CORPORATION

A corporation with share capital is the business entity used most frequently to carry on commercial activities. A corporation has a separate legal existence apart from its owners. Therefore, if a substantial uninsurable risk is possible, a corporation is the preferable vehicle to limit the startup’s liability to the amount of capital the founders have invested in the corporation. A corporation may be incorporated under either federal (CBCA) or provincial legislation (OBCA). A corporation is created by filing articles of incorporation with the appropriate provincial or federal office. Federal and provincial corporate laws are similar and the decision as to which jurisdiction to incorporate in depends on the wishes of the incorporators. If the startup intends to carry on business across Canada, than federal incorporation is preferred. If provincial incorporation is chosen it will generally be necessary to obtain a license in each of the provinces in which the startup intends to carry on business (other than the one in which the subsidiary was incorporated). It is possible to change the jurisdiction later since a corporation may transfer from one jurisdiction to another provided that certain procedures are followed.

The OBCA requires a majority of the directors to be resident Canadians, provided that if the corporation has only one or two directors, that director or one of the two directors must be resident Canadian. In contrast, the CBCA provides that, subject to certain exceptions, only 25% of the directors need to be resident Canadians, provided that if the corporation has fewer than four directors, one director must be a resident Canadian. Unless businesses that are owned by foreign entrepreneurs are able and willing to accept the citizenship requirements for directors, it will be necessary either to proceed by way of partnership or to incorporate in a province without such citizenship requirement (Nova Scotia).

A board of directors elected by the shareholders manages the corporation but the board normally delegates to certain officers the oversight of day-to-day activities. Owners are not liable for the actions of the corporation. However, under certain circumstances, the courts will strip away the corporation's protective shield and expose the owners to liability. Courts will "pierce the corporate veil" in extreme cases where shareholders do not follow corporate formalities or intentionally undercapitalize a corporation. The costs of creating and running a corporation may be significant depending upon the complexity of the corporation's organizational documents. The cost often exceed the cost of creating and maintaining a partnership or a limited partnership, and will almost always exceed such costs associated with a sole proprietorship. A corporation is a more formal entity that requires many administrative tasks such as regular board meetings, shareholder votes, and other corporate governance formalities. There are substantial advantages, however, to selecting the corporate form of a startup. Corporate structures permit the creation of sophisticated financial structures in which variable ownership classes are entitled to different rights and preferences. Also, without shareholder agreements restricting transfers, an ownership interest is freely transferable. Finally, the corporation's existence can be perpetual.

The income or loss of a business carried on by a corporation is both computed and subject to tax at the level of the corporation. When a corporation’s after tax income is distributed to its shareholders by the payment of dividends, these dividends are generally taxed again at the shareholders’ level. There is one very important instance in which less immediate tax will be paid if a business is carried on through a corporation rather than on an unincorporated basis – where the business is carried on by a Canadian-controlled Private Corporation (CCPC). A CCPC in Ontario is taxed at about one half the regular rate on the first $400,000 of active business income each year. If a corporation is not eligible for the small business deduction, there is still an advantage from a tax standpoint to carry on the business through a corporation rather than as a sole proprietorship or partnership. An individual proprietor or partner is taxed at marginal rates of up to 46.4%, while a corporation is taxed at a flat rate of about 36.1% on its first dollar of income. If all income earned by the corporation is paid out in the form of salary, the corporation will pay no income tax. The shareholders will thus be taxed at the same rate as if they had earned the income through a sole proprietorship or a partnership.