Incorporations, Annual Returns, Partnerships, Professional Corporations, Shareholder Agreements
Incorporation is the process of creating a Corporation that is validly registered in Alberta. Many small business owners look to incorporation for tax planning advantages, or to protect their personal assets from liability related to the business.
Incorporation is one of several “business vehicles” (Sole Proprietorships, Partnerships, etc.) available to you. Deciding on the most appropriate business vehicle is a complex and nuanced issue, and we recommend speaking to a lawyer to choose the right one for you. That being said, Incorporation is the most commonly recommended business vehicle in Alberta.
To remain current, Corporations must file Annual Returns each year with the Corporate Registry. We offer this service to our Corporate clients, and also use the opportunity to prepare resolutions of the Shareholders and Directors of the Corporation.
These ‘internal’ resolutions can be helpful to show who was involved in the business each year, and can be invaluable if the Corporation ever has issues with the Canada Revenue Agency, gets sued, or is being sold.
Our fee for Annual Returns can be found on our Fee Schedule.
Shareholder Agreements governing how the Shareholder of a Corporation will interact with the business, and with each other. Their primary purpose is to govern the relationship between business partners to protect all of their interests and to keep the business running if there are ever problems in the future.
The most common Shareholder Agreement is a Unanimous Shareholders Agreement (a “USA”). We recommend that every Corporate Business run by more than one person have a USA.
A USA is designed to protect the company and the business from disagreements between partners, and from unforeseen events that can complicate the ownership of the Corporation. The following is a non-exhaustive list of some of the issues our USA can cover:
- What happens if a Shareholder dies?
Most USAs will provide a mechanism for the Corporation or the other Shareholders to buy back the deceased persons’ shares to prevent a stranger from becoming a Shareholder.
- What happens if a Shareholder suffers from a mental breakdown?
Most USAs will provide a mechanism for the Corporation or the other Shareholders to buy back a person’s shares if they suffer a mental breakdown or become addicted to drugs or alcohol. This allows them to cut a problem shareholder out of the business.
- What happens if a Shareholder gets divorced?
When a Shareholder gets divorced, their property can divided with their former spouse. There is a risk that this division will result in the former wife or husband getting some Shares and becoming a Shareholder in the business. A good USA will provide a mechanism for ensuring that the former spouse of a Shareholder cannot become a Shareholder themselves through a divorce.
- Ensuring that no Shareholder has their ownership “diluted” (made worthless)
Where there are multiple Shareholders with differently weighted voting rights, it is possible to bully a smaller Shareholder by issuing more shares to “dilute” their ownership. A good USA will prohibit the dilution of a Shareholder’s interest without their consent.
- Ensuring that no Shareholder gets cut out of the decision-making process.
If a Shareholder own a small percentage of the voting shares in a Corporation, it can be difficult for them to have much control over the decision making process. It is possible to craft a USA such that a smaller shareholder can have more control over decision making without giving them more ownership of the Corporation.
- What happens if two Shareholders cannot work together anymore? Who stays, and who leaves?
Perhaps the most important provision in any USA is how to resolve a irreconcilable issue between two shareholders. If two partners simply cannot work together anymore, but neither is willing to leave, what then?
Most USA will have something termed a “Shotgun Clause”. These clauses are designed to provide a simple, definitive way of ensuring that one person leaves the Corporation without being treated unfairly.
Basically, a Shotgun Clause allows a Shareholder to offer to buy another’s shares. The initiating Shareholder sets a price, and the responding Shareholder must choose to either sell their shares at that price, or to buy the other’s shares at that same price. This ensures that one of the two Shareholders will leave the company, but that they will be paid fairly for their Shares.
- What happens if a Shareholder wants to sell their stake to someone else?
If a Shareholder decides they want to leave a business, they need to find someone else to buy their Shares. If they find a buyer, that buyer will take their place in the business. What happens if the other Shareholder do not want to be in business with a prospective buyer?
A USA can grant Shareholders a “Right of first Refusal” if another Shareholder is trying to sell their Shares to someone outside of the company. Basically, once the Shareholder finds a buyer willing to purchase their shares for a certain price, another Shareholder, or several Shareholders together can instead purchase those shares for that price. This allows the partners to prevent a 3rd party from entering the business without their consent.
Partnerships, like Corporations, are a type of business vehicle available in Alberta. Partnerships differ from Corporations in that they do not provide the any liability protection or tax advantages. They are, however, much more flexible than Corporations, and do not require their own tax filings.
Partnerships are commonly used among professionals, such as law or accounting firms. They are also often used as vehicles for real estate development projects.
Choosing the right business vehicle requires good advice and a thoughtful analysis of your business and its objectives. Our lawyers can help you to determine what solutions are right for you.
If you are a lawyer, accountant, doctor, other health care professional (including dentist, chiropractor, or optometrist), you may want to consider creating a Professional Corporation (a “PC”).
A Professional Corporation is identical to any other Corporation, except that its voting shareholders must all be practicing members of the same Profession, and that its business can be the “practice” in that Profession. As such, a Professional Corporation must obtain a license to practice from the governing society or college of the Profession.
The advantages to running your practice through a professional corporation are the same as any other business. You can immunize yourself from personal liability for debts of the Corporation, and you can take advantage of the special tax treatment of a Corporation.
If you are starting your own practice, a Professional Corporation is strongly recommended. Having your earnings taxed at a lower tax rate allows you to reinvest more into your business each year. Down the road, you can also take advantage of income splitting opportunities with your spouse, or with your children once they become adults.