Want to incorporate a business in Canada? We’ve got an overview here for you and we offer affordable services to get this done for you.
What Is A Canadian Corporation?
A corporation is a separate legal entity. Each corporation has its own CRA business number (equivalent to a Social Insurance Number for businesses), pays its own taxes, owns assets (cash, vehicles, equipment etc) and has liabilities (bank loans, money owing to suppliers etc). Each corporation should also have a minute book, which is an official record of the corporation’s activities.
There are essentially four forms of business ownership in Canada:
- the sole proprietorship
- the partnership
- the corporation
- the cooperative
What Is A Sole Proprietorship?
A Sole proprietorship is the simplest and least costly business structure. If you make over $30,000 then you have to register for GST, otherwise there’s no registration process to set up a sole-proprietorship with the CRA. Make sure you are aware of municipal requirements!
As a sole-proprietor, you will track income and expenses (Tip: hold on to and organize your receipts) and report these on your personal tax return. You will report it as self-employment income. You can take a deduction for vehicle expenses (if you have a mileage log) and can depreciate (expense over time) business assets.
The disadvantages are your unlimited personal liability. There is no separation between the business and the owner. It can be hard to raise capital. And it is often difficult to sell, should you decide to.
What Is A Partnership?
In this scenario you and your partner have shared risk and management. The tax reporting is simple, like the Sole Proprietorship. The downside is risk of conflict between the partners. Either partner can be held personally responsible for debt incurred by the other partner. Buyouts can be difficult.
What Is A Corporation?
In this scenario, there is limited liability. The owners are not responsible for company debts or obligations. It is easier to raise capital from financial institutes or investors. Business profits can be paid out to owners as dividends or as a salary. There are tax benefits to this. The downside is the cost to set up and maintain, it is the most expensive of the options. Tax filings require a lot of paperwork.
What Is A Cooperative?
There is limited liability. It is owned and controlled by the members. The disadvantages here are slow decisions making and the risk of conflict.
Should You Incorporate?
There are legal benefits, such as:
Creditor Protection.
This is the main reason people choose to incorporate their business. If your company is sued, your personal assets are protected. Please note you are still personally liable for CRA debts and any other debts covered under a personal guarantee. You need to ensure you are properly advised on setting up and operating your business. People can ‘pierce the corporate veil’ (go after your personal assets) under certain circumstances, for example if fraud was committed or if it wasn’t clear that they were dealing with the corporation.
Perpetual Existence
Corporations exist until they are dissolved, either voluntarily or involuntarily.
Ownership Flexibility
Setting up a corporation doesn’t make you the owner of it. Shares need to be issued. The owner of these shares become the shareholders of the company. The company articles of incorporation will specify the types of shares that are authorized to be issued. Shares can be classified as voting or non-voting.
Disadvantages Of Incorporation
The biggest downside of incorporating is the cost. There are higher upfront and recurring annual legal and accounting fees. If you’re uncertain about your business plan, you may want to start as a sole proprietor.
Self Incorporation
You can incorporate yourself, at any registry office. You will need to provide the registry with the appropriate documents. To properly do this yourself you will need to understand share classes and various other details for your Articles of Incorporation. You’ll need to perform a nuans search for your chosen business name. With this option, you only have a government registered entity. You do not have shares issued, business organization or any of the other necessary items to get your business up and running.
Using An Online Service To Incorporate
There are various online incorporation services. They are relatively cheap and easy, but they lack custom advice. This is not a great solution for a more complex business.
Using A Lawyer To Incorporate
Using a lawyer is typically the most expensive option, however you get custom-tailored advice, and you can trust it will be done right. Your lawyer will advise on classes of shares, federal vs provincial incorporation, trademarks (name protection), unanimous shareholder agreements and anything else relevant to your situation. Your lawyer will also maintain your minute book, file your annual returns and file resolutions as required, in most cases. CEO Law offers a flat rate, affordable option for incorporation.
After you have incorporated: be sure to sure to file annual returns each year. These keep your corporate address/director information up to date with the government. If not filed, the government will involuntarily dissolve your corporation which adds in extra costs.
Next Steps
Once you are incorporated, you need to:
- Issue shares
- Select a year end date
- Apply for CRA business numbers
- Open a corporate bank account
- Maintain a vehicle log
- Understand salary vs. dividends and determine how to pay yourself
Learn more about CEO Law’s Business Incorporation Services and how we can help you.
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