Ontario BUSINESS Law: BRINGING a Corporation to Life
The process of turning any idea into substantive results necessarily involves tedious and procedural works. So does the process of forming a corporation. In addition to the kind of interesting substantive rules discussed in prior articles, the “boring” procedural rules under the corporate law are equally important. This article will discuss the procedural rules related to formation and early governance of a corporation, and complement with subsantive rules when appropriate, aiming to lay out a comprehensive framework for understanding what matters are at stake in the early stages of a corporate’s life.
The creation of a corporation starts with registration of the corporation with the government. There are three ways to complete the process: (1) do it by the business owner himself on the OBR website, (2) use an authorized service provider, or (3) email/mail registration documents to the Ministry of Government and Consumer Service. Regardless of the option selected, two matters are particularly important at this stage: choosing a business name and drafting the Articles of Incorporation. Every corporation needs a name to be identified, and there are two choices - a dinstictive name or a numbered name. A distinctive name refers to any name with unique features, such as “Nike”, and is recommended for most cases, but a corporation formed for specific purposes - with no need to have the public remember its name - may choose a numbered name to simplfy the registration process, for example “1234567 Ontario Inc.” The number will be assigned by the Ministry during the registration process. Both distinctive names and numbered names must contain the word “Limited”, “Incorporated”, “Corporation” or their abbreviation for the purpose of informing the public that it is dealing with an entity whose owners have limited liability.1 In addition, registrants must complete a name search in the NUANS (Newly Upgraded Automated Name Search) system and obtain a report which confirms that there is no existing company with a duplicated name.2 A numbered company is exempted from this NUANS search so process is simplified and fees saved.
Articles of Incorporation is the other important matter to be carefully handled in the early stages of a corporation’s creation. It is a document that delineates the fundamental structure of the corporation. It contains matters from simple information such as name, address, and purpose of the business, to complicated provisions such as share structure, number of directors, first directors, restriction on director power, and other governance rules. The government has provided a free form of the Articles on [www.forms.ssb.gov.on.ca](http://www.forms.ssb.gov.on.ca) which may be adequate for small businesses, but if the underlying corporation is one involving large amount of capital and complicated relationships, a tailored draft of the Articles is necessary. For example, directors of a corporation by default OCBA rules have the prerogative power to make, appeal and amend by-laws.3 If shareholders are uncomfortable with such power, the easiest way to limit such power is to expressly limit it in the Articles.4 Amongst the provisions in the Articles, the appointment of first directors is of particular importance. These directors will serve as the members of the board at the initiation of the corporation and vote on important decisions. Once the Articles is crafted, it needs to be submitted to the Ministry along the NUANS search and all other anicilliary documents for registration purpose. After the Ministry approves the incorporation application, a Certificate of Incorporation will be granted and the corporation is legally created.
After the incorporation process is completed, the first directors, as appointed by the Articles, shall hold an organizational meeting, AKA the first directors’ meeting. In this meeting, the directors shall conduct the following matters: (1) make By-Law, (2) adopt forms of security certificates and corporate records, (3) authorize the issue of securities, (4) appoint officers, (5) appoint auditors, (6) make banking arrangements, (7) transact any other business. (**S117**). Even though OBCA uses the language “the directors **may**…”, arguably directors have an obligatory instead of discretionary duty to conduct these matters since these matters are vital to get the business running. Directors’ fiduciary duties put the directors in a position to carry out these activities in a timely manner. Amongst these items, the By-Law is particularly important because it determines how the corporation is going to be operated. The By-Law sets the rules of operation in far greater detail than the Articles, such as director power and term, procedure for director resignation and removal, director meeting quorum and notice, appointment of officer, indemnities, shareholder meeting quorum and notice, dividend declaration, etc. Once the first directors’ meeting is completed and tasks assigned, the company is ready to ship.
1 Business Corporation Act, R.S.O. 1990, c. B.16, s. 10(1)
2 Names and Filings, O. Reg. 398/21, s. 18
3 Business Corporation Act, R.S.O. 1990, c. B.16, s. 116(1)
4 Business Corporation Act, R.S.O. 1990, c. B.16, s. 116(1)
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