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What is a Corporation?

Lawyers and accountants often talk about the advantages of incorporating.  Most people have heard of numbered companies or limited companies but often people are confused about what they really are.  Numbered company, limited company, incorporation, shelf company, etc, are all references to a corporation.

A corporation is recognized as a person in our legal system.  A corporation does not breath, think or otherwise exist, as we understand a person to exist.  (The living breathing person is defined in law as an individual.)  A corporation or any other person has to pay income tax and each is a separate entity.

The corporation operates under the actions of the board of directors who make up the brains or operating mind of the corporation.  The board of directors may be as small as one or may consist of several directors.  Directors are elected each year by the shareholders of the corporation who are entitled to vote.

Shareholders are the persons, not necessarily individuals, who own the rights and benefits of the corporation.  There are three basic rights, which must be vested in the shareholders, they are the right to vote, the right to receive dividends, and the right to receive the value or assets of the corporation in the event of winding up or dissolving of the corporation.

When a corporation is first registered or incorporated an individual must sign as incorporator and name at least one individual to act as director.  The application is made to corporate registry with articles of incorporation, which set out among other things, minimum and maximum number of directors, the classes of shares and the rights attached to each and the restrictions on the business of the corporation.

Corporate registry assigns a name to the corporation.  The assigned name will be a number (They were six digit numbers followed by Alberta Ltd., now they are seven digit numbers. We used up all the six-digit numbers.).  If you request a specific name and you prove no other corporation is using it your corporation will be given that name. The corporation never loses the originally assigned number and can change its name back to the number any time in the future.

The name of a corporation in Alberta must have as the last word: Limited or Incorporated in French or English or Corporation and may use the abbreviation of the word selected.

Once this incorporation process is complete the corporation exists or on a human analogy is born.  It then needs to be organized.  The best analogy to organizing a corporation is that of spanking a baby to get it breathing.  In law there must be at least one shareholder.  A person must subscribe for shares of the corporation and become a shareholder.  The shareholder or shareholders must elect at least one director who then controls the corporation.  In order for actions of the corporation to be recognized in law such actions must be authorized by directors, who are validly elected by shareholders, having the right to vote. The appointment of the directors expires after one year and therefore the shareholders must elect directors each year.

The paper work behind a corporation may seem very strange in a very closely held corporation with only one or two shareholders who are also the directors of the corporation, however, the rules are the same for larger corporations where numerous shareholders elect a small board of directors to operate the day to day business and the shareholders are not involved. Since corporations are really what most of us would consider an artificial person we need a set of rules to define and regulate them.

By Glen D. Cunningham
January 22, 2003