CORPORATE LAW

There are generally three types of business structures that are commonly used:

• a sole proprietorship
• a partnership, or
• a corporation

The corporation (also referred to as a "limited company") is the most commonly used business structure. The main reason for forming a corporation or limited company is to carry on business or to be able to conduct business more efficiently.

A corporation is a separate legal entity created under the Business Corporation Act, S.N.B. 1981, c. B.-9.1. The corporation has an existence separate from the owners and the directors and officers of the corporation. A corporation has the same power as a natural person; for example, a corporation can enter into contracts in the name of the corporation, sue and be sued in the name of the corporation, carry on business, buy and sell property, form associations with other individuals or corporations. In the Province of New Brunswick a corporation can be formed by one or several individuals.

The directors of a corporation are in charge of the management and administration of the business and affairs of the corporation. The officers of the corporation may consist of a president, vice president, secretary and possibly a treasurer. Since it is possible that one person can form a corporation, the sole shareholder would also be the director of the corporation as well as the president conducting business alone without the need for a secretary or any other officer.

BENEFITS OF FORMING A CORPORATION:

Limited Liability is a primary benefit to forming a corporation. In general this means that the owners and shareholders of a corporation are not personally liable for debts, judgments or obligations of the corporation. However, be careful! There are certain exceptions to this general rule whereby statutory law or by some act done by the shareholders could make them personally liable. As an example, the shareholders could become personally responsible when a corporation applies for a line of credit. To secure the line of credit, the lending institution may require the shareholders to co-sign the loan or personally take out the loan themselves and then become responsible for that debt.

The corporation is a separate legal entity from the shareholders and therefore it has perpetual existence. If the ownership of the corporation changes, the corporation continues to exist in law. This provides for continuity of the business of the corporation.

The ownership of a corporation may easily be transferred simply by transferring shares, another benefit of conducting business as a corporation. The transfer of ownership can be as easy as endorsing the back of the share certificate in favour of the new shareholder. However, sometimes it is not so simple. The new owners may require various representations and warranties from the corporation and at the same time the previous owners may also wish to exclude liability in certain areas and limit representations and warranties. All this must be addressed while the corporation is actively carrying on business.

Tax advantages under the Canadian income tax laws are in place for running a business as a corporation as opposed to sole proprietorship or partnership. If a corporation qualifies as a small business and has active income, it can take advantage of small business deductions and pay income taxes at a reduced rate.

DISADVANTAGES OF FORMING A CORPORATION:

Since corporations are subject to regulations which require greater organization and record-keeping, this may be an added cost of doing business. For example, a corporation must keep records of its shareholders, directors and officers, and any changes in these categories must be recorded and filed with Corporate Affairs New Brunswick. Each year a corporation must file its annual return or "year end statement". These may result in additional costs that may not occur in a sole proprietorship or partnership.

It is worth noting that certain corporate records are open to public inspection. For example, the names of the directors of the corporation, the corporation's home address or home office is made available to the public.

As stated earlier, director and shareholder liability may also be a possible disadvantage to establishing a corporation. Consideration should be given to certain situations where directors or shareholders of the corporation could be held personally liable for certain wrongful acts or failures of the corporation.

It is important to have legal advice and guidance while conducting business as a corporation so that the business is able to run efficiently and personal liability is minimized.