Basics of Incorporation - Reynolds Mirth Richards & Farmer LLP

INCORPORATION IN ALBERTA
THE BASICS
Here are some very basic things you should be aware of in carrying on business through a
corporation. The following is simplified and is intended as information only and not as legal
advice. Important details, including many exceptions and qualifications, have been omitted.
You should seek legal advice specific to any particular matter of concern to you:
1. Accounting Advice You should retain an accountant to assist you with general income
tax and accounting matters. A good accountant is invaluable.
2. GST If you are anticipating revenues exceeding $30,000 per annum from non-exempt
activities you will need to be registered for GST purposes. You will need to apply at
your local taxation office and they will require a copy of your certificate of incorporation.
3. Corporation a Separate Entity In law a corporation is a person separate and apart from
its shareholders. This is the principle behind the concept of “limited liability" (see
below).
4. Shareholders The "shareholders" of a corporation are the persons who own the
corporation and receive the profits of the corporation through dividends. The role of the
shareholders is normally only to appoint directors and the corporation's auditors (or, if all
shareholders agree, accountants instead of auditors). The shareholders are required to
hold annual meetings for this purpose, although this can be accomplished by a simple
resolution signed by all the shareholders. The shareholders are also the persons who (by
at least a 2/3 majority) must approve any "fundamental changes" such as amendments to
the corporation's articles of incorporation, amalgamation with other companies or sales of
all or substantially all of the corporation's assets.
Shareholders make their decisions (as a group) through “resolutions”. A “resolution” is
simply a proposal that has been put to the shareholders at a meeting and has received the
required number of votes. Most resolutions (“ordinary resolutions”) require only a
majority of votes (unless the corporation’s constitution or shareholder agreement
requires otherwise). However, some kinds of decisions (e.g. those involving
“fundamental charges” - see above) require a “special resolution”, normally a 2/3
majority. Again, this can be varied by the corporation’s constitution or under a
shareholder agreement. In closely held corporations, it is normally not necessary to go
through the formalities of holding a shareholders' meeting in order to pass a resolution.
A resolution can also be passed if all of the shareholders who are entitled to vote on it
sign a written copy of that resolution even though a meeting is not actually held.

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5. Directors The "directors" are the people who make decisions for the corporation. They
make up the "brain" of the corporation. The directors are appointed by the shareholders.
The names and addresses of the directors must be filed with the Alberta Registrar of
Corporations. A Notice of Directors for the existing directors of the corporation is filed
when the corporation is incorporated. However, if any persons are added to or removed
from the Board of Directors, a Notice of Directors must be filed promptly.
Where there are two or more directors, no single director has the authority to enter into
contracts, banking arrangements or any other obligation on behalf of the corporation
unless that single director has been given that authority by the Board of Directors as a
whole or pursuant to the corporation’s bylaws. This authority can be general (e.g. the
authority to purchase goods up to $X or the authority to purchase supplies) or specific
(e.g. the authority to enter into a specific contract). Sometimes this authority can be
implied by a continuous course of conduct that has acquiesced in by the other directors..
Like shareholders, the directors, as a group (i.e. the “Board of Directors”) make their
decisions through “resolutions”. A “resolution” is simply a proposal that has been put to
the directors at a meeting and has received the required number of votes. Normally
(unless the corporation’s constitution or a shareholders' agreement requires otherwise) a
proposal is passed if a majority of directors vote in favour of it. As in the case of
shareholders, it normally is not necessary to go through the formalities of a directors’
meeting to pass a resolution. A resolution can also be passed if all of the directors sign a
written copy of that resolution. Again, in closely held companies, this is most often how
it is done and indeed many “resolutions” or corporate decisions are not written down at
all although certainly, the more important the decision, the more prudent it is to record it
in some fashion.
In exercising their powers, directors, unlike shareholders, owe a duty to their corporation
to exercise due care and to act honestly and in good faith with a view to the best interests
of the corporation. (See Director's Liabilities Checklist and Summary of Directors'
Duties for more information regarding directors duties and conflicts of interest.)
6. Officers The "officers" are the senior people (appointed by the directors) who run the
day-to-day operations of the corporation. They are the "arms and legs" of the
corporation. Normally the officers include a President and a Secretary (sometimes the
same person) and they have the powers that are given to them in the bylaws and/or as
assigned to them by the directors. In many, and perhaps most, closely held companies,
the shareholders, the directors and the officers are the same people.
In exercising their powers, officers, like directors, also owe a duty to their corporation to
exercise due care and to act honestly and in good faith with a view to the best interests of
the corporation.
7. Employees If your corporation has employees you will need to make tax, CPP and EI
remittances to the Canada Revenue Agency from each paycheque. You may also need to
set up a WCB account. Enquiries can be made to WCB at (780) 498-3999

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or Toll-free in Alberta: 1-866-922-9221. A WCB account can be applied for online at
http://www.wcb.ab.ca.
8. The Registered Office A corporation must have a "registered office" on file with the
Alberta Registrar of Corporations. This is the address at which the corporation must keep
the corporate minute book records and where important documents will be sent to the
corporation by the government (or, in the case of law suits, served upon the corporation).
Our law firm offers the service of acting as registered office for an annual fee (presently
$180 plus disbursements) payable at the end of each anniversary of incorporation. As
registered office, we also attend to the filing of your annual returns with the Registrar (a
requirement separate and apart from the filing of income tax returns) and the preparation
of your annual minutes. However, there is no legal requirement that the registered office
be a lawyer's office and you can be your own registered office. If you act as your own
registered office, though, it is important that it be a location at which you are certain that
there will be persons regularly present (to deal with service of legal documents or other
correspondence requiring urgent attention). Also, if you ever change your address, it is
extremely important that you file a Notice of Change of Address with the Registrar of
Corporations.
9. Tax Returns Because the corporation is a separate person, it must file its own income
tax return each year.
10. Corporation Property Any property that the corporation owns and any money that the
corporation earns belongs to the corporation and not to the individual shareholders. All
property and revenue must therefore be accounted for accordingly. If you use or take out
corporation assets without properly accounting for it, or without proper authorization you
may incur unexpected taxes (see below) and, in a worst case scenario, may even be
accused of theft.
11. Previous Operations If you have been carrying on business through an unincorporated
partnership or sole proprietorship or through another company you will need to consider
whether, and how, you will be transferring assets, contracts and permits into your new
company. There are tax issues that need to be considered so you should consult with a
professional legal or tax advisor before doing so. Note also that existing contracts, WCB
accounts, licenses and permits may also need to be reissued or otherwise moved into your
new entity.
12. Taking Money Out If you wish to take money out of the corporation for personal
purposes you should consult with your accountant as to the most advantageous method
of doing so. Some basic principals to keep in mind, however, are the following:
a. Salaries/Bonuses. The corporation can pay you for the services you provide to
the corporation just as it can pay anyone else for services provided to the
corporation. For example, the corporation can hire you as a full-time or part-time
employee or it can enter into contracts with you to provide services on a one time
basis or on a continuing basis. Payments, provided they are reasonable, are

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generally tax deductible by the corporation but are taxable in the hands of the
shareholder receiving them (in the same manner that they would be if they had
been paid to anyone else).
b. Dividends. If your corporation makes a profit, you can pay money out to the
shareholders by way of dividend. The corporation's directors decide when and in
what amounts dividends are declared. However, if you do pay a dividend, it is
important that the declaration of the dividend be recorded by a written directors'
resolution. A directors' resolution need not be very formal; a simple signed
statement as to what was resolved by all the directors is sufficient. Also, you are
not allowed to pay dividends if doing so leaves the corporation with more
liabilities then assets or where it is then in a state where it is unable to pay its
liabilities as they come due. Note also that there are different kinds of dividends
(ordinary, eligible, capital) and they are taxed differently. You should discuss
with your accountant or tax advisor which of these kinds of dividends are
available to you and how and if you should access them.
c. Loans. You can borrow money from your corporation but if you do not repay it
within one year you will be taxed on it as though it was income. However, the
corporation will not be able to deduct it. Furthermore, if you take a loan from
your corporation and do not pay interest on it, you may be taxed on the interest
that Revenue Canada thinks you should have been paying. The government sets
this interest rate from time to time.
d. Dangers. If you take money or property out of the corporation or use corporation
property for personal purposes and you do not properly account for it as either a
dividend, remuneration or a loan (that you repay within the year), the amount of
that money (or the value of that property, as the case may be) may be treated as
income in your hands and you may be taxed on it. Furthermore, the corporation
may not receive a corresponding deduction. For this reason, when taking money
out of the corporation or using corporation assets for personal purposes you must
be careful to properly characterize it and to record that characterization in some
fashion, preferably by directors' resolution. This is something you should discuss
with your accountant.
13. Limited Liability Because the corporation is a separate entity, it normally offers you
limited liability for some purposes. If, for example, the corporation purchases goods on
credit or enters into a lease and fails to make payment, the corporation, and not its
shareholders, will be liable for any unpaid money. This is one of the principal
advantages of incorporation. However it is important to be aware of the following
important exceptions:
a. Directors. The corporation's directors can be liable for certain of the
corporation's obligations. Some of those obligations are described in greater
detail in Directors' Liabilities Checklist. For this reason, it is not always desirable
to make all of the shareholders directors.

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b. Signing Contracts. You must make sure that all of the corporation's invoices,
cheques, contracts, correspondence and other documents contain the corporation's
full legal name. In particular, never omit the "Ltd.", "Inc." or "Corp." which
appears at the end of your corporate name. This is what notifies people that they
are dealing with a corporation and not you personally. If for example, your
corporation name is "Ace Enterprises Ltd." and you sign a contract under the
name of "Ace Enterprises" (i.e. without the "Ltd.") you may become personally
responsible for any liability under that contract. Contracts, cheques and other
documents should always be signed as follows:
Ace Enterprises Ltd.
Per: (you sign here)
You must also always make sure that you use your full and correct corporate
name. Do not, for example, use abbreviations unless those abbreviations are
actually part of your corporate name. For example, if your correct corporate
name is Ace Enterprises (Edmonton) Ltd. do not use "Ace Enterprises (Edm.)
Ltd." - that could mean someone else entirely.
If your company is a professional corporation you must make sure you use the
“Professional Corporation” designation in place of the “Ltd.”.
c. Personal Wrongs. Limited liability does not protect you against your own
personal wrong doing. For example, if one of your corporation's employees gives
negligent advice to someone and that someone suffers damages as a result, your
corporation (and the employee) will be liable but you will not. However, if you
personally do something negligent or personally commit some other kind of legal
wrong then you may be personally liable. The fact that you have committed the
wrong on behalf of your corporation will not normally protect you. There are
many ways that business people might become caught up in the commission of a
wrong, such as by making negligent or deliberate misstatements, negligently
supervising, encouraging someone to break a contract, unfairly competing,
defaming someone or committing a breach of trust.
d. Guarantees. In some cases, the shareholders may be required to sign a
"guarantee" of the corporation's liabilities. A guarantee is a contract under which
the person signing it agrees to be personally responsible for someone else's (i.e.
the corporation's) obligations. Banks, for example, almost always require a
guarantee from the corporation's shareholders before lending the corporation any
money. Landlords often request guarantees as well, although, depending on
market conditions, you can sometime negotiate out of this. Suppliers also
sometimes request guarantees. Incidentally, some credit application forms and
supply agreements contain "indemnities" from the person signing on behalf of the
corporation - these can have the same effect as a guarantee and some people sign

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them without realizing that they have exposed themselves to personal liability.
Be careful to read anything you sign on behalf of your corporation.
e. Professional Corporations. The liability protection for professional
corporations is more limited than it is for other limited companies. There is very
little case law on the issue and hence you should consult legal advice before you
embark on a risk venture in reliance upon limited liability protection. The basic
rule appears to be that activities directly associated with the practice of your
profession do not enjoy limited liability protection while activities beyond that
may.
f. Unlimited Liability Corporations. These are special corporations usually
incorporated to accommodate US tax concerns. A ULC does not generally have
limited liability protection. Unless your corporate name ends in a “ULC” you are
not a ULC.
14. Loans to the Corporation If you ever loan money to your own corporation make sure
that you document it in some fashion. First, if the corporation repays you, you do not
want the tax department arguing that the money you are taking out is taxable income
when it is not. Second, if the corporation should ever fail, you want to make sure that
you can take a share of any available assets just like any other creditor. In fact, you may
also want to secure your loan by having the corporation grant you security for your loan
through a general security agreement or a chattel mortgage. This would allow you to take
your money out ahead of unsecured creditors. However, if you are going to have the
corporation grant a general security agreement it is important that you do this before the
corporation is in financial jeopardy and that you properly register it at Personal Property
Registry.
15. Licensing There may be other federal, provincial or municipal licensing or registration
requirements applicable, depending upon the nature and location of your operations. A
listing of suggested governmental contacts in that regard follows:
In Edmonton:
Alberta Consumer and Corporate Affairs
Licensing Branch
3rd Floor, Commerce Place
10155 - 102 Street
Edmonton, Alberta T5J 4L8
Telephone: (780) 427-4088
City of Edmonton
Licensing Department
5th floor, 10250 - 101 Street

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Edmonton, Alberta
T5J 3P4
Telephone: (780) 496-3100
In Calgary:
Alberta Consumer and Corporate Affairs
Licensing Branch
301, Centre 70
7015 Macleod Trail South
Calgary, Alberta
T2H 2K6
Telephone: (403) 297-5743
City of Calgary
Assessment, Tax and Licence Department
3rd Floor, City Hall
800 Macleod Trail South
Calgary, Alberta
T2P 3L9
Telephone: (403) 268-5521
16. Municipal Requirements When establishing a business location in Alberta, the local
municipality will likely impose an annual business tax and will also require the obtaining
of an appropriate business license. See above for useful contact numbers. Also, all
municipalities have enacted land use bylaws which regulate the location of business
operations of all kinds and which frequently impose conditions concerning development,
fire regulation, transportation, construction and general operations. For the most part,
these limitations are limited to planning concerns and are designed to ensure public
safety, compatibility with existing uses, and a minimization of disruption to neighbouring
businesses and residences.
17. Annual Returns As mentioned above, each year the corporation must file an annual
report with the Alberta Registrar of Corporations. If you fail to file then eventually the
corporation will be struck from the official register and it will cease to exist.
18. Shareholders Agreements If you have more than one shareholder you should give
serious consideration to having a formal shareholders agreement. A shareholders
agreement could deal with death, dispute resolution, ownership of intellectual property,
restrictive covenants, creditor or matrimonial claims against shares, corporate
governance, financial matters and other important issues respecting the relationship
amongst the shareholders. Shareholders disputes that erupt in the absence of a
shareholder agreement can be difficult to solve and may lead to serious or fatal damage to

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the corporation. Not only does a shareholder agreement provide for a mechanism for
dealing with shareholder disputes and other eventualities, the mere fact of having such an
agreement can go a long way in preventing such disputes from arising in the first place.
Even if you are the only shareholder, you should give some thought to a shareholder
agreement that would be binding on the persons you leave your shares to on inheritance.
19. Death Give some thought periodically to what would happen if you died tomorrow.
Who would sign the payroll cheques? Is there someone who would have legal authority
to run things and if so is it someone you would want to have such authority without you
around? Does someone you trust have access to important information (e.g. computer
password, safe combinations, other important information that would be needed to
operate the corporation day-to-day)? There are legal techniques available for minimizing
this kind of disruption.
20. Insurance Liability insurance is very important. However carefully and honestly you
conduct your affairs the reality of business is that some day, some how, you (or your
employees) may do something that renders you liable to someone else. Even if you or
your corporation never commit a legal wrong you may still be accused of it and the costs
of defending even an unfounded allegation of wrongdoing can be substantial and
potentially ruining. If the costs of fully adequate insurance are prohibitive, then consider
even inadequate insurance if only to cover off your potential legal fees.
© Reynolds, Mirth, Richards & Farmer LLP, 2007