Did you know that there are several forms of business in Canada? One of the most popular is the legal person, or incorporated company, often identified by the abbreviation "inc". But is this the right structure for your traditional or online business? What are the advantages and disadvantages? What are the steps to follow to incorporate? Here are some important things to know.
What is incorporation?
"Incorporating" or "becoming a legal person" means creating your "company". Your business then becomes a legal entity with rights and obligations, much like a real person.
In the eyes of the law, and in most cases, the incorporated business is an entity separate from the individuals who make it up. Together with its directors, it can take actions in its own name: such as signing contracts, opening a bank account or paying salaries to its employees.
The shares in the incorporated company can be divided among several people. This makes it possible to distribute dividend income, for example. This is not the only way to distribute shares in a company, but it is one of the most common.
When you are a business owner, incorporation gives you several advantages over sole proprietorship, or "self-employed" status. There are also a few disadvantages.
What are the benefits of incorporating in Canada?
Legal benefits
Limited liability
The incorporated company is a legal person with its own legal personality. It is therefore the company that is liable for its debts and obligations. There are certain exceptions where the directors could be held liable for certain obligations of the company.
Sustainability
Because it is a separate legal entity, the incorporated business survives the death of its founder. It can also be sold to new owners.
Tax benefits
A lower tax rate
An incorporated business must pay taxes on the net income (profits) generated by its business activity. The rates may vary, but they are often more favourable than those that apply to the employment income of an employee or a self-employed person.
Tax deferral for shareholders
Only earnings distributed by the company in the form of salary and dividends are taxable. The shareholders and managers of the company are not subject to tax as long as the company's funds remain within the company.
What are the possible disadvantages of incorporation in Canada?
A heavier structure and costs
Incorporation involves costs and administrative procedures. The accounting and taxation of the company often requires more expertise, as there are financial statements, tax returns and other documents to be filed each year.
Be well surrounded
If you decide to incorporate your business, professionals such as lawyers, notaries, accountants or business consultants can help you with the process. There are costs involved, but their expertise is often worth its weight in gold.
Ready to get started? Here are the steps you'll need to take to incorporate your business.
Step 1: Choose the location
In most cases, when you start a businessin Canada, you have the choice of incorporating it either federally or provincially (or in a territory).
This choice depends very much on your business plans. If you think your business will expand outside your province or territory, you may want to incorporate federally. If not, incorporating provincially or territorially may also work well for you.
The following is a summary of the features of federal, provincial and territorial incorporation:
Federal incorporation
- Company name protected across the country
- Possibility of having your head office anywhere in Canada
- At least 25% of the directors must reside in Canada and be Canadian citizens (or permanent residents)
- Possibility, with the necessary permits, of doing business anywhere in the country
Provincial or territorial incorporation
- Less expensive
- Faster
- Less administrative procedures
- Rules sometimes different from federal (e.g. on the issue of shares)
- May require an "extra-provincial" licence to do business outside the province in which the business is incorporated
Please note that your decision is reversible. However, fees and forms will be required.
In any case, you can also do business anywhere in Canada and internationally. As long as you comply with the legislation in force and obtain the necessary permits, the doors are open to you.
See the Canadian government's published list of provincial and territorial organizations to incorporate.
Step 2: Confirm the legal status
Most private for-profit companies are incorporated as joint stock companies. However, check whether another legal form is not more appropriate for your business.
There are also general partnerships (GPs), limited partnerships (LPs) and joint ventures. Also, some activities are better served by a non-profit legal person, cooperative, association or trust status.
Limited liability and taxation may differ depending on the legal form chosen.
Step 3: Find and save the name
The quickest and easiest way is to ask the provincial or federal agency where you decide to incorporate to assign a number to the business. It consists of a unique number, the name of the state (e.g. Canada), and the abbreviation "inc.". This is called a "numbered company".
However, to build brand awareness, many companies prefer to use a real name, which is easier to communicate and remember.
The name should also contain a legal notice, the most common being "inc."or "Ltd. In some places, it must contain a descriptive element such as the category of products or services offered. For some professions, a professional designation is also permitted, for example, dentists, optometrists or lawyers.
However, the name must comply with the rules and standards for business names. In all cases, you must choose a valid and unique name. In some places, a name search report, sometimes called Nuans, may be required to validate its availability.
To avoid last-minute disappointment, check the availability of the name before starting the legal process of incorporating the company.
Step 4: Produce the documentation
The documents, forms required and deadlines vary between authorities. As information, you may need to provide :
- The names of the shareholders and directors and their number
- The address of the registered office
- Types of shares and associated rights (voting, dividend)
- Your field of activity
- The company's regulations
- The start date of the financial year
- Provisions for the liquidation or dissolution of the company
Although there are standard templates, it is best to consult a professional (lawyer or accountant) for the preparation of the documents, especially if the company has several shareholders. Most of the documents and even the help you may need can be found online.
Step 5: Pay the fees
The fees vary from place to place. In most cases, you will pay a few hundred dollars to incorporate.
If you are federally incorporated, you may have to pay provincial or territorial fees in addition.
Often you can make your payment online with a credit card.
Step 6: Obtain the certificate of incorporation
Once your application has been processed, you will receive the necessary permits and certificates for your business. Then take the time to check that all the information in the register is valid and update it as necessary.
Depending on the jurisdiction, you may have to fill in a form to update your information or renew your rights each year.
Step 7: Finalise the internal organisation
Once your company has been incorporated, you and the other shareholders must contribute to its capital by subscribing for shares.
The directors then adopt the corporation's by-laws, establish its registered office, set its financial year-end and appoint officers. Shareholders, directors and officers are separate functions, although they may appoint the same people.
If your company has several shareholders, consider a shareholders' agreement. This is designed to make it easier for you to manage the business on a day-to-day basis and make important decisions, as well as in the event of a death, disability or other serious event among the shareholders.
To do things properly if you decide to incorporate, consult experts (lawyers, notaries, accountants, business consultants). With a solid foundation, your business will be ready to conquer the market.
https://www.bnc.ca/entreprises/conseils/demarrage/incorporation-entreprise-canada-quebec.html