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Limited Company or Corporation

''Limited companies'' include corporations incorporated under the Quebec Companies Act and companies incorporated under the federal Canada Business Corporations Act. These corporations are hence legal entities, which entail a distinctive name, a distinctive domicile, a distinctive wealth and the possession and exercise of civil rights.

Federal or Provincial Statutes

The difference between a "federal" and "provincial" limited company is the legislation which they are constituted. A provincial limited company is constituted under the provision of the Companies Act, while a federal limited company is constituted under that of the Canada Business Corporations Act. The main criteria for determining the applicable legislation are:

Whether the constitutional jurisdiction is federal or provincial;
The required permits and administrative reports: Administration is simpler under provincial statutes;
The costs related to constitution: Forming a federal corporation is more expensive than forming a provincial one;
The scope of the rights and obligations of directors and minority shareholders.

It is important to consider all elements related to the legal form of a business before choosing this option. Below, you will find relevant information to help you make a decision in regards to creating a:

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LIMITED COMPANY OR CORPORATION
- COMPARE BENEFITS AND DISADVANTAGES
  - Limited liability - Liability is limited to the capital invested by the member.
  - Best operating practices - The gathering of the people involved in various bodies for specific purposes (Board of Directors, general meeting, etc.) results in enterprise management improvement.
  - Continuous existence - The death, retirement or departure of members have no impact on the corporation.
  - Better techniques to raise capital - Allows to offer various types of securities likely to meet the needs of different types of private investors.
  - Division/ transferability of shares - Inclusion of new members is simplified.
  - Financing - Promotes an influx of foreign capital, increases borrowing power and access to varied financing terms and government support programs.
  - Fixed and progressive tax rates - A business constituted as a legal entity has its own juridical personality and hence, its own income declaration. Therefore, it has a fixed tax rate rather than a progressive one as do individuals.
  - Small business deduction - It is granted to a privately-held Canadian-controlled limited company on the first $500,000 in earnings generated by its ongoing operations.
  - Capital benefit - Tax measures that allow the transfer of capital property used by the business to a taxable Canadian limited company in exchange for shares without immediate tax impact.
  - Income splitting option - In order to reduce taxation, it allows to transfer to a family member who is in a lower tax bracket, a portion of the business' income. In fact, the constitution as a legal entity splits income and offers additional income splitting.
  - Corporate deductions - Usually, expenses made in order to generate an income are deductible from it.
  - Other tax benefits - Possibility to sell out eligible shares from a small business that include a capital gains tax exemption of $750,000.
  - Succession and tax planning - Multiple options are available in order to delay or save income tax.
  - Incorporation fees - Incorporation as a legal entity involves certain accounting and legal costs which are of an ongoing nature.
  - Government regulations - An owner operating a limited company is often subject to stricter regulations than prior to incorporation.
  - Eventual loss (integration theory) - As soon as the income earned by the limited company exceeds $600,000, the excess earnings are taxed at the ordinary rate for limited companies, given that the small business deduction no longer applies.
  - Personal and business losses - Given that the limited company incorporated is recognized as a distinct, business losses cannot be used to reduce personal income.
- SHAREHOLDER AGREEMENT
  - Guarantee a market for the shares - Because those likely to have an interest in purchasing the shares of a small business are the people already involved in the business and looking to increase their ownership participation.
  - Ensure that shares will be sold at a fair price - This agreement establishes a purchase price or a method to calculate the value of the shares at various moments.
  - Ensure a quick settlement - Given that provisions are already established, all transfers should be finalized quickly in any circumstance.
  - Provide cash for the estate - The agreement is usually financed by a life insurance which provides the business with the cash needed to purchase the shares and provide the heirs with the agreed upon amounts.
  - Ensure that the family of the deceased does not own a portion of the business.
  - Be reassuring for employees, creditors and clients, all of whom might be tempted to "abandon" the business in view of the possible instability. An example of such a case can be that of a banker which might be tempted to close a corporate line of credit.
  - Avoid a forced winding up of the business in order to allow it to pay the estate or outgoing shareholders the shares that are owed.
  - Guarantee that ownership percentage can be maintained by giving shareholders the right to purchase a portion of the available shares which is equal to the percentage of shares they already own in the corporation.
  - Include provisions establishing the applicable settlement terms in the event of the retirement, disability, exclusion or departure of one of the shareholders.