Note: This article is provided for educational purposes only. This article does not constitute legal advice and may not be relied upon as such.
The corporation is a modern legal creation. A corporation is treated as a separate entity from its owner(s), and may acquire properties, rights and obligations of its own.
Terminology
The owners of a corporation are called shareholders.
The shareholders hire a board of directors to run the company. The directors make all the business decisions, and are the mind and soul of a corporation.
The board of directors, may at their discretion, hire high-level managers to run the company on a day-to-day basis. These managers are called officers.
The directors generally delegated certain decision-making powers to the officers. The powers generally include: hiring and dismissing of lower-level employees, purchasing and selling inventories and assets, conducting business transactions, and so on.
In small corporations, it is not unusual that one person is the sole shareholder, director, and officer of the corporation at once. This is perfectly legal and does not affect the corporation’s separate existence from its owner.
Registration
Registration is required for corporations operating in the Province of Ontario.
Liabilities
In contrast to the liabilities of sole proprietorships and partnerships, the shareholders are only liable to the extent of their investment in the corporation. If a corporation is found liable for damages and is unable to pay, its shareholders will not have to worry about losing their homes to satisfy the liabilities (unless they mortgaged their homes to buy the shares in question).
Directors and officers of a corporation, on the other hand, may from time to time be held personally liable for the wrong-doings of the corporation.
The directors and officers may be found liable on the following grounds:
- not exercising reasonable care, diligence and skill in the discharge of their obligations
- breach of fiduciary duties (e.g., stealing from the company)
- unpaid wages under tax laws
- certain civil wrongs
- environmental damages
Therefore, the incorporation of a company certainly does not shield its shareholders from all responsibilities, especially when they are also the directors and officers of the same company.
Tax Considerations
Because the corporation and its owners are separate and distinct in law, the corporation must pay tax on its earnings. The after-tax earnings may be retained by the corporation, or paid out to its shareholders as dividends. The dividends are seen as the shareholders’ income from their investments, and thus they are taxable at the individual shareholder’s tax rates.
To avoid double taxation (which occurs when the shareholder is also paying tax on the corporation’s already-taxed earnings), the shareholders are given a tax credit for the dividends they receive. Governed by the Income Tax Act, the tax credits are supposed to neutralize the burden of double-taxation.
