The joint stock company (company)

The joint stock company (also known as a "company") is a form of business used to do business. The purpose of a company is to operate a business in order to make a profit. Although this form of business is more complicated and expensive to set up and run than others, it is an almost inevitable choice when a business has a larger turnover.

 

Definition of a joint stock company and incorporation

The joint stock company

The corporation (also known as a "company") is a very different form of business. This difference arises from the fact that the corporation is a "legal person", i.e. it is an entity separate from the people who run it and those who own it.

In other words, a company is autonomous and has its own existence, rights and obligations. Just like an individual, the company can, for example, sign contracts in its name, own property, sue someone or be sued.

One or more shareholders control the operation of the company, including electing directors and voting on important decisions. They also share in the value of the company. The type of shares each shareholder holds determines their rights in the company.

The functioning of the company can be more or less complex. This depends mainly on the number of shareholders, directors and employees it contains. Thus, a multinational company will be much more complicated to operate than a company set up by a single person who is the only shareholder, director and employee.

The functioning of a company depends on :

• of the law under which it was created (its "constitutive law");
• of its articles of incorporation (its "charter");
• its general regulations; and
• of any shareholder agreement.

Incorporation

The process by which a company is created is called "incorporation" or "incorporation". The company is then said to be "incorporated" or "incorporated". The terms "incorporation" and "incorporated" are both anglicisms, but are commonly used in practice to refer to the process of incorporation.

It is possible to create a company "federally" or "provincially". In other words, you can go to the Government of Canada or the Government of Quebec to set up a company. The choice of a federal or provincial company determines the main rules that apply to the company and its operation.

See "Incorporation: Federal or Provincial" for more details.

Benefits of the company

Limited liability of shareholders

Since the company is a legal person, it is distinct from its shareholders. In principle, it is solely responsible for its debts.

With a few exceptions, shareholders therefore enjoy a high degree of protection since their personal liability is limited to the value of their shares.

Unless they have provided a bond or other security (which is frequently required to allow the company to borrow money), shareholders are not liable for the company's debts. Their personal assets are thus protected from recourse by the company's creditors.

See "Disadvantages of Incorporation - Limited Shareholder Liability: An Illusion?" of this article for more details.

Less tax to pay

A company's federal and provincial tax rate is generally lower than that of a person with a large income.

• For tax rates for companies in Quebec, refer to the website of Revenu Québec.
• For federal tax rates, refer to theCanada Revenue Agencywebsite.

Depending on certain criteria, a company can benefit from the small business tax deduction on a portion of its annual revenues:

• For the Quebec "small business deduction", refer to the website of Revenu Québec.
• For Canada's "small business deduction", refer to theCanada Revenue Agencywebsite.

Since a company pays less tax, there is more money left in its coffers at the end of the year. After ensuring that it meets the requirements of the law, the company can then pay out money to its shareholders in the form of 'dividends'.

Finally, the tax that these shareholders have to pay on the dividends is generally lower than the tax they would have to pay if they were making a large income from a sole proprietorship or a partnership. The company can therefore leave more money in their pockets at the end of the year.

Possibility of sharing the income of the joint stock company

Under certain conditions, it is possible to share the income of the joint stock company among the family members of the shareholder. This can be done by paying salaries or bonuses, or by issuing shares and paying dividends.

It is then possible, in some cases, to decrease the income of the person paying the highest tax rate and increase the income of the person paying the lowest tax rate.

Possibility to accumulate income and use it later

The directors of the company may choose to pay only a portion of the dividends to the shareholders and let the remaining income "accumulate in the company".

The directors of the company can then pay these dividends to the shareholders later.

Easier and more flexible financing

The methods of financing a joint stock company are easier and more varied. In order to obtain the money needed for its operation and development, the company can not only borrow money, but it can also issue shares and bonds.

In other words, it can ask employees or relatives to invest in its business. On the other hand, the company generally cannot ask other people to invest in its business by buying its shares without first obtaining the approval of theAutorité des marchés financiers. It is therefore important to check with the AMF before issuing shares.

Unlike borrowing from financial institutions, issuing shares allows the company to raise money without having to repay it and pay interest. It therefore gives the company flexibility in financing itself.

No board of directors (provincial only)

The shareholder(s) of a provincial company may, under certain conditions, decide not to constitute a board of directors or to remove the existing one. They can do so by signing a "unanimous shareholder agreement", which is called a "single shareholder declaration" when there is only one shareholder.

This possibility is particularly interesting for the self-employed or partners who wish to create their own company while simplifying the internal functioning of their business.

Continuity of existence

A company continues to exist until it is dissolved or integrated into another company, even if its owners (shareholders) die.

Disadvantages of the joint stock company

Higher start-up and operating costs

There are many costs involved in setting up and running a joint stock company, including

• government fees (incorporation, registration and licensing);
• organisational costs (e.g. for keeping the book of directors' resolutions, minutes and company rules);
• an annual fee for the maintenance of the company;
• lawyers' and accountants' fees.

The costs of operating a corporation may therefore be higher than those of a sole proprietorship or partnership.

A more complicated operation

More complex taxation and accounting

• The operation of a company requires the preparation of separate tax returns and company-specific accounting (financial and other statements).

Additional paperwork

• The company's minute book and several other registers must be kept up to date (register of shareholders, directors, share and securities transfers).
• Companies operating in Quebec must be registered at Registre des entreprises. The registration must then be updated annually and when there are changes to the information contained in the company's file.

Heavier internal structure

• Apart from a few exceptions, a board of directors must be formed, general meetings of shareholders or resolutions in lieu thereof are required annually, officers may be appointed, etc.

Limited shareholder liability: an illusion?

Although the establishment of a company in principle offers protection to shareholders against personal liability, in practice this protection is often diminished.

Thus, when lending financial institutions or major new suppliers require the personal guarantee of shareholders in case of non-compliance with the company's commitments, their personal liability is engaged.

This situation arises in particular when the business is young or not yet financially strong enough to give confidence to lenders and investors. For the self-employed worker or the partners of a general partnership who are starting a business, choosing the company as a legal vehicle will not generally protect them at all times, since they will have to guarantee the commitments of their company.

Furthermore, it is quite common that shareholders of the company are at the same time directors of the company. Although their liability is limited as shareholders, it is much greater as directors. Thus, if they fail in their duties as directors, they can be held liable, both in civil and criminal matters. We advise you to consult a lawyer on this issue.

See "Advantages of incorporation - limited shareholder liability" of this article for more details.

Incorporation: federal or provincial corporation?

Once the decision to use the corporation as a legal form of business has been made, it is necessary to proceed with incorporation. This incorporation process can be done under either federal or provincial law. The choice will affect the rules applicable to the company and its operation.

The two main laws that allow the creation of a company are the Canada Business Corporations Act (at the federal level) and the QuebecBusiness Corporations Act (at the provincial level).