Incorporating is a two part process

July 13th, 2012 by Meliha Waddell

Go on-line. Fill in the appropriate forms. Pay your fee. You are incorporated right? Not exactly.

Incorporating a corporation is actually a two step process. The first step in the process is filing articles of incorporation with the appropriate agency, namely the Ministry of Government Services for a provincially incorporated corporation and Industry Canada for a federally incorporated corporation. The second step is to draft and pass by-laws and the organizational resolutions of the corporation.

By-laws set out the internal rules of the corporation for items such as how often a directors’ or shareholders’ meeting can be held, the process in which meetings are run and the roles and responsibilities of officers. Organizational resolutions are the resolutions, or corporate actions, which are required when a corporation is first incorporated to address issues such as appointing directors, issuing shares and setting a fiscal year end. A properly organized corporation will also contain registries setting out who the shareholders, officers and directors are.

Some entrepreneurs file articles of incorporation and believe they are incorporated. However, without properly constituted by-laws and resolutions, it will be difficult to determine who actually owns what shares and who the properly appointed directors are.

The absence of by-laws and resolutions becomes problematic in three common situations: (i) the shareholders begin to have a dispute as to ownership rights; (ii) Canada Revenue Agency, Workplace Place Safety & Insurance Board or some other government agency requests a review of the by-laws and resolutions for the purposes of an investigation or audit; or (iii) the owner is selling the shares in the corporation.

In the case of a government agency’s review, the absence of these documents may result in these governmental agencies making a finding which is not in the best interests of the business owners. Without the proper paperwork to back this up though, it is difficult to argue against the government. In the case of selling a business, poor incorporation paperwork may create doubt in the purchaser’s mind which sometimes can result in a lower purchase price.

For those who incorporated but never organized the incorporation properly, it is not too late. An “omnibus” or “rectifying” resolution can be authorized by the directors and shareholders of the corporation to correct the lack of paperwork. In some cases, the owners of the corporation pass omnibus or rectifying resolutions in advance of a sale, financing or just to clean up the books.

If you have any questions regarding incorporation, please do not hesitate to contact the Business and Corporate Services department at Devry Smith Frank LLP. We have been assisting our clients grow and prosper since 1964.

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