What are the basics of corporate law in Canada?

What are the basics of corporate law in Canada?

From small startups to multinational corporations, corporate law influences every aspect of business operations, ensuring compliance, protecting shareholders’ rights, and facilitating seamless transactions. It plays an important role in shaping the country’s economic landscape, offering a stable and secure environment for businesses of all sizes and industries to thrive. Let’s explore the foundational structure of doing business in Canada and understand the incorporation process, different business structures, and the crucial role of corporate lawyers, all of which contribute to the success of businesses in Canada.

What are the main types of business ownerships in Canada?

In Canada, businesses can choose from various structures, each tailored to suit different needs and operations. From the simplicity of sole proprietorships to the extensive capabilities of corporations, entrepreneurs can select the structure that aligns best with their vision and long-term objectives.

• Sole proprietorship: A sole proprietorship is the simplest form of business structure, where the business is owned and operated by a single individual. While this structure offers full control to the owner and minimal legal formalities, it also means that the individual assumes personal liability for the business’s debts and obligations.
• Partnership: In a partnership, two or more individuals or entities collaborate to carry on a business together with the intention of making a profit. There are two main types of partnerships in Canada:
  • General partnership: In this form, all partners share equal responsibility and liability for the business’s debts and obligations.
  • Limited partnership: In a limited partnership, there are two types of partners: general partners, who have unlimited liability, and limited partners, who have limited liability to the extent of their investment.
• Corporation: A corporation is a distinct legal entity from its owners (shareholders). It offers limited liability to its shareholders, protecting their personal assets from the corporation’s debts and liabilities. Corporations can be incorporated under federal or provincial law, each offering unique benefits.
• Co-operatives: A co-operative in Canada is a legally incorporated entity owned by a group of individuals with shared needs, such as access to products, services, or employment opportunities. These can serve various purposes, falling into categories like consumer, producer, worker, or multi-stakeholder co-ops. They must incorporate under specific co-operative Acts at the provincial, territorial, or federal level, which govern their ownership, governance, and profit distribution. Cooperatives in Alberta, except utility co-operatives and credit unions, are generally governed by the Alberta Cooperatives Act.

What is meant by incorporation?

The process of incorporation is the foundational step in establishing a business as a separate legal entity, distinct from its owners. In Canada, entrepreneurs have the option to choose between federal and provincial incorporation, each offering unique advantages. 

Federal incorporation, governed by the Canada Business Corporations Act (CBCA), provides the primary benefit of national corporate naming rights (i.e. the name you reserve can be reserved nationally, as opposed to just within one province). In contrast, unless you register a company extra-provincially, a provincial incorporation only provides corporate name protection within your specific province (i.e. Alberta). Having said that, incorporating federally does come at an additional cost. Specifically, in addition to paying federal incorporation fees, the company must also be extra-provincially registered in each province or territory in which it carries on business.

Additionally, in Alberta, there are three different types of corporations: (1) Limited Corporations; (2) Unlimited Liability Corporations; and (3) Professional Corporations. For most entrepreneurs, a Limited Corporation will fit their needs as Unlimited Liability Corporations or Professional Corporations are typically used for very particular or special situations. 

What are the key advantages of incorporation?

Besides being recognized as a separate legal entity, incorporation offers numerous advantages that can significantly benefit businesses. The three main advantages are as follows:

• Limited liability: Incorporation protects shareholders’ personal assets from the debts and liabilities of the corporation. They are not personally liable for the company’s obligations beyond their invested shares.
• Perpetual existence: A corporation has perpetual existence, allowing it to continue operations even if key individuals or founders leave, providing stability and assurance to investors.
• Ease of transferability of shares: Ownership in a corporation is represented by shares, which can be easily bought or sold, providing liquidity and attracting investors.

Can a foreign company operate in Canada?

Canada’s thriving economy and diverse market make it an attractive destination for foreign businesses seeking expansion opportunities. Foreign corporations interested in operating in Canada have several options to establish their presence and engage in business activities.

• Subsidiary: By incorporating a legal entity in Canada that is wholly or partially owned by a parent company, the parent company can have increased flexibility in its operations and tax benefits in Canada.
• Joint venture: By forming a joint venture with local partners, foreign corporations can leverage their combined resources, expertise, or capital to undertake specific business projects or ventures in the Canadian market. 
• Branch operations: Set up a branch office in Canada, benefiting from tax advantages while operating as an extension of the parent company.
• Franchise: By partnering with local entrepreneurs, known as franchisees, foreign corporations can grant them the right to operate under the established brand, business model, and support system. This structure not only allows for smoother market entry but also enables foreign corporations to capitalize on the market knowledge and expertise of their franchisees, who are already familiar with local consumer preferences and business practices.

What do I need to know before doing business in Canada?

The key factors that foreign corporations should be aware of when conducting business in Canada are as follows:

• Legal compliance: Understanding and adhering to Canadian laws and regulations for the chosen business structure is essential to operate within the legal boundaries.
• Tax implications: Different business structures have varying tax implications in Canada. Seeking tax advice can aid in making tax-efficient decisions and fulfilling tax obligations.
• Disclosure requirements: Compliance with disclosure regulations in franchise agreements and certain business structures is crucial to protect the interests of local partners and investors.
• Resident director appointment: Some provinces in Canada, like Alberta, do not require foreign corporations to appoint a resident director, providing more operational flexibility.

If you are a Canadian or foreign business corporation looking for legal guidance to navigate the intricacies of doing business in Canada, contact Shory Law at 403-216-1199. Our corporate lawyers will provide comprehensive assistance to ensure your business operates seamlessly within the Canadian legal framework. From incorporation to exit, we’ve got you covered. Don’t hesitate to reach out now to embark on a successful business journey in Canada!