Legal Forms for Gourmet Gift Shops & Gift Basket Companies (Part 4)

Corporations: An Overview From A Gourmet Gift Basket Company Perspective

The most significant business enterprise in both Canada and America is the Corporation. Typically, start-up, home-based and smaller gourmet shop / gift shop / gift basket businesses will not be formed as a Corporation, but as they grow, usually, for tax and liability reasons, a Corporation is formed.  The following are some of the factors that you will want to consider when you are determining if you and your gift basket company would be best suited as a Corporation.


Corporations Are Separate Legal Entities

The business Corporation is a legal entity separate and apart from its Directors, Officers and Shareholders and has its own legal status.  The business Corporation owns and operates the business and incurs the liabilities.  The Directors of the Corporation are charged with the duty of managing the affairs and business of the Corporation.  The Officers of the Corporation (President, Secretary, Treasurer and others) are appointed by the Directors to govern the daily operations of the Corporation.  A Shareholder of a Corporation has no power to deal with the business assets or to bind the Corporation to obligations, and only exercises control over the business by his ability to elect the Directors.  Unless a Shareholder's ownership of the Corporation is sufficient to control the Board of Directors, his participation in the affairs of the Corporation is quite limited.  In reality, however, the owners (i.e. Shareholders) and Officers of a gourmet shop or gift basket businesses are usually the same people and their influence is total.


Gift Basket Corporations: The Same But Different!

The federal governments of Canada and United States as well as the provincial and state governments have all enacted legislation relating to business corporations.  For all intents and purposes, businesses incorporated federally or by the state or province are basically the same.  However, for many investors, there is a perceived prestige associated with a corporation incorporated federally, even though provincial or state corporations have the same capacity as a federal corporation to transact their business across the country and worldwide.  We strongly recommend that you confer with your own attorney to determine if there are any unique circumstances in your case that would make it more advantageous to incorporate your gourmet gift basket business at the federal, state or provincial level.

After incorporation, Directors are elected; by-laws are enacted governing the internal workings of the corporation; Officers are appointed: share certificates are adopted; shares are issued; share certificates are authorized to be delivered; Auditors and Accountants are appointed; banking arrangements are made and, the business corporation then begins to transact business.  Slight variations may exist under the various enabling legislation, such as whether a corporate seal is necessary but by and large, most gift basket business corporations are organized along these lines.


Incorporating Your Gift Basket Business Federally or Provincially: Some Considerations

A provincial or state incorporated business may carry on business in the province or state of incorporation. Such a corporation may also carry on business in other provinces or states, provided that it has complied with the applicable registration or licensing requirements of those other provinces or states.  A federal corporation, on the other hand, has the right to conduct business in any province or state, subject to the provincial or state laws of general application to all corporations doing business there, such as filing corporate returns or paying fees.  Generally, therefore, if you deem that establishing a corporation for your gift basket business is optimal and that you anticipate conducting business outside of your home state or province, you should consult with your lawyer to determine the optimal arrangement for you and your gourmet gift basket business.


Corporations and Limited Legal Liability for the Shareholders

As discussed, business Corporations have their own distinct legal personality.  Business Corporations can therefore maintain and be subject to legal actions in their own names. Since the business Corporation owns the business operated, the business liabilities incurred are the responsibility of the corporation and not of the shareholders of the Corporation. Shareholders have the fundamental right to receive share certificates registered in their names to evidence their share ownership.  The Shareholder's only liability (excluding any personal guarantees that might have been provided to outside parties dealing with the business Corporation) is limited to the amount unpaid with respect to the shares the Shareholder has agreed to purchase.  The limited liability of Shareholders is another of the principal advantages of choosing the Corporate business vehicle in preference to a Sole Proprietorship or Partnership.  At times, however, even this aspect of limited liability is illusory.  For example, if credit-granting institutions (such as a bank) require major shareholders to guarantee Corporate indebtedness.  A further cautionary note is made here in that Directors, Officers and Shareholders with significant shareholdings may have statutorily imposed obligations and liabilities with respect to wages, improper loans to Shareholders and the filing of corporate tax returns, to name a few.  Hence, if you are considering establishing a Corporation as a business vehicle for your gift basket business purely to limit your personal liability, you should be aware of these issues.


Starting a Gift Basket Business: Some Income Tax Considerations:

The income or loss of a business Corporation is determined and taxed within the Corporation. If a business Corporation distributes its after-tax income to its shareholders by way of dividends, the receipt of those dividends are, for the most part, taxed in the hands of the Shareholders.  It should be noted that any losses incurred by the business Corporation belong to it and cannot be utilized by the Shareholders against their income for tax purposes.  Again, due to the varied and complex nature of tax legislation, we recommend that you should consult with your own accountants and / tax lawyers for the optimal business form for you and your gourmet gift basket business.


Phyllis and Greg Sprout began their own gourmet food company in 1993.  Since that time, they have built a company that supplies gourmet foods and gift basket supplies to gourmet food stores, gift shops and gift basket packers across North America.  They have helped thousands of start-up companies grow and become successful.  Many of these companies are still loyal customers today.  They can be reached at phyllisandgreg@epicureanfoods.com.