Incorporation of a Company in Quebec

Incorporation consists of legally constituting a " corporation ", formerly known as a "company" in Quebec. Incorporation requires the filing of articles of incorporation with the appropriate government authorities, either the Enterprise Registrar for provincial incorporations, or Corporations Canada for federal incorporations. Generally, a detailed description of the authorized share capital, a restriction on the transfer of shares and other securities of the corporation, and sometimes other provisions authorized by law are attached to the articles of incorporation. Also attached to the articles of incorporation is a list of persons who will act as the first directors and who will be responsible for holding an organizational meeting, including authorizing the issuance of shares and adopting bylaws.

Incorporation differs from other business vehicles such as a sole proprietorship or partnership in that a separate legal entity is created. Indeed, the corporation has what is called a "legal personality", and is a "legal person" within the meaning of the Civil Code of Québec. Therefore, a corporation can, like a natural person, carry on a business, be a party to a contract, have property and obligations, take part in legal proceedings, and declare bankruptcy.

At the level of internal management, decisions are generally taken by the board of directors, by majority vote. Thus, in order to authorise the purchase or sale of a building, the hiring of an employee or the opening of a new establishment, the board must in principle intervene for approval. However, certain decisions are taken by the shareholders at an annual or special meeting. These decisions include the election of directors and the appointment of an auditor. If there is a unanimous shareholder agreement removing or restricting powers of the board ofdirectors, the shareholders can vote on the matters covered by the agreement.

Decisions of directors and shareholders are either taken at a meeting/meeting, where the required quorum is present, or by written resolutions in lieu of a meeting/meeting, signed by all directors or shareholders entitled to vote, as the case may be.

It is possible for a company, and this is often the case, to have a single shareholder, and for that shareholder to be the sole director and officer. The sole shareholder and director will still have to comply with the corporate formalities provided for by law. There are, however, several possibilities for simplifying internal governance. These include the withdrawal of powers from directors, or, for Quebec corporations, the decision not to have a board of directors. Of course, the sole shareholder and director of a corporation will often act by signed written resolution, instead of a meeting.

In general and with some exceptions, the shareholders of a corporation have limited liability for the obligations and debts of the company. The only liability of the shareholders is, in principle, the payment of the subscribed shares. This principle of limited liability is fundamental, and is one of the main reasons (in addition to tax reasons) for running a business through a corporation rather than a sole proprietorship or partnership.

As corporation is a legal person in the eyes of the law and has a legal personality of its own, the assets and liabilities of the company are not to be confused with those of the shareholders. Thus, if the company has incurred a debt and the shareholders have not guaranteed it, the principle of limited liability means that the shareholders are free from liability.

The principle of limited liability can be set aside by a court of law in certain cases. This is known as "lifting the corporate veil". A judge will act in this way in particular when a person uses a company in a fraudulent manner or in a manner that goes against public order, or otherwise to effect an abuse of right (see Article 317 of the Civil Code of Québec on this subject).

In addition, in certain cases a director of a company may be sued personally for his own extra-contractual fault, which would be distinct from any breach committed by the company itself. In this case, it must be proven thatdirector has committed an extra-contractual fault, that it has caused damage, and that there is a causal link between the fault and the damage.

A corporation can be tax efficient because it allows for tax deferral, or in other words, deferring income tax liability. This is because, except for investment income, the corporation benefits from a lower tax rate than individuals, especially when it benefits from the small business deduction. For example, in 2021, a corporation benefiting from the federal and provincial small business deduction has a combined tax rate of 12.38% on its business income (on the first $500,000 of income), excluding, however, specified investment and personal service businesses which are subject to specific rules.

When a dividend is paid to shareholders, they will have to pay tax on these dividends. The tax law also provides for a gross-up and tax credit mechanism so that the total tax paid by the company and its shareholders is the same, or almost the same, as if the business were operated by a private individual (integration principle).

Thus, since directors has total discretion over the declaration and payment of dividends to shareholders, it is possible to achieve a tax deferral, which also allows the company to have more capital in hand to invest in its activities.

Our professional fees for incorporating a business in Quebec start at $395. In addition, there are non-taxable government fees payable to the Registraire des entreprises. In 2022, these fees are $356. The total government fees are higher when incorporating a company under the federal system. In this case, you must pay a $200 fee to Corporations Canada, as well as a $356 registration fee to the Registraire des entreprises, for a total of $556 in non-taxable government fees.

In addition to these start-up fees, there are government fees payable annually. If the corporation is incorporated under the Quebec system, the fee is, in 2021, $93 and is payable at the time of filing the annual update, or via the tax return, if the election has been made to combine the annual update and the tax return.

If the company is federally incorporated, an annual return must be filed each year, and a fee of $12 is payable if the return is filed online (otherwise $40 if filed by mail or email). An annual registration fee of $93 is also payable to the Registraire des entreprises du Québec.

The legal organisation of a company is essential for a successful incorporation. Indeed, simply filing articles of incorporation with government authorities and obtaining a certificate of incorporation is not enough. In order to legally "own" the company, resolutions, registers and share certificates (if shares are issued with certificates) are required to authorise the issue and issue of shares.

A first step in the legal organisation is the signing, by all directors included in the list of the first directors of the company, of resolutions in lieu of a first meeting of directors. Alternatively, a 'real' meeting can be held by directors, with minutes being taken, but this is rarer in smaller companies. These resolutions usually provide for the appointment of officers, the authorisation of the issue of shares, the adoption of the rules of procedure and the authorisation to open a bank account.

Then the shareholders step in to sign resolutions in lieu of a first shareholders' meeting (or hold a real meeting) to elect the company's directors , approve the bylaws, and decide unanimously, if necessary, not to appoint an auditor.

A list of shareholders, directors and officers of the company are inserted in the company book. A register of securities (shares) is also kept in the book, as required by law. This register details the issues and transfers of shares, by shareholder name and by class of shares.

Following incorporation, it is not mandatory to conclude a shareholders' agreement. However, it is strongly recommended, in particular to avoid potential disputes. A shareholders' agreement serves several purposes. For example, it can be used to resolve an impasse between shareholders with a so-called "shotgun" clause, to provide for compulsory buy-sell clauses in the event of disability, death, bankruptcy or other situations, to establish in advance a mechanism for setting the share price, and to prevent any dilution of the shares.

In addition, since shareholders of small and medium-sized companies are usually active in the management and operation of the company, it is possible to put in writing what each shareholder promises to contribute in terms of time, services and resources to the company. In case of default, a compulsory buy/sell clause can be triggered.

The shareholders' agreement is different from the so-called "unanimous shareholders' agreement". The unanimous shareholder agreement allows the powers of directors to be withdrawn or restricted, in whole or in part. For example, the shareholders may reserve the power to declare dividends, or to authorise the issue of shares. They can also leave these powers to directors, but retain a right of approval over these decisions. A shareholders' agreement and a unanimous shareholders' agreement can be contained in the same document.

The process of incorporating a sole proprietorship is similar to the normal incorporation process. The Articles of Incorporation are filed, and the company is organised in the same way as any other company. The name of the company, if already registered, must be withdrawn from the Business Registry or undertake to withdraw it, so that the name becomes available for incorporation.

If the sole proprietorship has assets to transfer to the company (including goodwill and intellectual property), it is usually necessary to consult a tax professional to properly plan the transfer so that it can be done without tax impact. The tax professional then drafts instructions to the lawyer or notary who prepares the business transfer. Often, the transfer of assets is made in exchange for preferred shares of the company's capital stock. These shares are redeemable at the fair market value of the assets, and a tax election is made so that no capital gains result from the transaction. The sale agreement will provide for a price adjustment clause, should the tax authorities be of the opinion that the sale price does not represent the fair market value of the transferred assets.

If the entrepreneur has no assets to transfer to the company and the goodwill of the business has no value, the transition from sole proprietorship to corporation will be relatively simple.

Once the incorporation and legal organisation have been completed, changes to the structure can still be made.

A transfer of shares, and thus a change in shareholding, can be effected by the endorsement and delivery of the share certificate by the shareholder in favour of the buyer of the shares. If the shares are issued without a certificate, it will be a notice of transfer instructions given to the company. A share sale agreement, whether elaborate or not, may be entered into between the buyer and seller to provide for the terms of the transfer, but this is not a requirement. Where the company finds that there has been a valid endorsement of the shares or instructions to transfer, the board of directors must authorise the transfer in accordance with the articles of incorporation. The registers of shares and share certificates are then changed accordingly, and a current update statement is filed with the Registraire des entreprises, if the information in the register is no longer current following the transfer.

A change in the board of directors requires the intervention of the shareholders. A director may resign or, failing that, the shareholders may decide to revoke his mandate by resolution. In order to elect a new person asdirector, this is also done by resolution duly adopted by the shareholders. If the number of persons composing the board of directors is modified, it is possible that the directors must intervene in order to fix the number ofdirectors of the company at the new desired number, within the limits provided for by the articles. The directors must intervene only if the internal regulations of the company grant this decision to the directors. Some by-laws leave this decision to the shareholders directly. Changes to the book registers will have to be made, in addition to a current update declaration to the Registraire des entreprises and Corporations Canada, if applicable.

It is possible to incorporate under Quebec or Canadian law. It is important to note that provincial incorporation does not limit the geographic area in which the company can operate. Thus, a Quebec corporation can operate anywhere in Canada and the world. However, the corporation must register in the various provinces or states in which it will do business.

The Quebec Business Corporations Act is a modern law, adopted in 2009. In contrast, the Canada Business Corporations Act was adopted in 1975. In adopting the Quebec Act, the legislator essentially based itself on the Canadian Act, but made some interesting additions. These additions include the possibility of issuing uncertificated shares and having classes of shares with identical rights and restrictions. In addition, in continuity with the former Companies Act, it is possible under the provincial regime to issue shares that are not fully paid up at the time of issue, and also to issue shares at par value, i.e., an issue cost set out in advance in the articles. This is not possible under Canadian law.

One of the advantages of federal incorporation is that it may enjoy better recognition when doing business internationally, especially since the form of articles of incorporation is bilingual, unlike Quebec corporations whose form of articles is solely in French.

One of the disadvantages of federal incorporation is the administrative duplication it imposes. In fact, when you are federally incorporated, you must file an annual report with Corporations Canada each year, in addition to filing an annual update declaration with the Quebec Enterprise Registrar. There is therefore a duplication of administrative costs. For provincial corporations, no report or update has to be filed with Corporations Canada.

A corporation incorporated in Canada must be registered in the income tax files of Revenue Quebec and the Canada Revenue Agency. Indeed, any corporation incorporated in Canada is required to file an annual income tax return, even if the corporation did not generate any income during the given year.

A provincially incorporated corporation is automatically registered in the Quebec income tax file, and a file number is assigned and mailed to it. This same corporation must then apply to the CRA to have a federal business number created, thereby creating a federal income tax account. However, if the corporation registers for GST and QST with Revenu Québec, a federal business number and federal income tax account will be created when Revenu Québec requests the creation of the GST account.

If the corporation is federally incorporated, the reverse is true. A federal business number and federal tax account are generated automatically, and the corporation must take additional steps to obtain a Quebec number. The sole effect of registration with the Enterprise Registrar is to create a Quebec business number and to register in the Quebec tax files.

A corporation will have to determine, following incorporation, whether it must or wishes to register for GST and QST. Unless the corporation is a small supplier ($30,000 or less in taxable supplies), a corporation must generally register for taxes as long as it sells taxable goods or services, excluding supplies that are exempt under the law. A small supplier may also decide to register for taxes without being obliged to do so, provided that it is engaged in commercial activities, still excluding exempt supplies.

Registration for the GST and QST is done directly with Revenu Québec, even though the GST is a federal tax. In fact, an intergovernmental agreement ensures that these two taxes are managed by the Quebec government.

The online incorporation service offered by Pronto Corporate Services Inc, operator of IncorporationQuebec.net, meets the highest professional standards and constitutes a true legal service, in the same way as if one were to mandate a traditional lawyer's office or notary. We offer a free consultation and guidance with a lawyer throughout the incorporation process, and accept face-to-face meetings at our Laval office.

Our online services should not be confused with "do it yourself" incorporation sites operated by non-lawyers, which are not professional services but only a support service for producing incorporation forms, and sometimes offer pre-designed models of legal organisation.

Apart from incorporation, there are several other forms of business operation, which can be sometimes elaborate and sometimes very simple.

The simplest form of operation is undoubtedly the sole proprietorship, or the self-employed person. This is simply an individual operating a business. The income generated by the business is the individual's own income and is therefore subject to his or her own tax rate, depending on the taxable income. The individual may operate the business under his first and last name or under a business name. If he operates under a business name, he must register with the Registraire des entreprises; he will then be assigned a Quebec business number (NEQ).

Several people can join together to operate a business. They may then form a "partnership" as provided for in the Civil Code of Québec. The most common forms of partnership are general partnerships (GPs) and limited partnerships (LPs). Partnerships are formed by contract between the partners. The contract sets out, among other things, the percentage each partner has in the profits of the partnership, as well as the contribution of each partner. Like any business in Quebec, a partnership must be registered in the Enterprise Register.

The partnership, unlike the corporation (or company), does not have full legal personality, and is not a separate entity from its partners. However, for tax purposes, the tax laws provide that the taxable income of a partnership is calculated as if it were a separate entity. After determining the income of the partnership, it is allocated to the partners according to the partnership agreement.

Another form of enterprise is the joint venture. A joint venture will exist when several people decide to pool resources for the purpose of carrying out a specific project. The difference between a joint venture and a partnership is that the joint venture exists for a particular project only. A contract will then be drawn up to set out the various terms of the partnership.