Company Incorporation in Quebec

Incorporation consists of legally constituting a corporation. Incorporation requires the filing of articles of incorporation with the appropriate governmental authorities, either the Registraire des entreprises 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 included with the articles of incorporation is a list of persons who will act as the first directors and who will be responsible for holding an organization meeting, including authorizing the issuance of shares and adopting by-laws.

Incorporation differs from other business operating vehicles such as a sole proprietorship or a partnership in that a separate legal entity is created. Indeed, the corporation has what is called a "juridical personality", and is a "legal person" within the meaning of the Civil Code of Québec. Consequently, 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.

With respect to corporate governance, decisions are generally made by the board of directors, by majority vote (unless the by-laws provide otherwise). Thus, in order to authorize 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 made 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 of directors, the shareholders may vote on the matters covered by the agreement.

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

It is possible for a company, and it is often the case, to have only one shareholder, and for this shareholder to be the sole director and officer. The shareholder and sole director will still have to comply with the corporate formalities provided for by law. There are, however, several possibilities for simplifying internal management. For example, it is possible to withdraw the powers of the directors, or, for Quebec corporations, to take the decision not to have a board of directors. Of course, the sole shareholder and director of a company will often act by signed written resolution, instead of a meeting or meeting.

In general, the shareholders of a corporation have limited liability for the obligations and debts of the corporation. 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 operating a business through a corporation rather than a sole proprietorship or partnership.

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

However, 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 corporation in a fraudulent manner or in a manner that goes against public order, or otherwise to affect an abuse of right (see article 317 of the Civil Code of Quebec on this subject).

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

A corporation can be advantageous from a tax point of view because it allows for a tax deferral. 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 dividends are paid to shareholders, they will be taxed on these dividends. The Tax Act also provides for a gross-up and tax credit mechanism so that the total tax paid by the corporation and its shareholders is the same or nearly the same as if the business were carried on by an individual (the integration principle).

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

Our professional fees to incorporate a business in Quebec start from $ 395. In addition, there are non-taxable government fees payable to the Registraire des entreprises. In 2021, these fees are $ 347. The total government fees are higher when incorporating a company under the federal regime. In this case, you must pay the fees of $ 200 with Corporations Canada, as well as the registration fees of $ 347 with the Registraire des entreprises, for a total of $ 547 in non-taxable government fees.

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

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

The legal organization of a company is essential to properly execute an incorporation. In fact, the mere filing of articles of incorporation with the governmental authorities and obtaining a certificate of incorporation is not sufficient. In order to legally become the "owner" of the corporation, resolutions, registers and share certificates (if shares are issued with certificates) are necessary to authorize the issuance of shares and to issue the shares.

A first step in the legal organization is the signing, by all directors mentioned in the list of first directors of the corporation, of the resolutions taken at the first meeting of directors. Alternatively, a "real" meeting may be held by the directors, with minutes taken, but this is rather rare in smaller companies. These resolutions usually provide for the appointment of officers, the authorization of the issuance of shares, the adoption of by-laws and the authorization to open a bank account.

Then, the shareholders intervene in turn to sign the resolutions of the first shareholders' meeting (or hold a real meeting) in order to elect the directors of the corporation, to approve the by-laws, and to decide unanimously, if necessary, not to appoint an auditor.

A list of the shareholders, directors and officers of the corporation are inserted in the corporate 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 create a shareholders' agreement. However, it is strongly recommended, in particular to avoid potential disputes. A shareholders' agreement has several uses. It allows, for example, to resolve an impasse between shareholders with a so-called "shotgun" clause, to provide for mandatory buy-sell clauses in case of disability, death, bankruptcy or other situations, to establish in advance a mechanism to set the price of the shares, and to prevent any dilution of the shares.

In addition, since shareholders of small and medium-sized businesses are generally active in the management and operation of the business, it is possible to provide 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 what is called the "unanimous shareholders' agreement". The unanimous shareholder agreement allows for the withdrawal or restriction, in whole or in part, of the directors powers. For example, the shareholders can reserve the power to declare dividends or to authorize the issuance of shares. They can also leave these powers to the 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 organized as any other company. The name of the company, if it is registered beforehand, must be withdrawn from the Registraire des entreprises or undertaken to withdraw it, so that it becomes available for incorporation.

If the sole proprietorship has assets to transfer to the company (including goodwill and intellectual property), it is generally necessary to consult a tax professional in order to properly plan the transfer so that it can be done without any tax impacts. The tax professional then drafts instructions to the lawyer or notary who prepares the business transfer. Often, the transfer of assets is made in consideration of preferred shares of the company's share capital. These shares are redeemable at the fair market value of the assets, and a tax election is made so that no capital gain results from the transaction. The sale agreement will provide for a price adjustment clause, in the event that the tax authorities are 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 corporation 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 organization is completed, changes to the structure can still be made.

A transfer of shares, and therefore a change in ownership, can be affected by the endorsement and delivery of the share certificate by the shareholder, in favor of the purchaser 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 purchaser and the seller in order to provide the terms of the transfer, but is not required. When the corporation determines that there has been a valid endorsement of stock or instructions to transfer, the board of directors must authorize the transfer in accordance with the articles of incorporation. The securities registers and share certificates are then changed accordingly, and a current update declaration is filed with the Registraire des entreprises, if the information in the register is no longer accurate 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 director, this is also done by resolution duly adopted by the shareholders. If the number of persons that compose the board of directors is changed, the directors may have to intervene in order to fix the number of directors of the corporation to a new desired number. The directors must intervene only if the by-laws of the corporation grant this power 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 in 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. Furthermore, 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 issuance, and also to issue shares at par value, i.e. an issuance cost provided for in advance in the articles. This is not possible under Canadian law.

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

One of the disadvantages of federal incorporation is the administrative duplication that it imposes. Indeed, when you are federally incorporated, you must file an annual report with Corporations Canada, in addition to filing an annual update with the Registraire des entreprises. 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 programs of Revenu Quebec and the Canadian Revenue Agency. In fact, every 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 program, and a number is assigned and mailed to it. This same corporation must then take the necessary steps with the CRA to create a federal business number and thereby create 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 company is federally incorporated, the opposite is true. A federal business number and federal tax program are generated automatically, and the corporation must take additional steps to obtain a Quebec number. The sole registration with the Registraire des entreprises creates a Quebec business number and registration 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. Alternatively, a small supplier may choose to register for taxes without being required to do so, provided that it is engaged in commercial activities, again 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 manner 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 meetings in person at our Laval office.

Our online services should not be confused with "do it yourself" incorporation sites operated by non-lawyers, which do not constitute professional services but only an accompaniment service to produce the incorporation forms, and sometimes propose preconceived models of legal organization.

Apart from incorporation, there are several other forms of business operation, which may be elaborate or quite simple.

The simplest form of operation is without a doubt the sole proprietorship, or the self-employed person. It is simply an individual who operates a business. The income generated by the business is the income of the individual, and therefore subject to his tax rate, depending on the taxable income. The individual can operate the business under his or her first and last name, or under a business name. If he operates under a commercial name, he must register with the Registraire des entreprises; he will then be given a Quebec Business Number (NEQ).

On another hand, several people can join together to operate a business. They can then form a "partnership", as provided for by the Civil Code of Québec. The most common forms of partnership are the general partnership (GP) and the limited partnership (LP). A partnership is formed by a contract between the partners. The contract sets out, among other things, the percentage of the partnership's profits that each partner has, as well as the contribution of each partner. The partnership must, like any other business in Quebec, be registered in the Enterprise Register.

Unlike a corporation, a partnership does not have a complete 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 in accordance with the partnership agreement.

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