Anatomy of Incorporation: Part 1

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Anatomy of Incorporation: Part 1

In Medicine Hat we appreciate the importance of shopping locally and supporting local business. Many small businesses start off initially as a sole proprietorship. As a business thrives and grows over time, your accountant may tell you it makes sense to incorporate your business. Your accountant may direct you to a lawyer to set up your company.

You may be wondering how the process of incorporation works. In this article, and the article next month, I will explain some of the concepts of incorporation and the documents you will sign with your lawyer in order to set up your company.

In law, a corporation (or company) is a separate legal entity which is controlled by its directors and shareholders.

As the name implies, the directors direct the conduct of the business. Directors may be involved in providing the goods and services to its’ customers, or through the use of employees. They are appointed by the shareholders to run the company. Directors are also appointed as officers of the company. The titles of officers include, President, Vice-President, Secretary, Treasurer, or a combination like Secretary-Treasurer. It is important to note, all directors have the same powers and obligations. In other words, the president does not have more powers than the secretary.

Shareholders are the people who are entitled to receive value from the company through dividends, a sale of their shares, or by participating in the division of net value of the company on windup. In many cases the directors and shareholders are the same people. In some cases the shareholder can be a person, another company or a family trust. The voting shareholders control the company and can appoint or remove directors. Shareholders vote with their shares. Where a company has shareholders holding equal amounts of voting shares, and they have a falling out, the company may be in a stalemate as business decisions would require a majority vote. A company that will be owned by two shareholders should consider whether a 51/49 ownership would be helpful to avoid such a deadlock.

Some of the concepts associated with incorporation include the following:

1. Articles of Incorporation

The Articles set out the different classes of shares the company can issue. The articles will give the company the ability to issue common shares and preferred shares. Either type can have voting and non-voting attributes to provide greater flexibility for different levels of ownership and to facilitate business succession planning.

2. Bylaws

The Bylaws mainly set out how, when and where meetings of the shareholders and directors are set, and how voting is conducted on business decisions. For a typical Medicine Hat mom and pop business, the bylaws are not normally relied upon to set meetings. Meetings generally take place with the accountant, or at the kitchen table. However if the business grows and more people become directors or shareholders of the company, the bylaws provide a framework to allow meetings and voting on decisions to take place. The bylaws will also set out how many directors are required to sign cheques.

Stay tuned to my article next month where I continue with my review of general concepts of incorporation.

Les Scholly
Les Scholly helps you navigate the turning points of life. He is a partner with Pritchard & Co. Law Firm, LLP and member of the Society of Trust and Estate Practitioners (STEP). Contact Les at 403-527-4411 or at