Many small businesses start out as sole proprietorships. As business takes off and grows, the legal and tax advantages of incorporation often become evident, and entrepreneurs decide that it is time to incorporate. The most basic document of a corporation is its articles of incorporation. The articles are the foundation of the company’s legal existence, and they must be drafted with care to ensure that they will be functional and reflect the company’s business. Make sure you understand these basic elements before filing your articles of incorporation.
The vocabulary surrounding articles of association may vary from province to province (or if you are using a federal incorporation), and it has evolved over time. “Articles of association,” “corporate charter” and “articles of constitution” are all generally synonymous expressions, although you should check with the relevant law in your jurisdiction. At its core, the articles of incorporation specify the essential elements for a company’s legal existence. The articles of incorporation define the company’s purpose and lay out the process for appointing its directors, how its financial records will be handled, and the decision-making process at the board level. The articles of incorporation also lay out provisions regarding regular and extraordinary shareholders’ meetings.
Company Name and Purpose
The first thing to do when creating a company is to give it a name. This name is enshrined in the articles of incorporation. While a company can have just about any name, a suffix such as “Inc.” or “Limited” must usually be used to indicate the limited liability associated with corporations. Almost every jurisdiction bans certain names that could be confusing or offensive. In Quebec, there are also language requirements. Usually, you must also state the company’s purpose, or reason for being, in the articles of incorporation. Some jurisdictions accept very broad purposes, such as “management,” while others require greater detail (“the operation of a private tennis club”).
Share Capital and Corporate Organization
Another important section of the articles deals with the legal aspects of the company’s capital and organization. This includes the number and type of shares that comprise the company’s capital and the various types of shares (common, preferred) that the company may issue. The legal organization of the company including its address, the number of directors and officers, the identity of the founders and original shareholders is found in this section. The provisions for the first general meeting of shareholders and the rules that will govern subsequent annual shareholder meetings such as notices, resolutions and votes are laid out in detail in this section. Articles of incorporation may contain many more details. It may be wise to consult with a professional before filing them, since the articles of incorporation will continue to govern the company’s operations for a long time and are not easy to change.