Hello blog readers! This post is about directors' residency requirements in Ontario.

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with entrepreneurs in a wide variety of industries. (It is actually one of the best parts of this job.)

Several years ago, when covid first hit, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create a blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs. More recently, the law around director's residencer requirements changed, and so I wanted to write this short blog.

It’s all good, man. Let’s do this!

Provincial Incorporation Versus Federal Incorporation 

In Ontario, business peopel are free to choose between incorporating federally or provincially.

A federal corporation will be governed by the Canada Business Corporations Act (CBCA). Meanwhile, a provincial corporation in Ontario will be governed by the Ontario Business Corporations Act (OBCA). 

These two pieces of legislation are, overall, very similar. However, one significant differnece between the two acts bears noting. This is the removal of requirements in the OBCA around the residence of corporate directors. 

The Starting Point 

Corporations operating in Canada were historically subject to  residency requirements for their directors.

Both federal and provincial corporate law enforced the requirement that  a certain percentage of corporate directors were Canadian residents. Under the Canada Business Corporations Act (CBCA), at least 25% of a corporation's directors were, and still are, required to be "resident Canadians." This has the practical consequence that if there are less than four (4) directors, one of them must be a Canadian resident, and if there is only one (1) director, he or she must be a Canadian resident.

The Ontario Business Corporations Act (OBCA) mirrored these residency requirements. Before July 5, 2023, section 118(3) of the OBCA mandated that 25% of an Ontario corporation’s directors had to be "resident Canadians." For companies with four or fewer directors, at least one of them had to meet this residency criterion.  

Considerations

The residency requirement rule was thought to be part of a policy aimed at ensuring Canadian control over corporate governance.

The rule presented both challenges and benefits for businesses. While it guaranteed Canadian influence within corporate boards, it also limited the ability of multinational corporations to freely appoint directors. Businesses seeking to expand into Ontario or Canada as a whole often had to ensure compliance with these rules, which sometimes meant finding Canadian directors even when suitable candidates were located outside the country.

Changes to Ontario Legislation

As of July 2023, the OBCA has been amended, which removed the director residency requirement.

With the elimination of section 118(3), Ontario corporations are no longer obligated to appoint directors who are resident Canadians. This change means that businesses operating in Ontario under the OBCA can now be entirely controlled by non-residents of Canada.

The removal of this requirement may be material for multinational or  foreign-owned businesses. Ontario corporations now have more flexibility in determining who can serve on their boards, without needing to navigate residency-related restrictions. While the shift may ease operational burdens for corporations, it has also raised questions. Some may argue that removing the residency requirement will reduce Canadian influence over corporations operating within the country.  

It is beyond the scope of this post to argue one way or another whether

Practical Takeaway  

We have previously reviewed certain differences between provincial and federal corporations. In that post we came to the conclusion both types of corporations have advantages and that choice between the two should be made based on specific facts in each particular case. 

The removal of residence requirements adds one more important consideration of which entrepreneurs should be aware.  

Hey guys! 

In this post, we will keep digging into the question of "what is a corporation?"  We are going to look at three practical features of a corporation. 

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with a range of legal structures, and that includes corporations. 

Last year, when we first got locked down, I was, of course, a bit shocked. As time goes on, I started thinking about giving something back to those around me. One idea was to create this blog as a source of credible, reliable information. In particular, I hope this first set of blog posts helps guys (and girls) who may be first-time entrepreneurs. 

Incorporation is a powerful legal structure. It has both legal and business advantages as well as disadvantages, which we are going to introduce below. 

It's all good, man! Let's get started! 

Learn Something New Everyday

What is a Corporation

A corporation is a structure -- you may also refer to it as a 'legal form' --- for carrying out business activities. 

Incorporation was historically justified as a means of allowing private individuals to pool risk. Sharing risk helped people to undertake distant journeys. (These long-distance trips were otherwise only possible for states.) 

In today's world, there is a related orthodoxy. It holds that the corporate form enables business people to reduce transaction costs. The corporation also standardizes agreements between the various participants in a corporation (i.e. directors, executives, shareholders). These agreements are too complicated and expensive for individuals to articulate through private contracts alone. 

Ultimately, a blog can't tell you *everything* that you need to know. 

Still, I think that everyone deserves to know as much as possible about what they are dealing with when they incorporate their business. For that reason, I am writing up these rather detailed, technical posts.

The rest of today's post introduces three key features of the corporation.

Feature 1: Distinct Legal Person

The previous post talked about three theories for why corporations get a separate legal existence. The bottom line, tho, is that Canadian courts will treat a corporation as having a distinct identity. That means that the corporation's legal identity is separate from its owners, i.e., the shareholders. The corporation's legal identity is also separate from its management, i.e., the directors and officers.

A corporation's separate identity has several significant consequences. 

Feature 2: Limited Liability

The corporation's separate identity results in limited liability for the owners. Let's think about this a little more. 

In practice, the corporation's separate identity means that while the shareholders own the corporation through their ownership of shares, they do not own the corporation's property. Likewise, the rights and liabilities of the corporation are not the rights and liabilities of the shareholders.

A shareholder has limited liability because the corporation's distinct identity means that the shareholder's personal liability is limited to whatever amount he has invested in the corporation's share capital. Put more simply, the most the shareholder can lose is whatever he or she has put into the corporation. 

(The word liability refers to both financial liabilities and legal liabilities.) 

Feature 3: What Can a Corporation Do?

Another key feature of the corporation is the expansive range of activities that a corporation can participate in. This feature also relates to the corporation's legal person-hood.

Historically, individual corporations were created through the granting of a corporate charter by a national government. The corporate charter was essentially a mandate. It set out what the corporation could do. By extension, if a certain activity was not listed in the corporate charter, then the corporation was not legally authorized to participate in that activity. In Canada, acts outside the corporation's charter were referred to as ultra vires.

The law has changed, however. In Canada, corporate law now embraces a liberal approach to corporate acts. A corporation can own property, carry on business, possess rights, and incur liabilities. It can enter into contracts. It can sue or be sued. It can lend money, borrow money, buy insurance, and soon. The default assumption is now that there is not a need for specific authorization. 

Today, if the founders of a corporation want to limit its activities, they can do so in the Articles of Incorporation. However, most corporations today do not tie their hands in this way. 

Feature 4:   Multiple Owners

Canadian corporations can potentially have an unlimited number of different owners. The owners of a corporation are shareholders. Shareholders own a share of the corporation's equity. 

Your business may still be in the start-up stage. But, the possibility of having numerous owners can be important, both at the beginning and as your business grows.

Ownership through shareholdings also makes it make it relatively simple to transfer ownership in the business. Why? Because the owners of shares may simply sell those shares either to another shareholder or back to the corporation.

Feature 5:   Brand Building

The corporation's distinct legal identity has numerous consequences, as you might already know. Many of these consequences are advantageous for the shareholders.

One important consequence is that a corporation has no expiry date. Instead, a properly managed corporation may enjoy perpetual existence. 

Furthermore, a corporation's name is protected by law (but this protection only applies in the jurisdiction where the corporation is registered.)  A federal corporation benefits from name protection across all of Canada. A provincial corporation, otoh, will only have its name protected in its home province. 

The combined significance of indefinite existence and corporate name protection is that incorporation creates a platform for building a brand.

Feature 6:   Multiple Actors

Finally for today, a defining characteristic of the corporation that it is comprised of multiple actors. 

Yes, a single person can theoretically act as shareholder, director, and officer of a corporation. However, this is very much the exception. 

Even if a single natural person occupies all three roles he still needs to understand what role he is acting in. You might think of this in terms of knowing which "hat" you are wearing when you make decisions or take action. 

Understanding and properly documenting the corporation's multiple actors is especially important if the corporation intends to issue additional shares or bring in outside investors. Even if outside investment is not anticipated, it is important to keep track of the "hats" for shareholders, directors, and officers (i.e. officers are seniors managers.)

Alternatives

You may now be wondering: "are there any other options for structuring my business." 

Yes! There are most definitely other options. Here is a brief rundown. 

Sole Proprietorship

A sole proprietorship is simply put a business owned and operated by a single individual. It can do business under the owner's name or under a trade name that the owner has chosen (subject to certain limitations.) The rules for a sole proprietorship will vary slightly depending on the province or provinces in which you intend to carry out business. For information on this structure, please check out our post. 

Business Partnership  

In a general partnership, each partner is personally liable for the debts, contractual obligations, and torts resulting from the partnership's operation. Also, the persons who own the partnership and the partnership itself are not separate entities at law. Therefore, the profits - or losses - of the partnership will flow to the individual partners as business income. 

Cooperative

A cooperative is a legally incorporated corporation that its members own. The members also either use the cooperative's services or purchase its products. A cooperative can be either a for-profit or a non-profit enterprise. Depending on the principles and priorities of the owners, a cooperative can have many advantages. It is probably only worth looking into the cooperative structure if a large team with shared priorities and interests will be involved in your business. 

Peace Out

What was this post all about??

Thanks for reading today’s post. It provided a high-level introduction to three features of the corporation.

The key point is simply that a corporation is a ‘legal person.’ If you are thinking of incorporating your business, there are quite a lot of details to nail down. I'm going to continue to write about this topic. See you in the next post!

Hey guys! In this post, we will dive into your questions about "should my corporation have directors."

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with various corporate actors, and that definitely includes dealing with corporate directors. 

Last year, when we first got locked down, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create this blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs. 

The answer to today's question -- should my corporation have directors -- is both straightforward and deceptively complicated. Let's start with the simple answer: Yes, any corporation absolutely must have directors. There are no exceptions to this one!

And, what about the more complicated answer? Well, I am going to dig into that below. 

Its all good, man. Let's do this. 

What Role Do Corporate Directors Play? 

Incorporation is a powerful legal structure. It has both legal advantages -- think limited liability -- and potential business advantages, such as the opportunity to build an enduring brand. 

As a first-time entrepreneur, you might have questions about the role that directors play within the corporate structure. 

Yes, in some cases, a single person wears multiple hats, i.e., as shareholder, director, and chief executive officer. 

But, in all cases, a corporate director has specific functions and obligations under the law. 

If you are thinking about incorporating, you should understand these details. I am going to cover three points below

1. The corporation brings together multiple actors with distinct roles.
2. The directors are metaphorically akin to the corporate vehicle's driver.
3. Without directors, a corporation is not properly incorporated.

Point 1: Multiple Actors

We have already talked about how the corporation enjoys a separate legal identity. This separate legal identity can be helpfully described as a structure, or you might like to call it a frame.

The corporate frame needs to be filled by persons, i.e, actors. Inside the frame there will be at least three types of actors: the shareholder(s), the director(s), and the officer(s). 

Sometimes the actor can be either a natural person (a human being) or a legal person (such as a corporation). But, some roles can only be acted out by an actual human being. 

Both the directors and the officers must be natural persons, i.e., real human beings. 

Shareholders are entitled to vote on decisions that go to control of the corporation. However, they (the shareholders) are not necessarily entitled to decide the corporation's strategy. This role falls to the directors. Likewise, everyday business decisions are the responsibilities of corporate officers, such as the chief executive officer.

Point 2: Directors are the Corporate Driver

A director of a corporation is responsible for the overall performance of a corporation's business and must make strategic decisions. Concretely, directors have signing authority to make these decisions on behalf of the corporation. This allows the directors to make decisions on behalf of the corporation in a legally valid form.

More practically, the directors oversee management to ensure that the business strategy is properly executed. The directors are, therefore, the agents of the shareholders. (Future posts will discuss the principal-agent problem.)  

Metaphorically, you can say that if the corporation is a vehicle, then the directors are the driver. 

Or, the directors are like an airline pilot. The pilot, sitting in the cockpit, is operating at the 30,000 feet level. He oversees what is happening, takes in the big picture, and has the responsibility to change course when necessary.  

Point 3: A Properly Incorporated Corporation Needs Directors

Now Air Canada does not let you or me fly the plane when we buy a ticket. In the same way, even if the corporation has shareholders, it still needs at least one pilot, i.e. a director.

The process of incorporation has two steps. 

In the first step, the incorporator files for and receives the Articles of Incorporation. The incorporator may be either the founder shareholder of the corporation or an agent thereof.  

At this point, it would be a mistake to think that the corporation is constituted properly. There is still a second step that needs to be completed, and this second step requires at least one corporate director. 

During this second step, the corporation appoints the director(s). The second step also involves approving shareholders' and directors' resolutions that organize the new corporation's affairs. These resolutions serve to confirm the central tenets of the corporation's governance as required by law. Furthermore, in an Ontario corporation, certain paperwork must be returned to the Ministry within sixty days.

Still Looking for More Details?

The above was an attempt to simplify what is a complicated and at times confusing question. 

A few related issues definitely come up and you may have questions about: principal-agent problem within the corporation; directors' common law duties and statutory duties; corporate maintenance; and etcetera. Ill be adding more posts over the coming months. 

That is all, Folks

Thanks for reading today's post. I hope it helped clear up any questions about why your corporation definitely needs at least one director. 

Hey Guys! Today’s post is gonna compare provincial incorporation versus federal incorporation for entrepreneurs in the GTA.

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with entrepreneurs in a wide variety of industries. (It is actually one of the best parts of this job.)

Several years ago, when covid first hit, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create a blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs. 

It’s all good, man. Let’s do this!

Provincial Incorporation Versus Federal Incorporation 

In Canada, our federal and provincial governments have concurrent jurisdiction over business corporations. To make a long story short, the result is that entrepreneurs in Toronto are free to choose between incorporating federally or provincially.

A federal corporation will be governed by the Canada Business Corporations Act (CBCA). Meanwhile, a provincial corporation in Ontario will be governed by the Ontario Business Corporations Act (OBCA). 

These two pieces of legislation are, to be frank, very similar. (In fact, the OBCA was modeled after the CBCA in order to promote corporate law coherence.) As a result, the differences between provincial and federal incorporation are relatively minor.

Today’s post is going to break down some of key considerations, especially: 

• Geography of operations, 
• Location of shareholders and directors
• name availability, and 
• Administrative cost and timing

Consideration 1: Where is the Business going to Operate

To get started, it makes sense to consider whether the business is going to operate only in Ontario, or in a wider swath of our vast country. 

A corporation established under the federal  Canada Business Corporations Act is automatically entitled to operate in all ten Canadian provinces. But, a corporation established under a provincial corporate law statute, such as Ontario' s Ontario Business Corporations Act, does not automatically enjoy this privilege.

As a result, an Ontario corporation will need to register in any other province in which it intends to operate.

Likewise, a non-Ontario provincial corporation should file certain additional paperwork before operating in Ontario. Specifically, we have the Extra-provincial Corporations Act in Ontario. It requires that a licence is required to do business in Ontario if a corporation was incorporated elsewhere. These are given out as a matter of course. 

A federal corporation may establish its business operations and market itself across Canada. For this reason, some business people prefer federal incorporation when they intend to establish a physical presence across Canada.
 

Consideration 2: Where are the Shareholders (and Directors) Going to be Located?

The founding shareholders will also want to think about where the corporation's shareholders will be physically located.

One reason is that both statutes require annual shareholder meetings as well as annual directors meetings.

There is an important difference between the two Acts, however, that we can examine by way of shareholders meetings.

You will want to think about whether it is going to be feasible for, for instance, the shareholders to be "present" in a single location for the annual shareholders meeting. Even if gathering for an in-person meeting is not practical, the corporation still has an obligation to hold an annual shareholders' meeting. In this respect, questions arise such as can the shareholders meeting be held online?

Ontario Corporations are generally thought to be able to hold an online shareholders meeting so long as the communication mechanism being used provides a means for the shareholders to vote. This is a general statement and will depend on a variety of specific factors.

However, under the CBCA the requirements for holding online meetings are more restrictive. Under the CBCA, an online shareholder meeting can only be held if the corporation's bylaws expressly permit it and the relevant communication mechanism used permits all participants to communicate adequately with each other during the meeting.

Without going into extraneous hypotheticals, the simple take-away is that incorporation under the federal statute may make virtual shareholders meetings more difficult. 

update: first this blog post was first published, there has been an important update in terms of directors' residency requirements under the provincial and federal acts [click here] for more information

Consideration 3: Name Availability and Protection

The corporate name may be one of the reasons why an entrepreneur wants to incorporate in the first place. First, doing business as a corporation carries a certain amount of prestige. Second, the corporate name is protected in the jurisdiction in which it is registered.  

Provincial incorporation means that the corporate name is protected only within that province. Federal incorporation results in wider name protection. Once the corporate name is approved by Industry Canada, it is protected throughout Canada and all of its provinces and territories.

The flip side of greater name protection for federal corporations, is that the federal government imposes a stricter and more time consuming process for name selection. In order to incorporate a named corporation under the federal statutue, the incorporator must purchase something called a 'NUANS report'. This is a proprietary search on a database that is maintained of registered corporate names throughout Canada. 

Not only does the founder of a federal corporation need to obtain the NUANS report, the report has to be inspected and approved by Industry Canada. (Talk about government red tape!) 

In Ontario, the process is slightly lighter on bureaucracy. The onus is placed on the incorporator to ascertain that the corporate name complies with the statutory requirements and is distinct. 

 On balance, this consideration usually leans towards choosing to incorporate provincially. 

Consideration 4: Administrative Cost and Timing

So far, we have covered one consideration where federal incorporation has a clear advantage and two other considerations where the comparison is usually favorable to provincial incorporation. Let's look at a fourth consideration: what is going to take to get incorporated in terms of both time and cost.

The previous section talked about the federal government's bureaucracy heavy approach to corporate names. This is one of the factors that results in federal incorporation often being more time consuming.

While provincial incorporation is usually going to be faster than federal incorporation,, federal incorporation is going to have a smaller financial cost. Incorporating a business with Industry Canada under the Canadian Business Corporations Act costs $200 when done online. The alternative is going to Service Ontario's online portal and paying $350. 

Federal vs Provincial Incorporation: The Winner?

Guys, as you can see, there is no knock-out winner in this battle.

Federal incorporation and provincial incorporation are both very similar when it comes to the laws that regulate them. However, if your corporation intends on operating its business across Canada then federal incorporation gets the nod because of its automatic entitlement to operate in all ten provinces and three territories. 

Overall, it is good to keep things simple unless you have specific reasons for incorporating federally then the standard practice would be setting up an Ontario corporation under the provincial act.

In any case, there are variety of factors to consider and it is best practice to discuss any specific issues with a lawyer. 

Hey guys! Today's post will cover some more details you might want to consider before selecting a corporate name.

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with various corporate actors, and that includes incorporators and founders.

Several years ago, when covid first hit, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create a blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs.

Today's post is going to go in to lots of detail about corporate names. By the end, you will be ready to pull the trigger.

It's all good, man. Let's do this.

What You Really Need to Know about Corporate Names

Incorporation is a powerful legal structure. It has both legal advantages -- think limited liability -- and financial advantages, such as the opportunity to accumulate retained income in the corpoation at a lower applicable tax reate. We have written a whole post about the leading theories for why a corporation is granted a separate identity as a legal person. 

The bottom line is that a corporation is a separate person and it therefore has to have its own specific name. As a first-time entrepreneur, you might have questions about this, you might be wondering whether there are things you have to do or have to avoid in selecting a name. We are going to get into that here. 

The two things that you absolutely have to understand about corporate names are that:

1. A corporation can be either named or numbered
2. A corporate name has three essential elements. 

Point 1: Numbered or Named

The federal and provincial governments share jurisdiction over business corporations. To make a long story short, the result is that an entrepreneur in Toronto gets two choices. You may choose

• to incorporate federally under the Canada Business Corporations Act (CBCA); or
• to incorporate provincially under by the Ontario Business Corporations Act (OBCA).

We have compared the key considerations elsewhere, but in either case the corporation must identify itself via either a number or a name.

You may have heard the term numbered company, this simply refers to a corporation that has decided to not use a corporate name.  If you incorporate a numbered company, the registry will assign a number followed by the appropriate legal designation.

If you choose to incorporate as a numbered company, and later want to use a corporate name, that is definitely possible. 

The only alternative to a numbered company is a named company. Furthermore, if you choose to incorporate a named company, the corporate name must be distinct have three essential elements. This brings us to point 2.

Point 2: A Corporate Name Has Three Essential Elements

A named company has a corporate name that has been chosen by the incorporator, for example Yellowbird Consulting Corp.

When choosing a corporate name you need to satisfy the requirement for three specific elements:

• a distinctive part, e.g., 'Yellowbird'
• a descriptive part, e.g., 'Consulting' and
• a corporate suffix, e.g., 'Corp.'

Let's just briefly, explain the above. Yellowbird is the distinctive element that promotes the corporation's brand. Consulting is the descriptive element describing the nature of the business. And, Corp. is the corporate suffix.  

Now, let's get into more detail about these three elements.

Point 3: Does Your Corporate Name Have a Distinctive Element?

A corporate name must have a distinctive element.

The distinctive element identifies the business through a distinctive word or set of words. There is going to be a spectrum between the highly distinctive and the less distinctive. A coined or made-up word is likely to be highly distinctive. A person or place name is likely to be less distinctive. 

Let's consider a hypothetical named company called Yellowbird Consulting Corp. 

The word 'Yellowbird' is the distinctive element in this corporate name. Yellowbird is not at the extreme end of the highly distinctive continuum. It could be made more distinctive by using synonyms, such as 'Goldenbirds'; but, then again, it is more distinctive than simply 'Yellow.' 

For a few more thoughts on this balancing act, see 'Your Corporate Name Must Be Unique' below.

Sufficient distinctiveness is one consideration. At the same time, the word or set of words used for your distinctive element is going to be an important part of the brand that the corporation builds around its business.

Point 4: Does Your Corporate Name Have a Descriptive Element?

A corporate name also should have a descriptive element. 

The descriptive element indicates the main activities or type of business in which the corporation is engaged.

Let's go back to the example of Yellowbird Consulting Corp. 'Consulting' is going to be the descriptive element in this corporate name. The incorporator could just as well use words such as 'Advising' or 'Counselling'.

Point 5: Does Your Corporate Name Have a Legal Element

Finally, a corporate name must have a legal element. This is also referred to as a corporate suffix. 

Because corporate names can be in either French or English, there are two sets of corporate suffixes that are available. The first set is English, i.e.,  Limited, Ltd., Incorporated, Inc., Corporation, Corp. The second set is French: Limitée, Ltée, Incorporée, Inc., Corporation, Corp.

The incorporator therefore has a total of 12 legal identifiers to choose from. But, once a specific suffix is registered with the corporate name, the expectation is that only that suffix gets used.

So, for example, 'Corp.' is the corporate suffix in Yellowbird Consulting Corp. It would be incorrect to refer to this corporation as Yellowbird Consulting Incorporated or Yellowbird Consulting Corporation. 

Your Corporate Name Must Be Unique

Now that you have put together the three required elements, you are going to want to check that your name is unique.

You do this by obtaining a name search report, which is often referred to as a NUANS report. NUANS refers to a specific, commercial database of corporate names. 

The report consists of the results of a search where your proposed name is put into the database, and the most similar existing, registered names are displayed.

Let's look at this in terms of the hypothetical of 'Yellowbird Consulting Corp.'

It may well be that there are already registered corporations in Ontario that have the distinctive element 'Yellowbird', e.g., "Yellowbird Dynamics Incorporated". In that case, generally speaking, Yellowbird Consulting Corp. and Yellowbird Dynamics Incorporated are sufficiently different that Yellowbird Consulting Corp. would still be considered unique.

If, however, the name search report indicates that there is already a registered corporation with the name "Yellowbird Consulting Corporation", well then you are out of luck. Why? Because Yellowbird Consulting Corp. and Yellowbird Consulting Corporation are sufficiently similar that Yellowbird Consulting Corp. would not be considered unique.

Odds and Eds

There are other rules against obscene names. Also, this being Canada, there is a rule stipulating that a corporate name may be in either French or English and that it must not imply a connection to the royal family.  

The Takeaway

The basic principle is that a corporate name has three parts and that it must be distinct.  

That is all, Folks

Thanks for reading today's post. I hope it helped you feel more confident about the details of selecting a corporate name. 

Hey guys! In this post, we are going to start answering the question "what is a corporation."

I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with a range of legal structures, and that includes corporations. 

In a nutshell, a corporation is a 'legal person' created by the combination of applicable legislation and one or more natural person's initiative.  Incorporation is a powerful legal structure that has both legal and business advantages. 

But, you may be wondering what exactly it means for a corporation to be a 'legal person.' I am going to dive into that debate in this post. (Future posts will go over some associated practical questions.)

It's all good, man. Scroll down to find out more.

How Can a Structure be a Legal Person?

Incorporation is a powerful legal structure, and it has both legal and business advantages. 

But, as a first-time entrepreneur, it makes sense to have questions. In particular, many guys ask me what it means for a corporation to be a 'legal person.' Today I am going to address that issue from a theoretical perspective. 

You are in the right place to understand better the leading theories of how and why modern, common law jurisdictions create a 'legal person.' I am going to dive into the three main theories below, which are: 

• Property Aggregation
• Entity Theory
• Nexus of Contracts

Theory 1: Property Aggregation

The first theory we are going to talk about is the corporation as an aggregator of property. On this theory, the corporation is primarily an extension of the shareholders. 

According to the aggregation theory, the property and business may be carried on in the corporation's name. But in reality, the property and business belong to the shareholders. 

Therefore, the aggregation theory holds that the so-called 'personhood' of the corporation is what is sometimes called a legal fiction. This legal fiction, in turn, does not change the fact that the corporation is just a placeholder for the shareholders. 

This theory stresses the close relationship between the shareholders' best interest and the corporation's best interest. As a result, management's duty is to do whatever is in the best interests of shareholders, which is usually defined as maximizing profit.

Theory 2: Entity Theory

The second theory is called the 'entity theory.' On this account, the corporation is a distinct institution, and it is not reducible to its shareholders. 

According to the entity theory, many people participate in the corporation. This includes the shareholders and the management and employees, customers, and suppliers. Therefore, it is incorrect to reduce the corporation's identity to just one of these parties. 

On this view, the corporation's legal personality is not a pure fiction. Instead, the corporation's legal personality indicates that it has a distinct  identity that is separate from any one group. Therefore, the corporation's best interest is not reducible to the best interests of only one group, i.e. the shareholders. In turn, this has the further implication that the duty of directors should not be narrowly defined. 

Theory 3: Nexus of Contracts

The final theory we are going to introduce is the 'nexus of contracts' approach. This is also sometimes called the 'bundle of contracts' approach. 

According to the nexus of contract theory, a corporation's most salient feature is that it has contractual relationships with numerous other parties. These other parties include the corporation's shareholders, lenders, suppliers, and employees.  

For example, shareholders and the corporation have a contract. The shareholders provide the corporation with investment capital. In exchange, the shareholders get benefits such as dividends and voting rights. Another example is the employment contract between the corporation and its employees. Under the employment contract, employees provide labor, and in exchange, the corporation gives them wages. 

You can also think of the nexus of contract theory, metaphorically, as a bicylcle wheel. The corporation is the 'hub' at the center of the wheel. And, the corporation's contracts are 'spokes'. The result is a hub-and-spoke network structure with the corporation is at the center. In this way, the corporation plays a coordinating role. 

For proponents of the nexus of contract theory, the promise to run the corporation in the interests of the shareholders is no more than a contractual term.  (The term is found in the implicit contract between the shareholders and the corporation.) The term is a promise, albeit a legally enforceable promise.  

Bonus: Theory 4

The three formulations identified above are the classical theories of the corporation. There is, however, a fourth theory that is percolating in today’s society and merits consideration.

This fourth theory is the ‘stakeholder theory’ of the corporation. I am not going to discuss the stakeholder theory here today. But just wanted to flag it for the time-being. I will return to this topic and the stakeholder theory in later posts.  

That is all, Folks

Thanks for reading today’s post. I hope it helped open up the question of what exactly is a corporation.

Simply put, we can say that a corporation is a ‘legal person’ that is created by the combination of applicable legislation and the initiative of one or more natural person.  The above reviewed three classical theories, i.e. the corporation as aggregation of property, the corporation as an institution, and the corporation as a bundle of contract. We also previewed the stakeholder theory of the corporation. 

But, there is significant debate and disagreement about the true character of the corporate entity that gets created through the above interaction of law and action.