When you want to form a corporation in Ontario, you will need to prepare and file articles of incorporation. The articles of incorporation is the document that brings your corporation into existence, and sets out certain features of the corporation, for example, any restriction on the business that may be carried on, the classes of shares that can be issued and any share transfer restrictions. As such, proper preparation of your articles of incorporation is vital to your business.
Choose a name
Before you even begin drafting, you must choose a name for your corporation. You want a distinctive name, one that avoids any confusion with other similar names that are already registered, whether as business names, corporation names or trademarks. You also want to choose a name that people will remember. Prior to filing your articles of incorporation, you (or your lawyer) will run a NUANS search to review any similar names previously registered.
Registered Office and Number of Directors
Your articles of incorporation will identify a registered office address in Ontario. This will serve as your official address for any legal or governmental purpose. Note that this does not have to be your place of business that you promote to the public. With that in mind, a lot of people use their home address when starting up.
In addition, you will indicate the number of directors for your corporation. In Ontario, you are required to have a minimum of one director and at least 25% of the directors must be resident Canadian. In most cases, you will want to indicate a minimum and maximum range. This gives you room to grow or contract. Given that your business may change over time, allowing for a minimum and maximum number of directors offers more flexibility than having a fixed number of directors.
Restrictions on Business
Section 5 in your articles of incorporation requires you to identify any restrictions on the business. In most cases, the articles will provide that there are no restrictions on the business that the corporation can carry on. Again, a growing, evolving corporation should give itself room to develop new ideas and directions. If, on the other hand, you are creating a professional corporation, you will need to restrict the business to the profession you are practicing (i.e. doctors have to restrict their business to the practice of medicine).
Class of Shares
Section 6 of the articles of incorporation sets out the classes of shares that your corporation is authorized to issue. You will include Common shares and may sometimes include Special (or Preferred) shares.
- Common shares are either voting or non-voting equity shares. The holder has a right to a proportional share of equity in the corporation, but if they are non-voting shares, he or she cannot vote as a shareholder.
- Special shares are typically non-equity shares and are sometimes used for tax planning purposes. They are also generally redeemable and retractable – which means the company can require that they be sold back, or you can require that the company buys them back.
You may want to start simple with only the class of shares that you need. Alternatively, you can build in extra classes you think you may need in the future, even if you’re not issuing that class right away. In either case, your articles of incorporation must properly set you up for the right approach. Remember that you can always amend or change your articles to add new share classes down the road.
Restrictions, Privileges, and Conditions Attaching to Each Class of Shares
Section 7 outlines the attributes that each class of shares will have. For example, it will set out if the shares:
- are voting or non-voting;
- provide for fixed or discretionary dividends;
- are redeemable or retractable;
- entitle the holder to any assets of the corporation on dissolution, liquidation, or winding down.
If your corporation is only going to have one class of shares, this section can simply read "N/A," because the Ontario Business Corporations Act provides for the basic rights that will apply if there’s only one class.
Issue, Transfer, or Ownership of Shares
If you are a private company, Section 8 of your articles should include language which restricts the issue, transfer and ownership of shares.
Section 9 provides space to include other terms that you want included in your corporation’s charter documents. This section may include provisions for borrowing money and the number of shareholders that the corporation can have. In most cases, this will not be necessary.
Some online tools purport to help you file effective articles of incorporation in Ontario. Unfortunately, the do-it-yourself option forces you to rely on knowledge you do not have, or use boilerplate language that may not meet your needs. At Ordower Law, our team provides legal expertise you can rely on to not only develop legally acceptable articles of incorporation, but to draft them to meet your specific needs, both for the present and future of your company.