“Small businesses are the lifeblood of dynamic capitalist economies. Canada is no exception.” These observations come from Professor Robert Yalden, who, in a new article evaluating provisions that the Quebec Business Corporations Act put in place 10 years ago to assist small business, offers concrete suggestions for eliminating measures that too often serve as impediments to the incorporation of small businesses. As Canada begins to see a way out of the pandemic, Yalden stresses the need to adopt new measures to support small business, noting that “since they employ around two-thirds of Canadian workers, ensuring the breadth and depth of the economy’s pool of small businesses, together with constant regeneration, is critical to long-term national prosperity.”
Yalden’s article emphasizes the importance of providing small businesses with as simple a path as possible to incorporation. “A simplified path to incorporation enhances entrepreneurs’ access to capital and encourages them to keep creating businesses,” he explains. “Incorporation allows business owners to separate and protect their individual assets from the company’s assets and ensures founders can better manage risk. But notwithstanding recent initiatives in Québec, several aspects of incorporation across this country remain overly burdensome for small business owners.”
Following on the recent publication of “Québec’s Sole Shareholder Regime and the Rise of Simplified Corporations: Innovation, Implementation and the Challenges Ahead” in 10ième anniversaire de la Loi sur les sociétés par actions du Québec: rétrospective, perspective et prospective (Wilson & Lafleur), Yalden shares his insights on how effective Quebec’s simplified corporate regime has proven, how it compares to what is in place in some countries, and how it can be improved in ways that would assist small businesses.
Why did Quebec focus on small business when overhauling its corporate law 10 years ago?
Quebec understood the fundamental importance of small business. The Quebec Business Corporations Act (QBCA) created a new regime for companies that have only one shareholder, typically the company’s founder. Today, its sole shareholder regime remains highly innovative, whether viewed from a purely Canadian perspective or seen through the lens of international developments.
The QBCA’s unique provisions allow a single shareholder, once a corporation has been incorporated, to take steps to dispense with having to establish a board of directors; adopt by-laws; appoint an auditor; hold shareholders meetings; and keep records of meetings of boards of directors or shareholders. The reduction in the administrative burden that being able to side-step these requirements entails is meaningful. Many a small business would benefit from getting out from under corporate law rules that are redundant when dealing with sole shareholder corporations.
How effective has Quebec’s sole shareholder regime been since it was established in 2011?
Not as effective as one might have hoped it would be. Some of that is due to the way the regime was designed, but my article stresses that this also about insufficient effort being put into making small business aware that the option exists to streamline matters. As things stand, not only has the regime got little traction in Quebec, but neither the federal government nor any other province in Canada has adopted similar measures. While the Yukon amended its corporate law in 2015 to allow for corporations without directors, it did not do away with the other features that Quebec’s regime enables founders to dispense with.
What kind of success have other countries had by simplifying incorporation?
Over 10 other member countries of the Organization of American States (OAS, of which Canada is also a member) have adopted legislation allowing for the creation of corporations that do not require boards of directors. Especially notable is Colombia, which inspired a wave of significant reform in Latin America over the last decade with hundreds of thousands of companies being incorporated as simplified corporations. The spin-off effects have been significant: the regularization of thousands of businesses that would otherwise have remained informal; increased employment and social security contributions and benefits; and enhanced tax revenue for governments.
Not only is Canada now trailing other OAS countries, but it is also behind those that have either already provided for corporations without directors (e.g., the U.S.) or are actively studying the matter (e.g., the EU).
The OAS countries’ models have met with exponentially greater acceptance than Quebec’s sole shareholder regime, which had been adopted by only 685 corporations in the first five years of its existence. This is quite startling since Quebec’s model actually has a number of features that are more attractive than those seen in some of these Latin American countries.
Why have few small businesses embraced Quebec’s sole shareholder regime even though it remains highly innovative and beneficial?
While Quebec’s regime offers advantages that some of the OAS regimes do not, Quebec’s approach could be made much more user-friendly – and that would make a difference. For example, it could give a founder setting up a company the option at the time of incorporation to dispense with a board of directors and other formalities, rather than requiring the founder to deal with the burden of drafting legal documents and making filings after the fact – as is currently required.
More significant, however, is the lack of visibility that the sole shareholder regime currently has in Quebec and the rest of Canada. In contrast with the substantial effort that the OAS and countries like Colombia have put into ensuring that the option to use a simplified model not only exists but is also well known and actively encouraged, Quebec has done very little to publicize the availability of its sole shareholder regime. I argue that a strategy that relies on word of mouth is no strategy. What is required is a developed and sustained government led communications strategy that will alert small businesses to the advantages that the sole shareholder regime has to offer and encourage them to consider going down this path.
What are your recommendations for Canada based on your research?
The introduction of a distinctive and highly innovative sole shareholder regime into the QBCA a decade ago marked an important step forward in advancing the potential inherent in simplified corporations. But for this potential to be fully realized, more needs to be done. Canada would do well to follow more closely the international movement to assist micro- and small business through the introduction of simplified corporations.
Quebec has advanced our appreciation for ways in which to integrate concepts central to these corporations into the province’s corporate law. The challenge going forward is three-fold: to encourage other jurisdictions in Canada to follow Quebec’s lead; to reflect on ways in which Quebec’s sole shareholder corporation regime can be improved; and to develop government led communications strategies that will ensure that businesses are made aware of the advantages that a well-crafted sole shareholder regime has to offer.
We have a tough road ahead of us as we seek to reinvigorate small business after the harm that the pandemic has inflicted. Obviously, ongoing economic support will have to be on the agenda. But my new article also points out some relatively straightforward, concrete steps to take that would eliminate those burdensome procedures that really make no sense to ask founder-run businesses to comply with.
Robert Yalden, the Stephen Sigurdson Professor in Corporate Law and Finance at Queen’s, will be presenting his research this spring at a conference hosted by University of Montreal professor Stéphane Rousseau, editor of 10ième anniversaire de la Loi sur les sociétés par actions du Québec.