Can I incorporate a company without a lawyer?
The short answer is yes. You can incorporate without using the assistance of a lawyer. In Manitoba, you can simply 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:
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 does so in violation of 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.
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, in part, that because the director of the company violated the act, 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 incorporation documents received from the Companies Office. 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 its records in the event of lost or damaged records. So while a corporation may be in violation of the act and 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 Companies Office. The annual return confirms the names of 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% 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-existant corporation. If the directors only paid 9% of the income to CRA believing the corporation still exists, the shareholders will be responsible for the difference between the preferential corporate rate (9%) and the rate the individual should have paid (around 48% 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.
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 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 shareholder 1 and 2 may 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 individual shareholder. In our example, the directors of the corporation will resolve to issue $1,000 per share to all common share owners. In this case, shareholder 1 and 2 will both receive $50,000.00.
While this may seem fair at first glance, 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? In order to issue dividends to shareholder 1, shareholder 2 must also receive dividends. Now all of a sudden, shareholder 2 receives income of $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 actually perform all that is required. When you choose a lawyer to prepare your corporation, you get the benefit of a compliant corporation.
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Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate, and corporate law, he leads his team in providing accessible legal services. Philippe also authored the business law course for the Knowledge Bureau and instructed the français juridique class at the faculty of Law at the University of Manitoba.