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.
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 legal separate
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.
- Individual members are not personally liable in certain instances, for the corporation’s debts and obligations.
- Continuity of the organization is assured while the membership changes.
- A corporation can own property in its name regardless of membership change
- The ability to bring a legal action in its own name (an unincorporated body cannot)
- Better chance of receiving government grants, because of the stability the organization appears to have.
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, the ultimate penalty being the cancellation
of the charter and dissolution of the corporation.
Types
of Corporations
Not-for-profit corporations are incorporated for the purpose of carrying
on, without financial gain, objects of a patriotic, charitable, philanthropic
religious, professional, sporting or athletic character. In other words,
not-for-profit corporations are engaged in activities that are of benefit
to the community. They are incorporated under Part III of the Corporations
Act as corporations without share capital.
Basically, there are five types of not-for-profit
corporations:
A. General type - this would include such corporations as ratepayers’
associations, business or trade associations, community organizations,
etc.;
B. Sporting and athletic organizations;
C. Social clubs - these are corporations with objects in whole or in
part of a social nature;
D. Service clubs such as Rotary, Lions, Kiwanis and Optimist;
E. Charities - these would include religious organizations and organizations
that are engaged in carrying out certain good works that are of benefit
to society.
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 of 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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