Incorporating your business in Canada: How, Why, Pros & Cons
If you’re thinking about starting or have started a business within Canada, you may be wondering if you should incorporate it and begin your journey as a corporation. In this article, we’ll go over the how, why, and additional pros and cons, to help you get a clear picture of the route ahead.
What is business incorporation?
Business incorporation is taking your business and turning it into a corporation. By definition, an incorporated business is considered to be a legal entity that is separate from its owners and shareholders. You can incorporate either federally or provincially, and both come with their pros and cons. If you’re a small or one-person business owner and don’t need to do business in other provinces for now, more than likely you don’t need to incorporate federally.
Incorporating your business in Canada isn’t legally required, but it does come with benefits such as potentially reducing tax liability, certain amounts of legal protection, and more. The main benefit of being a corporation is that your personal and business assets are separate. For example, if your business goes south or something happens, you are not liable for the costs from your own personal assets or accounts – it falls onto your business.
How does business incorporation work?
As said previously in this article – Business incorporation works by turning your sole proprietorship or general small partnership into a company formally recognized as a corporation. Through that incorporation, you (the owner, or owners if you have a partner) create a single separate entity to transact business. Regardless of where you choose to incorporate your business, either provincially or federally, you will gain benefits and disadvantages, depending on your current business set-up.
Benefits: Why incorporate a business
Benefits to incorporating your business are numerous and do depend on how large your business is, profits, and scale. It allows for certain cheaper tax benefits, legal protections and can even help you to profit and grow further than you could otherwise. Creating a separate legal entity is a good reason to incorporate, along with allowing business to continue on in your stead after you pass away or retire. Access to grants and capitals is another great benefit of becoming a corporation.
Benefits to incorporating your business are numerous and do depend on:
- How large your business is, profits, and scale.
- Benefits will depend on how large your company is and what profits you make. If you’re a smaller business just starting out with one or two employees and not a large profit margin, then your benefits will be less than a large, profitable business.
- Possible cheaper tax benefits, bring some legal protection and even help you to profit and grow further than you could otherwise.
- Cheaper tax benefits will depend on varying factors, and you won’t know until you register or do more research into your local laws, but they are worth checking out and benefitting from.
- Creating a separate legal entity is a good reason to incorporate, along with allowing business to continue on in your stead after you pass away or retire.
- Having a separate legal entity from your own personal name is generally always good advice, and doubly so when creating a corporation. After you pass on, your company can continue on after the fact.
- Access to grants and capitals are another great benefit of becoming a corporation.
- Grants and capitals are a fantastic benefit, whether it’s for helping with business space, and other such expenses that can help your business grow further, without stressing over having to pay every single thing upfront yourself.
How to incorporate your business in Canada
Incorporating your business in Canada can be done federally or provincially, and it’s a good idea to take some time to decide which you’d like to do. Below we’ve broken it down into 6 steps.
Step 1: Choose a name
You’ll have to choose your corporate name – make sure that it’s unique and not misleading in any way. Your corporate name is ideally not similar enough to already existing brands and companies that already exist within Canada. A NUANS Name Search is the perfect place to start going through and finding if your proposed business names are already taken.
Step 2: Articles of Incorporation
The Articles of Incorporation are necessary to apply. They’re the backbone and structure of what your corporation will be. You should specify important matters such as how many directors will serve on your corporate board, and restrictions you might want to place for business activities, or your business in general. Be prepared to specify classes and maximum shares your corporation can issue and address the rights and responsibilities of shareholders.
You can change these structures at a later date with amendments, though it will cost you around $200 to do so. If needed, a professional can help you what the best type of share structure would be best for your companies current needs and future goals.
Step 3: Establish office & directors
Your registered corporate office must be where your corporate records are kept. This address must also be able to receive official notices that come your way, and it’s important to note that it will be made public, so you must be comfortable with anyone coming to your corporate door.
Certain requirements are needed for choosing a board of directors and be sure to consult Corporations Canada about the documentation to make sure that your directors match with those requirements. You can make amendments on your directors board, adding or subtracting members as you wish, but the amendment fee applies again.
Step 4: Forms & fees
Federal incorporation is done entirely online, though there are two forms that you must print out and sign to keep with your own records, including ‘Articles of Incorporation’ and ‘Initial Registered Office Address and First Board of Directors’. They don’t need to be sent anywhere, but they are good to keep on file. After you’ve gone through all of the forms online and made sure that everything is in order, all that’s left is to pay the fees at the end.
Step 5: Certification
If everything was done correctly and there were no hiccups in regard to name, registration, and so on – you should be approved and accepted and receive a certificate of incorporation from Corporations Canada. It will have your business date and number, and you’ll also receive a corporate information key that allows you to conduct transactions online for your new company. Congratulations!
Step 6: Provincial registration
That all said, you may still need to register within your province and territory, which is separate from incorporating federally. Incorporation can happen only once, but registration can be done to conduct business in several jurisdictions, unless you’ve incorporated provincially – in which case you are allowed to only do business in the province you’ve incorporated with. Most regions will require you to register within a few weeks of being accepted as incorporated. Registering in a region means that you can run a business, have an address, PO box, or phone number, and offer services or products to earn a profit.
Depending on your business and local, municipal laws and differences, there may be additional requirements – be sure to check.
How long does it take to incorporate in Canada?
You may be wondering how long this whole process takes – and it’s faster than you may think. Online processing has made the incorporation process much easier, and if done online with no issues it can even be done and approved within four hours by Express Internet options. One day for online processing, and 10+ days if done by email or regular mail. Times can vary of course, depending on how many others are incorporating as well, and general things such as holidays, etc.
Federal vs. Provincial Incorporation
Federal versus Provincial incorporation is not as varied as it might seem. Registering and processing your corporation are the same steps, just with provincial incorporation you can’t do business in other provinces across Canada like you can do with Federal incorporations. Each province and territory has its own process as well, so be sure to check with your province or territory of choice before proceeding. If processed Federally you are able to do business within other provinces (as long as you’ve registered as well) even if there are similar corporate names already residing there, and your corporation will be recognized internationally.
Provincially you’re only allowed to do business within your registered province. You can always incorporate your business into another province at a later date as you grow, with something called extra-provincial incorporation.
Should I incorporate my small business?
Knowing when to incorporate your small business can be tricky, depending on what your business is and what your goals are. If you’re making a stable profit and feel comfortable with your business structure, it can be worthwhile to look into incorporation. It can be incredibly helpful to talk to a professional and do research to see if incorporation goals line up with your current profits and decide from there if it’s right for you. There are always alternatives as well, such as sole-proprietorship and having a partnership.
What are the possible types of corporations in Canada?
The types of corporations within Canada are
- CCPC – Canadian-controlled Private Corporation
- Other Private Corporation
- Public Corporation
- Corporation controlled by a public corporation
- Other Corporations
Examples of ‘Other Corporations’ in the last category are ones that don’t fall into the others, such as general insurers or Crown corporations. Certain rates and deductions are based on which you choose at the end of the tax year.
Disadvantages of incorporating a business in Canada
Disadvantages to incorporating your business do exist along with the benefits. Overwhelming paperwork and record-keeping being the main one, especially for a small business. It can also end up being a tax disadvantage and costing more money than profit. Limited liability is something to watch out for, as an example – Your corporation applies for a business loan and has insufficient funds to secure it, the bank or lender may look for personal guarantees from the business owners – you or partners.
You can’t claim any personal tax credit you would otherwise as a non-incorporated business, so do keep that in mind.
Alternatives to incorporating a business
If incorporating a business isn’t right for you or your company at the present time, there are alternatives to consider that might fit the bill better. Sole proprietor is the most common and first alternative for business owners. The upsides being that it’s generally the cheapest and easiest to maintain your form of business, and you maintain direct control over all decision making. The downsides are that sole proprietors have unlimited personal liability, you cannot share ownership with anyone else, income tax is at a personal rate which could place the owner into a higher tax bracket, and you have fewer options for branding and claiming business expenses for tax deductions.
Secondly is a partnership. Two or more people working together as a team to make a profit. In a general partnership, each partner is considered to be an agent of the partnership, including other partners. It’s easy to set up and easy to maintain, as long as the partners continue to get along. Entering into a partnership agreement is best done with a laid-out agreement, delegating respective rights and responsibilities to each member. The downsides of this are similar to a sole proprietorship in that liability is personal, each partner is responsible for decisions made by the others, and options for branding and name protection are limited.
Incorporate Canada is the perfect place to start with any questions or additional concerns you have if you or anyone you know is looking to learn more about incorporating their business within Canada. They offer guidance, information, brand name searches, and even a quiz to determine if incorporation is right for you now or in the future with your goals.
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