Consequences of incomplete incorporation

It is quite common for an incorporation to be carried out by the entrepreneur himself, instead of entrusting this task to a competent lawyer. We offer you a list of consequences that frequently occur in such a situation, and which make it strongly recommended that you mandate a professional to incorporate a company.

Lack of legal organisation

Simply filing articles of incorporation and obtaining a certificate of incorporation issued by the Enterprise Registrar (or Corporations Canada) does not constitute "full" incorporation. It is one thing to legally incorporate a corporation, and it is another to legally organize it in order to validly become a shareholder. The legal organisation of a company, which takes the form of written resolutions signed by all directors, is essential in order to issue shares, among other things. Shares ensure that a person is an "owner" of the company and can pay dividends to himself or herself, participate in the residue in case of liquidation, and vote to elect a director or directors directors. The legal documentation prepared for the legal organisation will set out the number of shares issued and their class, the price per share to be paid for the shares issued, the name(s) of the share subscriber(s), and the terms of payment for the shares, if any.

In addition, certain registers must be kept in accordance with corporate law, in particular the securities register, which details all share issues and transfers that have taken place since the company's incorporation. It should be noted that the tax authorities may require to consult the company's book.

Lack of share capital structure

The incorporating professional will usually annex a share capital structure, whether customised or not, to the articles of incorporation of the company. The share capital will then be composed of several classes of shares, with different rights and restrictions. These different classes are very useful, particularly in terms of financing, corporate reorganisations and generally in order to set up a more complex structure, as required.

The failure to provide for different classes of shares in the company's articles of association is not fatal. By operation of law, in the absence of different classes of shares in the articles of association, the share capital of the company will be of one class, in unlimited number, and the shares will carry the three basic rights (dividend, voting and remainder). These shares may in many cases be sufficient, but a plurality of share classes may be necessary, especially when the company is about to integrate new shareholders. In this case a modification of the articles of association will have to be made, which will generate professional fees to carry out the reorganisation.

No restrictions on the transfer of securities

National Instrument 45-106 requires, in order to have "private issuer" status, that the company's securities (including shares) be subject to a restriction on free circulation. This restriction may exist either in the articles of the company or by an agreement between the security holders. In practice, this restriction will be included in the articles of incorporation at the time of incorporation.

The absence of restrictions on the transfer of securities is not without consequences. If a company does not have private issuer status, it will be obliged to produce a prospectus when issuing shares, even to a close relative, for example. Typically, a small company will seek to avoid the requirement to produce a prospectus, given the cost and time involved in doing so.