Is incorporation right for you?
Whether you should operate your business as a corporation, partnership, sole proprietorship or co-operative depends on your particular situation and your particular needs.
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Among the factors to consider are the benefits of incorporating and the implications that incorporation can have for your business.
If you decide to incorporate, you will then have to choose between federal incorporation and provincial or territorial incorporation. Even if you are not ready to incorporate at this time, the factors affecting this decision can change over time.
The information found here does not apply to you if you are considering incorporating a banking, loan or trust company (see Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies), insurance company (see Guide for Incorporating Federally Regulated Insurance Companies) or a not-for-profit corporation, In Canada, note that these businesses are incorporated under different laws than the Canada Business Corporations Act.
Benefits of incorporating
No matter where you choose to incorporate, incorporation offers many benefits to your company, including:
- creation of a separate legal entity
- limited liability
- lower corporate tax rates
- better access to capital and grants
- continuous existence.
Separate legal entity
The act of incorporating creates a new legal entity called a corporation, commonly referred to as a “company”. Your corporation will have the same rights and obligations under Canadian law as a natural person. Among other things, this means that it can acquire assets, obtain a loan, enter into contracts, sue or be sued, and even be found guilty of committing a crime. Your corporation's money and other assets belong to the corporation and not to its shareholders.
Incorporation limits the liability of a corporation's shareholders. This means that, as a general rule, the shareholders of a corporation are not responsible for its debts. If your corporation goes bankrupt, your shareholders will not lose more than their investment (except shareholders who have provided personal guarantees for the corporation's debts). Creditors also cannot sue your shareholders for the corporation’s liabilities (debts), even though the shareholders are the owners of your corporation.
However, if a shareholder has another relationship with the corporation (for ex., as a director), there are circumstances when this person can be liable for the debts of the corporation. In other words, the person would not be liable for the corporation’s debts as a shareholder, but as a director. Under the CBCA, directors have a number of duties and liabilities (see Duties and liabilities of directors and officers). For example, it says that directors can be held liable for certain acts or for failure to act.
Lower corporate tax rates
Corporations are taxed separately from their owners. Because the corporate tax rate is generally lower than the individual tax rate, incorporation can offer you some fiscal advantages. Consider consulting a lawyer or an accountant to help you assess whether incorporating might save you money. In fact, your accountant will likely recommend incorporation once your revenues reach a certain point.
The Canada Revenue Agency offers information for Canadian small businesses, including information on tax benefits and implications of incorporation, business and professional income, and payroll deductions.
Better access to capital and grants
Raising money is often easier for corporations than it is for other forms of business. For example, your corporation would have the option of issuing bonds or share certificates to investors. Other types of businesses must rely solely on their own money and loans for capital. This can limit the ability of your business to expand.
Corporations are also often able to borrow money at lower rates than the rates offered to other types of businesses. Financial institutions and others tend to see loans to corporations as less risky than those given to businesses that are not incorporated.
The Canada Business Network explains the ways in which small businesses can finance their business ventures.
Your corporation would continue to exist even if every shareholder and director were to die. In these circumstances, ownership of the corporation would simply transfer to the shareholders' heirs. This is not the case for partnerships or sole proprietorships, which cease to exist on the death of their owners.
This greater stability would allow your corporation to plan over a longer term. It also helps in obtaining more favourable financing.
Implications of incorporating
Your decision to incorporate also needs to take into account the implications of incorporating, including:
- higher start-up costs
- administrative requirements
- more complex structure.
Higher start-up costs
If you decide to incorporate your business, you will have higher start-up costs than if you carry on the business as a sole proprietorship or partnership. Some of these costs are directly related to the process of setting up the corporation. Other costs can include ongoing professional fees paid for legal and accounting services. Consider consulting a lawyer, especially if you are thinking of setting up a company with a complex share structure.
Your federally incorporated business must file certain documents with Corporations Canada, including:
- articles of incorporation
- annual returns
- notices of any changes in the board of directors
- notices of any changes in the address of the registered office
- articles of amendment if changes to the structure of the corporation are made.
Your federally incorporated business must also:
- maintaining corporate records specified by the CBCA
- file corporate income tax returns with the Canada Revenue Agency
- register in any province or territory where it carries on business.
More complex structure
Because your corporation would be a separate legal entity that has no physical form, its activities must be carried out by individuals who have an interest in the corporation and who are entitled to act on its behalf. These individuals can be divided into three categories:
- Shareholders – These are the people who own the corporation. They make decisions by voting and passing resolutions, generally at a shareholders' meeting. Most importantly, they elect the directors of the corporation.
- Directors – They supervise the management of the corporation's business. A corporation must have at least one director. Directors are also responsible for appointing the corporation's officers. A director cannot be another corporation.
- Officers – A corporation's officers hold positions such as president, chief executive officer, secretary and chief financial officer. Although a corporation's officers are appointed by the directors, their duties are normally set out in the by-laws. In general, officers are responsible for managing and carrying out the corporation's day-to-day business.
An individual can hold more than one of these positions in a corporation. For example, you can be a shareholder, a director and an officer, or even the sole shareholder, sole director and sole officer.
Advantages of incorporating federally
While incorporation offers benefits no matter where you incorporate, federal incorporation offers additional advantages.
- Use of your name across Canada
- Location flexibility
Use of your name across Canada
Federal incorporation means you can operate your business using your corporate name right across Canada. This is important if you decide to expand your business to other provinces or territories. Note that the Province of Quebec can require that a French version of the name be registered.
Incorporation under the CBCA gives you flexibility in choosing a location for your business. This flexibility is not always available under the legislation of other Canadian jurisdictions. For example, the legislation sets no restrictions on the province or territory where your registered office can be located. Nor does it dictate where to hold annual meetings. In fact, you can even hold annual meetings electronically or outside of Canada.
Federal incorporation is a sign of distinction. Corporations incorporated under the CBCA are recognized around the world as Canadian corporations. This is an important consideration if you are incorporating a business that will have customers outside Canada.
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