One of the most frequent questions we are asked is why do I need a lawyer to incorporate.
Many see the advertisements online promising incorporation for as low as $100 without the need for a lawyer. What are these websites? And how is it possible that incorporation fees can be so low? Many ask, why would I use a lawyer to incorporate when I could do so myself for a tenth of the cost? The quick answer is, these websites do not complete the incorporation process: they only complete Step 1 of the Two-Step process to incorporation.
In this article, we break down the Two-Steps required to incorporate and explain each in depth. We explain the difference between what the online websites provide and what lawyers provide and how this affects the status of your corporation. For more information on whether incorporation is right for you, see our article here.
Two Steps to Incorporate: Step 1 and Step 2
Incorporation can be broken down into two basic steps.
- In the First Step, Articles of Incorporation are prepared, filed and issued with the Ministry.
- In the Second Step, organizational resolutions must be prepared which organize the new corporation and issue shares to the shareholders. As well, in the case of provincial corporations, an information return must be filed with the Ministry within 60 days of incorporation which informs the Ministry about its organization. At that point in time, the incorporation is complete.
The online websites offering incorporation for extremely low fees complete the First Step only. They log in to the government website and give the Articles of Incorporation to you. However, you could do this very same service yourself by logging in to the government website and having the Articles issued without their involvement. They have added zero value to a service that’s already provided to the public by both the Provincial and Federal governments for free. They then send these Articles to you under the guise that the incorporation is complete. You have essentially paid the $100 or $200 for no reason at all, as you could do the same on your own by accessing the government websites intended for the public and obtaining issued Articles of Incorporation.
In most cases, they fail to tell you that they have completed Step 1 of a 2-Part process only. They fail to tell you that if you don’t complete Step 2 on your own, your corporation is deficient and can be forcibly dissolved by the Ministry in a few years time when the deficiency isn’t rectified. It is certainly unfortunate to see these sites taking advantage of the public by failing to inform the public that further steps must be taken on their own. They leave no guidance as to how to complete Step 2 and in most cases, fail to inform you that Step 2 is required at all. You think you are incorporated because you hold Articles of Incorporation. This, unfortunately, is untrue. The incorporation is incomplete.
What is Step 2? And why is it important?
Step 2 is the stuff that lawyers do.
In Step 2, organizational resolutions are prepared which confirm the central tenets of the new corporation as required by law under the Ontario Business Corporations Act. These resolutions confirm and appoint the directors and officers, they issue shares to shareholders and specify the amount of their shareholdings, they confirm the fiscal year end, the corporation’s bank, the corporation’s accountant, the corporation’s solicitor, they consent to exempt itself from the requirement to prepare audited financial statements and to the indemnification of the directors and officers. Most importantly, physical share certificates are issued to the shareholders demonstrating their shareholdings, the class of shares and the percentages of their ownership. Finally, an official minute book is obtained which houses all of the corporate records. All of the above is required by law.
Why is Step 2 Required? Why Aren’t Articles of Incorporation Good Enough?
When filing Articles of Incorporation in Step 1, the government only requires the name of the corporation, the registered head office and the name of the director. Then Articles are issued.
You are then required to complete the incorporation process in Step 2 by electing directors, appointing officers and issuing shares to shareholders as explained above. A corporation that doesn’t complete Step 2 does not have legal shareholders or validly appointed directors. And a corporation without shareholders cannot exist. Think of it akin to a person without a head. A fundamental and required aspect of an incorporation is its owners/shareholders, without which, the corporation legally belongs to no one. As well, the directors have not consented to act as directors which is required by the governing legislation. At a basic level, the requirements at law to create a corporation have not been met.
Once Step 2 is completed, the lawyers return to the Ministry and file a Form 1 Initial Return. This Form 1 reports back to the Ministry the organization which was completed in Step 2. This Form 1 must be filed within 60 days of provincial incorporation and is required under the Corporations Information Act.
If the Form 1 is not filed (which is the case with online incorporations), the corporation can be struck off the registry and forcibly dissolved by the Ministry likely in a few years time.
You will then have to hire a lawyer to reinstate the dissolution of the corporation, or incorporate a new corporation properly.
Why is Completing the Corporation Important?
Without Step 2, you don’t have a complete corporation. Your corporation can and likely will be forcibly dissolved by the Ministry in several years time. Your business will likely have extreme difficulty being sold, as it was never properly constituted. You will have difficulty income splitting, as shares have not been properly issued. If there are two or more partners to the incorporation, you will have difficulty defining your roles and shareholdings – because these have never been determined. You will not be able to reap the benefits of incorporating which is (a) the limitation of liability and (b) tax planning. You will, in all sense, not have incorporated a corporation.
Rectification of a Corporation
Much of the work we do, unfortunately, is rectifying and reconstituting corporations which were incorporated online without a lawyer. This is usually occurs a few years after incorporation when the business begins to pick up and generate income. The owners are then interested in confirming the corporation was structured properly, or sometimes they are interested in selling all or a part of the business. We review what was done, and in most cases, only Articles of Incorporation were issued meaning the corporation is deficient.
Essentially, we are retained to complete Step 2. We organize the corporation, make the appropriate filings, issue shares to the shareholders and obtain an official minute book for the Corporation.
Finally, in 95% of the cases, corporations which were not completed properly at the outset, are also not carried forward in accordance with the law as well.
Annual resolutions are required each year in which the directors and officers of the corporation approve of the financial statements of the corporation which is required by law. Another reason why it is beneficial to incorporate using a lawyer is because the lawyer and the accountant ensure these filings and resolutions are completed each year. Incorporations which were incorporated online usually are deficient in its annual filings and resolutions as well.
Cost, and Do-It-Yourself
Lets be honest about the costs to incorporate a corporation.
Lawyers charge anywhere from $1,000 to $2,000 to incorporate depending on the law firm and the complexity. Incorporating online can cost as low as $100 or $199, however you have not created a valid corporation. You have two choices: either hire a lawyer, or do it yourself.
If you are savvy and resourceful, you could certainly review the Ontario Business Corporations Act and find out the required resolutions in order to complete Step 2. If you are cost sensitive and have the time to do the research, prepare the resolutions, issue the shares and obtain a formal minute book, you could certainly do so on your own.
Why You Should Incorporate Using a Lawyer
However, many with limited time and resources choose to have a professional undertake to do this work for them. Using a lawyer, you have the peace of mind and assurance that the corporation was incorporated properly, and it wont be forcibly dissolved by the government for deficiency later down the road. Using a lawyer also ensures that you have set up the corporation to maximize the tax planning and income splitting opportunities available to a corporation. Why pay more tax than necessary?
Lastly, if you incorporate online, you will likely have to hire a lawyer several years down the road to rectify the deficiency in the incorporation by completed Step 2. Lawyers fees are approximately $1,250-1,500 to reconstitute a corporation. You may as well incorporate properly initially, rather than worrying about the status of your corporation and ultimately paying higher fees down the road.
Thinking of Starting a Business?
If you have a new business venture and are considering incorporation, speak to a lawyer. We offer no-charge 25 minute consultations. We can discuss the reasons for incorporating and even, whether incorporation is right for you. Don’t just incorporate quickly online, lest you regret making the brash decision later. In most cases, using a lawyer to incorporate is far more beneficial, and at the end of the day saves you the legal fees in correcting it later. Theres a reason we do what we do. Take advantage of it.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2018
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.