1.1 Introduction
1.2 Nature of a Corporation
1.3 Should You Incorporate?
1.4 Types of Corporations
1.5 Incorporation Process and Corporate Maintenance
1.6 Self-help Remedies Available Under the Corporations Act
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1.1 Introduction

The purpose of this handbook is to provide general information on the nature of a not-for-profit corporation and guidelines on how to incorporate such a corporation.  This handbook also provides basic information on incorporating charitable corporations, which are a special type of not-for-profit corporation. 

Not-for-profit corporations incorporated in Ontario are governed by the Corporations Act and the Regulations made under it.  Incorporation of not-for-profit corporations under the Act is at the discretion of the Minister (or his delegate). This is in contrast to ‘incorporation as of right’ for business corporations incorporating under the Business Corporations Act.  Certain pertinent sections to the Act and the Regulations are included in this handbook.  The reader is, however, referred to the Corporations Act and the Regulations to examine those sections not set out here. 

This handbook contains general statements concerning the requirements of the Act and Regulations which are intended to serve only as a general guide and not as a substitute for statute when dealing with specific problems.  Also, reference to this handbook should not be a substitute for consultation with a lawyer on legal considerations or an accountant on financial matters.

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1.2 Nature of a Corporation

In law, a corporation is an artificial person or a legal entity having an independent existence, separate and distinct from that of its members.  The corporation owns property in its own name, acquires rights, obligations and liabilities, enters into contracts and agreements and has the capacity to sue and be sued as would a natural person.

Thus, for example, a corporation may be insolvent while its individual members may be wealthy.  As a separate legal entity a corporation is not affected by changes in its membership and its existence continues in perpetuity unless its members or the government take steps to dissolve it.

A corporation is managed or governed by a board of directors, which is elected by the members.  The board of directors, in turn, elects a president and appoints other officers such as a secretary, treasurer etc. who are responsible for the actual operation of the corporation.

The directors, officers and members do not “own” the corporation, nor do they have any right of ownership to any particular asset of the corporation and the corporation may not be operated for pecuniary gain of its members, directors or officers.

In certain circumstances, a not-for-profit corporation may engage in activities that are revenue producing and that produce a surplus, or “profit”.  However, such activities must be incidental to the principal objects of the corporation and in furtherance of the principal objects.  For example, a hockey club may hold a dance to raise funds for new uniforms for the team.  If, after paying the expenses, the dance produces a “profit”, the monies belong to the club and must be used for the benefit of the club (i.e. to purchase new uniforms for its team).

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1.3 Should You Incorporate?

The act of incorporation offers certain advantages to the incorporators and their successors but at the same time it also places certain responsibilities upon them.  Accordingly, before proceeding with incorporation, the members of an unincorporated organization should give the matter serious consideration.  In this regard you may wish to consult a lawyer who has experience in corporate matters and who, given all the facts, can advise you whether it would be to your advantage to incorporate.

If you need a lawyer, you may wish to contact the Lawyer Referral Service of The Law Society of Upper Canada. For a small fee the Lawyer Referral Service will provide the name of a lawyer who will provide a free consultation of up to 30 minutes to help you determine your rights and options (see Contacts - Appendix “G”).

It is not mandatory for a not-for-profit organization to incorporate.  There are in existence hundreds, possibly even thousands, of unincorporated organizations in Ontario that are carrying on their activities without any hindrance.  Unincorporated organizations do not have a separate legal existence apart from their members.

Advantages of Incorporation

As the corporation is a separate legal entity distinct from its members and has the capacity to own property, to sue and be sued, it affords limited liability protection to its members.  This means that individual members are not personally liable in certain instances, for the corporation’s debts and obligations.

The corporation is not affected by changes in its members, be it due to death or any other reason.  Therefore, it is easier to enter into a number of transactions in the name of the corporation such as, banking, owning real estate or signing a lease or contract.

A majority of the members of the corporation have the power to bind the others by their acts.

Disadvantages of Incorporation

As the corporation is a creature of statute, it is subject to some supervision by the Government of Ontario and it must conduct its affairs in accordance with the applicable statutes.  For example, the constitution or by-laws of the corporation, the election of directors and the calling of meetings of members are all governed by the Corporations Act.  In addition, a corporation is required to report certain information on a regular basis to certain departments of the Government. 

Failure to comply with reporting or disclosure requirements could render the corporation and its directors and officers liable to certain penalties, including the cancellation of the corporation.

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1.4 Types of Corporations

Not-for-profit corporations are organizations that carry on activities without pecuniary gain.  They are incorporated under Part III of the Corporations Act as corporations without share capital.  They are all subject to section 126, which states:

• Not to be carried on for gain -- section 126(1)
• 126. (1) A corporation, except a corporation to which Part V applies, shall be carried on without the purpose of gain for its members and any profits or other accretions to the corporation shall be used in promoting its objects and the letters patent shall so provide, and, where a company is converted into a corporation, the supplementary letters patent shall so provide.

Applications will not be accepted where the objects indicate that it is being incorporated for the purpose of profit. 

Below are categories of the most common types of not-for-profit corporations:

1. General type - this would include such corporations as ratepayers’ associations, professional associations, community organizations, etc.;
2. Sporting and athletic organizations;
3. Social clubs - these are corporations with objects in whole or in part of a social nature;
4. Service clubs such as Rotary, Lions, Kiwanis and Optimist;
5. Charities - these would include religious organizations and organizations that are engaged in carrying out certain good works that are of benefit to society. (See Part 6 in this handbook)

One of the main differences between a charity and another type of not-for-profit corporation is that upon dissolution a charity is required to distribute its remaining assets to other charities, not to its members, whereas another type of not-for-profit corporation may (unless prohibited from so doing in its charter or by-laws) on dissolution distribute its remaining assets among its members.  Also, a charitable corporation, because it usually solicits funds from the public and enjoys certain legal and tax advantages (e.g. under the federal Income Tax Act), is subject to more stringent reporting requirements than a not-for-profit corporation of another type.

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1.5 Incorporation Process and Corporate Maintenance>

If a decision is made to incorporate you should take the following steps:

• FIRST STEP Determine if objects of the organization will be those of a charity. If so, see Part 6 of this handbook.
• SECOND STEP Select the proposed corporate name (see Part 2 of this handbook).
• THIRD STEP Prepare and file the application for incorporation (see Part 3 of this handbook).
• FOURTH STEP Following the receipt of the Letters Patent of incorporation, organize the corporation (see Part 4 of this handbook).
• FIFTH STEP The organization of a corporation is followed by an ongoing activity of “corporate maintenance”, that is, ensuring that the corporation complies with the reporting requirements and conducts its affairs in accordance with the applicable Acts and Regulations (see Part 5 of this handbook).

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1.6 Self-help Remedies Available under the Corporations Act

The Corporations Act does not provide the Ministry with the authority to intervene and resolve internal disputes between members and its Board of Directors. It does provide members with various self-help remedies to ensure compliance with the Act.

You may wish to consult private legal counsel in determining the appropriate remedies available to you. See Appendix “G” for information about the Lawyer Referral Service of The Law Society of Upper Canada.

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