Business Corporations (Companies)

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A business corporation (also called a “company”) is a legal structure for doing business. The purpose of a company is to operate a business to make a profit.
A company is more complicated and expensive to set up and operate than other business structures. But it usually the best ch

Definition of Business Corporation and Incorporation

Business Corporation

A business corporation (also called a “company”) is quite different from other business structures because it is a “legal person.” This means that a company exists separately from the people who own and operate it.

In other words, a company is independent and has its own rights and obligations. Like an individual, a company can sign contracts, own property and sue someone or be sued.

A company belongs to the people who own shares in it. They are called shareholders. There can be many shareholders or just one. Shareholders control the company’s operations by electing the directors and by voting on important decisions. Shareholders also share in the value of the company. The type of shares held by a shareholder determines the shareholder’s rights in the company.

Running a company can be complicated. The level of complexity depends mainly on the number of shareholders, directors and employees. For example, a multinational company will be much more complex to run than a company created by a single person who is the only shareholder, director and employee.

The way a company runs depends on these factors:

  • the law it was created under (its “incorporating” law)
  • its articles of incorporation (its “charter”)
  • its by-laws
  • any agreements between the shareholders


The process of creating a company is called “incorporation.” Once the process is complete, the business is “incorporated.”

A company can be “federal” or “provincial.” This means that you can apply to the government of Canada or the government of Quebec to create your company. The rules that apply to your company and its operations depend on whether it’s a federal or provincial company.

To learn more, see “Incorporation: Federal or Provincial Company?” (below).

Advantages of a Business Corporation

Limited Responsibility of Shareholders

Because they hold shares in the company, shareholders are a kind of owner of the company. But since the company is a legal person, it is separate from its owners, and the company is usually responsible for its own debts.

With a few exceptions, shareholders are protected and their personal responsibility is limited to the value of their shares.

Shareholders are not responsible for the company’s debts, unless they have given a suretyship or other type of guarantee for those debts, which is often required before a company can borrow money. This means that the shareholders’ property is protected from the company’s creditors.

To learn more, see: “Disadvantages of Incorporation: When Shareholders Can Be Held Responsible” (below).

Lower Taxes

The tax rate of a federal or provincial company is usually lower than the tax rate of an individual who makes a lot of money.

If it meets certain criteria, a company can receive a tax deduction for small businesses on part of the money it makes in a year.

Since a company benefits from a lower tax rate, it will have more money left over at the end of the year, as compared to a sole proprietorship or general partnership that had the same amount of profit. The company can pay money to its shareholders as “dividends”, as long as it meets all of the legal requirements.

Finally, the income tax shareholders have to pay on dividends is usually lower than the tax they would have to pay if they earned a lot of money from their sole proprietorship or general partnership. By running their business as a company, they have more money in their pockets.

Income Splitting

Sometimes the money the company makes can be divided among the shareholder’s family members. This is done by paying salaries or bonuses, or by giving shares and paying dividends.

Through income splitting, it is possible to decrease the income of the person with the highest tax rate and increase the income of the person with the lowest tax rate.

Saving Money Made by the Company and Using It Later

The company’s directors can decide to pay only part of the dividends to the shareholders and keep the rest in the company.

The company’s directors could then pay dividends to the shareholders later on when the company’s profits are lower. This way the shareholders would pay less tax than if they had received a lot of money in dividends all at once.

More Options and Easier to Raise Money

It is easier for a company to raise money than other business structures, and there are several options. To raise the money it needs to operate and grow, the company can borrow money, but it can also issue shares and bonds.

The company can ask employees or family members to invest in the business. However, the company can’t ask other people to invest by buying shares unless it has the approval of the Autorité des marchés financiers (a government agency). Therefore, it is important to contact the Autorité before issuing shares.

Unlike loans from financial institutions, issuing shares lets the company raise money without having to pay this money back with interest. This gives the company a lot of flexibility in terms of financing.

No Board of Directors (Quebec companies only)

The shareholder or shareholders of a company incorporated in Quebec can sometimes decide not to have a board of directors or to remove the one that is already in place. They can do this by signing a “unanimous shareholder agreement,” which is called a “declaration of the sole shareholder” if there is only one shareholder.

This possibility is especially useful for a self-employed worker or for partners who want to create a company but keep its internal operations as simple as possible.

Company Continues to Exist

A company continues to exist until it is dissolved or merges with another company, even if the owners – the shareholders – die.

Disadvantages of a Business Corporation

Higher Start-Up and Operating Costs

Setting up and running a company involves several costs:

  • government fees (incorporation, registration and permits)
  • administrative costs (for example, to keep the book with the directors’ resolutions, minutes of meetings and bylaws)
  • annual fees to keep the company up to date
  • legal and accounting fees

So, it can be more expensive to run a company than to run a sole proprietorship (one person operating alone) or partnership.

More Complicated to Run

More Complex Tax and Accounting Issues

  • A separate tax return must be filed for the company, and there are accounting requirements regarding financial statements and other reports.


  • The company’s official record book (the “minute book”) and many other records must be updated regularly (for example, lists of shareholders, directors, share transfers and shares issued).
  • Companies that carry on activities in Quebec must be registered in the Registre des entreprises (business register). Registration must be updated every year and whenever there are changes to the information in the company’s file.

More Complicated Internal Structure

  • With a few exceptions, a board of directors must be formed, shareholders meetings must be held each year or resolutions taking the place of meetings must be passed, officers must be appointed, etc.

No Personal Tax Credits

Companies can’t take advantage of some of the tax credits that apply to self-employed workers and partners of a general partnership.

When Shareholders Can Be Held Responsible

Although running a business as a company protects shareholders from personal responsibility in theory, this protection is often reduced in reality.

For example, when financial institutions or new suppliers require personal guarantees (suretyship) from shareholders to make sure the company respects its obligations, the shareholders are personally responsible.

This usually happens with new businesses, or when lenders and investors don’t have a lot of confidence in the business’ financial stability. For a self-employed worker or general partnership starting up a business, choosing a company as a business structure will not protect them in all situations because they will have to guarantee their company’s obligations.

Also, it is quite common for shareholders of the company to act as its directors. Although their responsibility as shareholders might be limited, they have much more responsibility as directors: if they don’t carry out their duties properly as directors, they can be held responsible at both the civil and criminal levels. We recommend that you speak to a lawyer about this issue.

To learn more, read the section in this article “Advantages of a Corporation: Limited Responsibility of Shareholders”.

Incorporation: Federal or Provincial Business Corporation?

Once the decision is made to use the business corporation structure, the business must be incorporated. Incorporation can be done either under federal law or Quebec law. The choice determines which rules apply to the company.