Appendix 3:
Incorporation
Governance
Primary Care Toolkit for Family Physicians
The College of Family Physicians of Canada
The following information is adapted from McMillan Binch Mendelsohn.
Although this information is applicable in Ontario, there are similar to requirements in most other provinces.
|
Unincorporated Association (not-for-profit) |
Not-for-profit Incorporation |
Definition |
Informal arrangement between two or more persons Not a separate legal entity from members |
Separate legal entity from members Covers groups having scientific, social, professional character, etc. Goal of organization cannot be profit. Can pay members reasonable remuneration for services. |
Establishment And Maintenance |
Contract of association – determines governance framework |
Letters patent to create By-laws (governance rules), organizing resolutions (election of directors, etc.) to organize Annual members' meetings; board meetings Registration for tax and employer purposes Annual filings Requires compliance with governing statute |
Liability |
Unlimited liability of members |
Directors have potential liability to the corporation (fiduciary duty) Directors have potential liability to others for wages, taxes in arrears, environmental problems and health/safety issues No liability for members |
Perpetual Existence |
Perpetual existence not definite |
Permanent structure with perpetual existence Members may come and go without affecting structure |
Dissolution |
Simple |
Easy to withdraw. Steps required to dissolve No surplus distributable to members on dissolution |
Taxation |
Income/loss tax paid by member directly as personal income/loss |
Tax exempt but some corporations still need to file tax returns |
Other |
Cannot hold real estate, sue/be sued in own name (must hold real property through trustees and sue through members) |
Can hold real estate and assets, enter into contracts and sue/be sued Cannot pay dividends to members; no share capital |
Pros |
Can be simple to create/dissolve |
Limited liability Separate entity for ease of transactions Permanent structure with perpetual existence Tax exempt |
Cons |
Unlimited personal liability Cannot hold real estate itself; must hold it in name of trustee Cannot enter in contracts or sue/be sued in own name Perpetual existence not assured |
Some liability for directors Little possibility of gain to members; cannot aim to make profit; cannot pay dividends to members / no share capital; cannot distribute surplus upon winding up Additional steps to set up and dissolve Annual maintenance and compliance with the governing statute is required |
General Notes:
- No method is best in every case
- Consider what is legally possible
- Costs – Preparing a contract of association may cost just as much as incorporating
- Liability – What are the legal risks? Is there a substantial uninsurable risk? What are the costs of insurance for each business vehicle?
- Desirability of perpetual existence – death or withdrawal of member could result in renegotiating major contracts, changing banking arrangements, etc.
- Numbers of members – if large number, incorporation may be preferable as in most cases, one member is not responsible for acts of other members; also incorporation provides formal governance rules
- Tax considerations