Incorporating a business is a significant decision for entrepreneurs, but it can often appear more complicated than necessary due to the abundance of advice available. However, worry not! This article provides a comprehensive compilation of Ownr’s valuable insights on the process of incorporating a business in Canada. So, let’s dive right in!
Understanding the Factors and Benefits of Incorporating a Business in Canada
Determining the Right Time for Incorporation When contemplating business incorporation, two key considerations come into play: limited liability and taxes.
Limited Liability
The significance of limited liability cannot be overstated. Incorporating your business enables a clear separation between personal and business obligations. This division is crucial, as research conducted by Industry Canada revealed that only half of all small businesses manage to survive beyond their initial five years.
Incorporation grants shareholders limited liability, meaning their liability is typically limited to the amount they have invested in the company. By establishing the company as a separate legal entity, personal assets such as homes and cars are safeguarded. However, it’s important to note that there are exceptions to this general rule.
If you opt to operate your business as a sole proprietorship or partnership without incorporating, there is no legal distinction between you and your business. Consequently, you, as the owner, become personally responsible for all debts, losses, and risks. This situation puts your personal assets at risk, including your home, car, and other possessions.
Please be aware that there are instances where directors can retain personal liability for a business’s debts under certain conditions. The most common examples include:
- Unpaid employee wages and vacation pay: Directors can be liable for up to six months’ wages and 12 months’ vacation pay.
- Employee source deductions and remittances: This encompasses source deductions for employee income taxes, Employment Insurance (EI), and Canada Pension Plan (CPP) contributions.
- GST/HST Remittances: This includes GST/HST collected by the corporation but not remitted to the government.
Tax Advantages Corporations are subject to different tax regulations than individuals in Canada. Corporate tax rates are typically lower than personal tax rates, offering incorporated small businesses numerous tax deductions. By retaining funds within the corporation instead of transferring them to your personal account, you can reduce your overall tax burden. Additionally, you have the flexibility to choose between salary, dividends, or a combination of both, depending on the option that minimizes your tax liabilities.
For instance, in Ontario, a Canadian Controlled Private Corporation (CCPC)—a corporation predominantly owned by Canadian residents—faces a tax rate of 12.2% on the first $500,000 of annual income, and 26.5% for any income exceeding that threshold. As a business owner, retaining funds within the company rather than withdrawing them for personal expenses enhances the value of your company’s assets and reduces your tax obligations. This surplus capital can be reinvested in various ways, such as marketing initiatives, acquiring new equipment, expanding inventory, or hiring additional staff. Additionally, remember that you are only liable for personal taxes on the money you withdraw from the corporation.
Exploring the Clear Advantages of Business Incorporation
Benefits of Incorporating Your Business In addition to the aforementioned advantages of limited liability and tax benefits, there are several other compelling reasons to consider incorporating your business:
- Raising Capital Incorporation opens doors for attracting investors who are looking to invest in your company. By incorporating, you can issue shares and offer them to potential investors. Without incorporation, you lack the ability to sell shares and tap into investment opportunities.
- Professional Image Incorporating your business enhances its professional image, especially when interacting with clients. By incorporating, your invoices bear the name of your business followed by the appropriate legal designation (such as Inc., Ltd., or Corp.). This conveys to your clients that you have considered the long-term sustainability of your business and take it seriously.
- Transferability Corporations offer the advantage of easy transferability among individuals through the sale or transfer of shares. This simplifies long-term succession planning, enabling smooth transitions between owners.
- Continuous Lifespan Unlike businesses owned by individuals, corporations are not limited by the lifespan of their owners. They can exist and be passed down through multiple owners, ensuring the longevity and continuity of the business.
Incorporating your business not only provides limited liability protection and tax benefits but also empowers you to raise capital, project a professional image, facilitate transferability, and secure the continuous lifespan of your enterprise.
A Step-by-Step Guide to Incorporating Your Business in Canada
a) Choosing a Business Name Selecting a business name can be an exciting process, albeit slightly daunting. While you have the option to incorporate a numbered company, most entrepreneurs prefer to give their business a unique name. Consider the following:
- Decide on a formal legal name for your business, separate from your brand name.
- Ensure your chosen name meets three legal requirements: a distinctive element, a descriptive element, and a legal ending.
- Conduct a trademark search to avoid any conflicts with existing registered trademarks.
Note: Ownr handles all necessary NUANS searches when you incorporate through their platform, eliminating the need for a separate business name search.
b) Filing Articles of Incorporation with the Government Once you have finalized your business name, you must file the initial registration forms with the government. This step involves determining your share class structure and selecting initial directors for the company. Ownr simplifies this process by automatically filing your registration documents through their onboarding system.
c) Company Formation Documents Incorporating your business involves more than just filing with the corporate registry. You must also create and sign essential company formation documents, including Corporate Bylaws, Shareholder and Director Resolutions, Director Consents, Share Subscriptions, and Share Issuances. Neglecting these documents can pose risks, such as lacking official owners or impeding potential investments. Ownr takes care of preparing all necessary company formation documents, customized to your business, for eSignature, and storage within your Ownr account.
Cost of Incorporating a Business in Canada On Ownr, the total cost of incorporating ranges from $499 to $699, depending on your location. This comprehensive fee covers government fees, name search expenses, company formation documents, and grants you 12 months of access to the Ownr platform. Experience the convenience of incorporating in minutes with Ownr.
Embarking on the journey of incorporating your business in Canada entails choosing a suitable name, filing the necessary registration documents, and ensuring the completion of essential company formation documents. By leveraging Ownr’s services, you can streamline the entire process and enjoy the benefits of a simplified and hassle-free incorporation experience.
Also read: Tax Planning Strategies for Canadian Individuals and Families
Federal Incorporation vs. Provincial Incorporation
When incorporating your business in Canada, you have the choice between federal and provincial incorporation. Opting for federal incorporation requires registering your company in the province where your business operates.
The disparities between federal and provincial incorporation are often exaggerated. Both options enable your company to conduct business in all provinces and cater to clients worldwide.
The primary advantage of federal incorporation lies in enhanced name protection. Your business name becomes registered nationwide, as opposed to being limited to a single province.
Another distinction between federal and provincial corporations pertains to the residency requirements for directors. Federal corporations mandate that at least 25% of directors must be Canadian residents. However, certain provinces like Alberta, British Columbia, and Ontario do not impose such residency requirements.
One drawback of federal corporations is that, in certain jurisdictions, the registration process can be more time-consuming and costly. However, with Ownr, we have streamlined the additional paperwork for federal corporations in Ontario, making it more affordable to incorporate federally than provincially.
Roles within a Corporation
A corporation consists of three key roles: shareholders, directors, and officers. In small businesses, it is common for one person to fulfill all three roles.
Shareholder A shareholder is an individual who owns shares in the company, representing ownership units.
Shareholders are legally distinct from the company, shielding them from personal responsibility for the company’s debts, except in cases where a shareholder has provided a personal guarantee.
Director Directors hold the overall responsibility for overseeing the corporation’s activities and strategic decisions. Collectively, they form the Board of Directors.
Directors are appointed by the shareholder(s) of the corporation.
Officer Officers are actively involved in managing and operating the business.
A corporation can have various officer positions, tailored to its specific needs. President, Secretary, CEO, Vice-President, and Treasurer are common officer titles, which can be held by the same individual.
Directors appoint officers to oversee the day-to-day operations of the corporation.
Structuring Your Corporation
The ownership proportion of shareholders is determined by the number of shares they own, but not all shareholders have equal rights. When incorporating your company, you have the flexibility to create multiple share classes, granting different groups of shareholders varying rights and privileges over the company.
It’s important to note that although you can establish multiple share classes during incorporation, you are not required to issue shares in each class initially. For example, your company can be structured with three share classes: Class A Common Voting Shares, Class B Common Voting Shares, and Class C Common Non-Voting Shares, but you may choose to issue shares only in Class A.
Let’s explore some common types of share classes:
a) Voting and Non-voting Shares One common distinction among share classes is the ability to vote on company matters. Voting shares are held by shareholders who actively participate in decision-making, such as founders, directors, and senior managers. Non-voting shares are designed for shareholders who want to benefit from the company’s growth but prefer not to be involved in high-level decisions, such as employees.
b) Common Shares Common shares are the standard shares in a corporation. As the corporation expands and becomes profitable, the value of common shares increases. Common shares do not possess any special priority over the company’s assets. If the corporation ceases operations, holders of common shares will be paid according to their ownership stake. Directors have the discretion to declare and pay dividends on common shares at any time, subject to certain exceptions regarding retained earnings.
c) Preferred Shares Preferred shares have specific privileges or restrictions. For instance, some preferred shares may carry a certain number of votes, be eligible for dividend payments, or have predetermined values. However, it’s important to note that preferred shares are not necessarily more valuable than common shares. Preferred shares often have limitations on their potential value growth and are typically issued for tax-planning purposes based on the advice of an accountant.
Ongoing Obligations
After Incorporation Following incorporation, your business has a responsibility to maintain certain documents and records. In exchange for the legal and tax benefits conferred by incorporation, it is essential to ensure that your corporation remains compliant with the law. There are three key obligations that every company must fulfill:
a) Minute Book and Share Records You are required to maintain your company documents in an organized manner. This can be done through a traditional paper binder or, as done at Ownr, via a secure electronic minute book.
b) Company Updates Whenever there are changes to your company’s details, such as adding a new director or modifying the registered address, you must file forms with the government and prepare corporate resolutions that officially approve these changes. Ownr simplifies this process by automatically handling the paperwork, including preparing and filing forms, gathering e-signatures, and securely storing all documents within your account.
c) Annual Return and Resolutions Each year, your company must file an annual return with the government and pay the associated fees, which vary depending on the jurisdiction. In addition, you need to prepare annual shareholder and director resolutions. These documents are essential for maintaining compliance. Failure to file the annual return can result in the government dissolving your company, leading to its closure and loss of legal existence.