corporation. A Numbered Corporation will typically look something like 1234567 Alberta Limited (or Canada Limited if incorporated federally). The government provides the number and the incorporator can choose from a list of suffixes. A Named Corporation is one that has had a name selected by its incorporator. Generally, the name must be distinct enough to distinguish it from other corporations and include both a term that describes the business dealings of the corporation and a choice of suffix. It is possible to change a Numbered Corporation into a Named one, but the process can cost between $250 and $400.

A corporation can be incorporated either provincially or federally. The advantage to incorporating provincially is that the corporate name must only be distinct from federal corporations and corporations inside the province. The disadvantage is that the name will only be protected within the province of incorporation. There may be a similar name in another province which can make it difficult to expand the business. Conversely, incorporating federally means that it will be harder to choose a sufficiently distinct name, but when once incorporated, the corporation name will be protected across the country.

Ready to create a free legal document?
Know someone who could benefit from legal FAQs? Pass this along: