There are advantages and disadvantages to all forms of business organizations. Accordingly, we recommend that you obtain legal and financial advice prior to establishing any form of business.
Where to Incorporate
A company may be incorporated under either Nova Scotia law or federal law. We have the experience to incorporate a company in both jurisdictions. If the company will conduct business primarily in Nova Scotia, we generally recommend incorporating a Nova Scotia company. If the company will carry on activities throughout Canada or in several provinces, we generally recommend incorporating a federal business corporation.
Different Kinds of Companies
In Nova Scotia, there are three kinds of companies. The first two are companies limited by guarantee and unlimited liability companies. A company limited by guarantee is not used often, and is usually a good idea if the members of the company are not operating for profit, such as a charitable organization. An unlimited liability company is useful for U.S. businesses setting up operations in Canada, and is usually used only on the basis of detailed legal and tax advice. Companies limited by guarantee and unlimited liability companies are not discussed in this letter.
The third kind of company is a company limited by shares, and is the most common form of incorporated business. A shareholder in a company limited by shares is liable for the debts of the company but only up to the unpaid amount of the shares. Practically speaking, this means that a shareholder in a company limited by shares has no liability for the debts of the company provided the shareholder has paid the established price for his or her shares. Under federal law, there are business corporations that have limited liability for shareholders, and there are not-for-profit corporations. Only for profit business corporations are discussed in this letter.
Advantages of Incorporation
The greatest advantage of incorporation is that shareholders have limited liability for the debts of the company. This means that creditors can look only to the assets of the company to satisfy the company’s debts, because a company is a distinct legal entity separate from its shareholders. The company is responsible for debts that the company incurs to run the business. However, it is important to note that the limited liability of a shareholder of a company is ineffective if a shareholder personally guarantees the company’s debts.
It is also important for business owners to understand that incorporating will not shield them from all liability for the activities of the business, if they serve as directors and officers. Under many different laws, directors and officers can be personally liable for things such as employee source deductions, environmental liability, and occupational health and safety matters, if they do not properly carry out their duties as officers and directors. Business owners should ensure they understand these issues as they may particularly apply to the particular business activities.
By contrast, sole proprietorship’s and partnerships are unincorporated businesses. In a sole proprietorship, the owner is personally liable for the debts of the business. In a partnership, each partner is personally liable for the debts of the business.
It is easier to raise capital to fund the operations of a company than in a sole proprietorship or a partnership. To raise capital, a company can issue shares in the company to investors. As well, some government grants and loans are available only to companies.
If there are a large number of individuals interested in running a business, a company is preferable because the rules for corporate governance provide a framework to deal with the interests of each of the individuals.
In addition, it is much easier to transfer shares in a corporation to other shareholders in cases of a buyout, new shareholders, or a sale of the company, than it is to remove a partner or to transfer the assets of a sole proprietorship to another person.
Incorporation also avoids many of the pitfalls that develop upon the death of a sole proprietor or partner. Since a company is a separate legal entity, it continues to exist after the death or withdrawal of a director or shareholder. The company continues to carry on the business under the direction of the remaining directors and shareholders.
A company may have access to lower income tax brackets. A portion of the incorporation costs can also be deducted over time on the company’s tax return.
Disadvantages of Incorporation
There are some disadvantages to incorporation. There are record keeping obligations, separate tax filing requirements, and a company must hold an annual meeting of shareholders and pay the costs associated with calling the meeting and distributing information to shareholders. It is more difficult and expensive to dissolve a company than other forms of business enterprises. The annual accounting costs associated with a company are normally greater because a tax return must be filed for the company and the shareholders may require an accounting firm to prepare financial statements, rather than management.
The costs of incorporation, including fees that must be paid to the Registry of Joint Stock Companies and the professional fees of a lawyer and an accountant are factors to consider.
There is a considerable amount of legal work involved in drafting the incorporating documents. It is prudent to seek the advice of an accountant to ensure that any relevant tax consequences have been considered.
Shareholders’ Agreements
If there is more than one shareholder in a company, it is advisable for the shareholders to enter into a shareholders’ agreement. The cost of a shareholders’ agreement is additional to the cost of incorporation. A shareholders’ agreement will place restrictions on share transfers to third parties, and will deal with issues such as third party offers and insolvency or death of a shareholder. A properly drafted shareholders’ agreement will also include provisions relating to management of the company, fundamental decisions requiring shareholder consent, and the resolution of disputes.
Procedure for Incorporation
There are several procedural requirements related to incorporation, including the selection and approval of a name, the election of officers and directors, the filing of annual reports with the Registrar of Joint Stock Companies, the shareholders’ and directors’ meetings that must be held, and the maintenance of an adequate corporate record keeping system.
We provide all of the services necessary to incorporate a company. We also provide additional services to keep the company in compliance with annual reporting requirements. We will also act as the registered agent for the company.
Conclusion
There are many factors that must be taken into consideration before choosing the legal entity best suited to a certain business. Some of those factors are listed above, but this letter does not contain a comprehensive list of considerations. As well, there are considerations that are unique to every business and circumstances. We therefore recommend you seek professional advice, and our business lawyers are listed below.
This information has been provided for general reference only. For advice on an actual matter, you should consult a lawyer. To contact a member of our team call us at 902-469-9500 or 1-866-339-3400 or contact us online to make an appointment.