You have goals for your business and you’re ready to take it to the next level. With the right planning, incorporation could be a leap forward.
Whatever your field of business—agriculture, technology, design, and more—there are many managerial strategies to consider, including incorporation, that can quickly become overwhelming.
The term “incorporation” refers to the legal process of creating a “corporation”. In Canada, a corporation has the same rights and obligations under Canadian law as a human being. Legally separate from its owners and shareholders, a corporation can, through its directors, act in its own name. This might include signing contracts, opening a bank account, or paying salaries to employees.
Zoom in to get a closer look at how to incorporate your business.
All Canadian entrepreneurs, with a few exceptions, have the option to incorporate federally or provincially.
The jurisdiction you choose will decide how your business will operate and the rules that apply. A company incorporated in Ontario, for instance, is governed by the Ontario Business Corporations Act (OBCA) and set out by its rules and restrictions. Meanwhile, a company incorporated in Quebec is governed by the Quebec Business Corporations Act (QBCA) and subject to a different set of rules and restrictions. A company operating in Quebec, for example, must have a French name and a head office located within the province.
Federal incorporation also comes with its own set of conditions. When incorporating at the federal level, at least 25% of the directors must be Canadian residents.
While most for-profit companies are incorporated, another legal status might be more appropriate for your business. You can choose to register as a general partnership (GP), a limited partnership (LP), or a joint venture. Some companies are better served as non-profit corporations, cooperatives, associations, or trusts.
If you decide to incorporate, you’ll need to choose a name for your business—either a numbered company or a word name. Most people prefer a word name to give their company a unique identify.
When choosing a name, you’ll want consider how it will attract customers and help them identify your business. That’s why many entrepreneurs choose a name that’s easy to communicate and remember. Keep in mind that different provinces have different rules and standards to which these names must conform. The Ontario Ministry of Government Services provides a guide to incorporating a business corporation and the Quebec Enterprise Register provide some rules (in French only) to follow carefully before choosing a name.
Lastly, but most importantly, you’ll want to make sure the name you’ve chosen stands out from the crowd. The Ontario Ministry of Government Services offers an integrated business services application where you can compare your name to other businesses registered in Ontario and avoid last-minute panic. It’s called a NUANS search and is required when incorporating a business to be 100% certain your name isn’t being used by someone else. In Quebec, the Enterprise Register offers a similar search tool for you to consult before legally incorporating.
First, some articles of incorporation are required to set out the classes of shares that the corporation is authorized to issue, as well as the rights that come with those shares—like the right to vote, the right to receive dividends, and the right to receive the remaining property of the corporation upon liquidation. These articles limit your ability to carry out business; so, it’s important to pay careful attention at this step. Even when presented with a standard model, you should always seek professional advice from a lawyer or an accountant, as they can assist in the preparation of documentation, especially if the corporation has many shareholders.
Next, the initial declaration needs to be made. This declaration provides standard information about the company, including the field of business and the names of its shareholders and directors.
Finally, all documentation must be submitted upon initial registration, or within 60 days. In Ontario, this includes the NUANS name search report and must be submitted to the Ontario Ministry of Government Services. In Quebec, documents are filed with the Quebec Enterprise Register.
Each province charges a fee to receive and process the initial registration.
The Ontario Ministry of Government Services charges a filing fee of $300 (online incorporation) or $360 (by mail or in-person). In Quebec, the Enterprise Register charges $331 ($496.50 for priority handling).
As the province proceeds with your incorporation, you’ll be assigned a unique business number. In Ontario, this is called a Business Identification Number (BIN), not to be confused with the federal business number (BN) assigned by Canada Revenue Agency (CRA) for GST/HST, Payroll Deductions, and Corporate Income Tax, and other federal programs. In Quebec, it’s called a Quebec Enterprise Number (NEQ). Like the BIN, it’s a numerical identifier for your business, composed of a unique number, the name of the province, and the abbreviation “Inc.”.
In addition, you’ll be issued a certificate of incorporation. From this point forward, your company is 100% official and nothing short of a tribunal can reverse your corporation status.
Once the declaration is received, the declared information is published in the business register.
Now that you’ve incorporated, there are significant distinctions to be made between shareholders, directors, and officers—even if one person holds several of these titles. Your directors can implement by-laws, establish a head-office, set the fiscal year-end, and appoint officers. Shareholders can invest in your company with shares, for which they should pay at least $1.
If your business has several shareholders, you may decide to enter into a shareholders' agreement, which can be used to avoid legal entanglements in the case of possible death or disability of a shareholder, etc.
While presented as a step-by-step process, oftentimes these steps happen in tandem. That’s why it's always important to have your documentation ready before embarking on this adventure. If necessary, clarify agreements between shareholders too.
As a company founder, incorporating a business has several advantages—especially when compared to a sole proprietorship.
Because an incorporated business possesses the same rights as a human being, the personal responsibility of shareholders becomes limited to the money they’ve invested in the business. The company itself is responsible for its debts and obligations.
As a separate legal entity, an incorporated company will survive the death of its founder. Selling a corporation is also more straightforward.
An incorporated company pays fewer taxes on net revenue (profits) generated from commercial activity. Today, an Ontario SME is required to pay in 2018 13,5% (12.5% for 2019) tax every year on the first $500,000 of taxable business income and 26.5% on revenue that exceeds this. In Quebec, a SME would pay 18% on the first $500,000 and 26.7% for 2018 (26.6% for 2019) on anything after. These rates are often better than personal tax rates.
Earnings distributed by the company in the form of dividends are taxable. Shareholders (including company directors who own shares of the company) are not subject to tax as long as the company’s funds remain in the company bank account.
While in principle the separation of the company’s assets removes any personal responsibility from the shareholders, most financial institutions require a personal guarantee as an added assurance that the owner is committed to the business, especially in its infancy. In some cases, the shareholders are also the directors. The latter has a personal responsibility to make sure the company meets certain obligations, particularly when it comes to the payment of wages.
The incorporation process comes with added fees and administrative procedures. Plus, with financial statements, tax returns, and other documentation to provide every year, the company’s accounting and taxation departments will require further expertise.
If you decide to incorporate your business, professionals such as lawyers, notaries, accountants, and advisors specializing in business can help point you in the right direction. They’d be happy to share their expertise.
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