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Can I incorporate a company without a lawyer?
Author: 
Philippe Richer
February 18, 2020
A person writing on a notepad and a computer

The short answer is yes. You can incorporate without using the assistance of a lawyer. In Manitoba, you can go to the Company's Office located at 405 Broadway. You pay the applicable fee, $50 for a name search and reservation if you want a specific name, and $350 to create the new corporation, and voilà, you are incorporated. Many people do this. However, the work is not finished. The Manitoba Corporation's Act  stipulates the following at s.20:

Other Obligations:

20(1) A corporation shall prepare, and maintain at its registered office or at another place in Manitoba designated by the directors, records containing...(a) the articles and the by-laws, and the amendments to them, and a copy of any unanimous shareholder agreement;(b) the minutes of meetings and resolutions of shareholders;(c) a register of directors setting out the name, address, and other occupation of each person who is or has been a director of the corporation, and the dates on which he or she became and, if applicable, ceased to be a director; and(d) a securities register that complies with section 46.20(2) A corporation shall also prepare, and maintain at its registered office or at another place in Manitoba designated by the directors, adequate accounting records and records containing minutes of meetings and resolutions of the directors and of any committee of directors. So, in addition to paying the fees and registering the corporation at the Companies Office, shareholders and directors must prepare and maintain a minute book. Furthermore, directors, creditors, shareholders, their agents and legal representatives must have access to the minute book during regular business hours for inspection. The language used in the act is clear. If a corporation fails to prepare and maintain proper records, it violates the act. You may ask, yes, but what's the big deal if someone doesn't do this? The act creates an offence punishable by a fine of up to $5,000.S. 20(9) of the act states: 20(9) A corporation that, without reasonable cause, fails to comply with this section is guilty of an offence and liable on summary conviction to a fine not exceeding $5,000.

Court Cases

While I haven't come across cases where the Crown prosecuted companies under this section, a judge referred to this section in Cholakis v. Cholakis et al., 2006 MBQB 91. In that case, the judge concluded the director of the company violated the act and he was not entitled to a judgement in his favour (The judge also relied on other behaviour for her reasons). The court stated: "It was (the director) who carried out the unauthorized and oppressive acts that were outside of his authority as a director and officer." While many individuals decide to incorporate themselves, very few follow through with all of their obligations. Whenever we deal with clients who incorporate themselves, they usually only provide the Companies Office's incorporation documents. In these cases, we assist our clients in bringing the corporation into compliance with the act, by preparing the required documents. Fortunately, the act allows corporations to update their records in the event of lost or damaged records. So while a corporation may violate the act and be subject to prosecution, a remedy exists.

Income Tax Consequences

In addition to these requirements, directors of a corporation must file an annual return with the Manitoba Companies Office. The annual return confirms the directors, officers, the registered office and the shares issued. If any of these change, a corporation (or its directors) must notify the Companies Office. Failure to file the annual return will result in the corporation's dissolution. If the corporation earns income, this will have a significant impact on the shareholders' tax situation. Corporations (provided they meet eligibility) in Manitoba pay 9 per cent corporate tax on income under $500,000.00. Individuals pay significantly higher rates. If the corporation ceases to exist, Revenue Canada will attribute that income to the individual shareholders rather than the non-existent corporation. Suppose the directors only paid 9 per cent of their income to the CRA, believing the corporation still exists. In that case, the shareholders will be responsible for the difference between the preferential corporate rate (9 per cent) and the rate the individual should have paid (around 48 per cent for income over $70,000.00). Add to this penalties and interest, and you have a very costly mistake. Further to the income tax problem, failing to file a return amounts to an offence under the act. The act states: 375(1) A corporation or extra-provincial corporation that, without reasonable cause, fails to comply with(a) an order of the Director; or(b) a requirement to provide any document, information or return to the Director; is guilty of an offence and liable on summary conviction to a fine not exceeding $5,000.

Share Classes

Finally, unless you specify that you want different types of shares with different rights and privileges such as voting and non-voting shares or preferential shares, those who incorporate themselves will typically only authorize common voting shares. If a single individual owns all the shares, this won't be much of a problem. However, if you incorporate with someone else, either a spouse, friend or family, then all the shareholders will receive the same type of shares. For example, in equally divided corporations, shareholders one and two each own 50 shares. When it comes time to issue dividends (profit from the corporation), both shareholders will receive the same amount because corporations issue dividends by share class and not by an individual shareholder. The corporation's directors will resolve to issue $1,000 per share to all common shareowners in our example. In this case, shareholders one and two will both receive $50,000.00. While this may seem fair initially, it may not be the most efficient from a tax perspective. What happens if the shareholders are spouses and one spouse receives a salary of $60,000.00 from another employer? To issue dividends to shareholder one, shareholder two must also receive dividends. All of a sudden, shareholder two receives $60,000 + $50,000 in dividends for an annual income of $110,000.00 — significantly increasing the tax burden. When lawyers incorporate companies, we ensure that corporations are authorized to issue different classes of shares. In the case above, we would issue shares with the same rights and privileges under different classes - Class A common shares and Class B common shares, for example. So, while anyone can incorporate a company, few perform all that is required. When you choose a lawyer to prepare your corporation, you get the benefit of a compliant corporation. Thinking of incorporating a business? Learn how much it costs.

Disclaimer - Legalese

This article is presented for informational purposes only. The content does not constitute legal advice or solicitation and does not create a solicitor-client relationship (this means that I am not your lawyer until we both agree that I am). If you are seeking advice on specific matters, please contact Philippe Richer at 204.925.1900. We cannot consider any unsolicited information sent to the author as solicitor-client privileged (this means confidential).