How to Incorporate a Business in Canada
Incorporation is a big decision for an entrepreneur, and there is a lot of advice out there that can make it seem more complex than it needs to be. But never fear, this article is a comprehensive compilation of Ownr’s insights on incorporation.
From an overview of incorporation to a step-by-step guide to the process to in-depth posts on specific topics, this article is of value to every entrepreneur who’s looking to take the next step.
What is a corporation?
Regarding the law in Canada, a corporation is a separate legal entity, separate and distinct from its owners. A corporation can:
- Buy and sell property
- Raise capital
- Bring a lawsuit (or have one brought against them)
- Be taxed
- Sign a contract
Corporations can even legally commit crimes.
What is the difference between corporation and incorporation?
A corporation is the end result of incorporation. By performing the tasks of the process of incorporation, you create a corporation.
Why do businesses incorporate?
For most entrepreneurs, the decision to incorporate their business is for lower tax rates and limited liability. Here are the benefits of incorporating in Canada:
The benefits of limited liability cannot be overstated. Incorporation separates your personal and business obligations. This is crucial, as a study conducted for Industry Canada concluded that only half of all small businesses survive beyond their first five years.
If you incorporate and your company goes south, your personal assets will remain protected and untouched. If you do not incorporate and operate your business as a sole proprietorship or a partnership, you will remain personally responsible for the debts of the business—which can put your personal property (home, car, and other assets) all at risk.
NOTE: There are times when directors can remain personally liable for a business’s debts if certain preconditions are met. The most common examples include:
- Unpaid employee wages and vacation pay: up to six months’ wages and 12 months’ vacation pay.
- Employee source deductions and remittances: includes source deductions for employee income taxes, EI and CPP contributions.
- GST/HST Remittances: includes GST/HST that has been collected by the corporation but was not remitted to the government.
Corporations are taxed differently than individuals. Corporate tax rates in Canada are lower than the tax rate for individuals. And there are further tax reductions available to incorporated small businesses.
For example, in Ontario, a Canadian Controlled Private Corporation (a corporation owned primarily by Canadian residents) pays a tax rate of 13.5% on the first $500,000 of income each year, and 26.5% for all income beyond that. As a business owner, if you are able to leave money in the company, and not take it all out for personal expenses, you can increase the value of your company’s assets and pay less in taxes.
This means that the money you leave in your company could be used to invest back into the business: for example, to spend on marketing, buy new equipment, purchase additional inventory or hire new staff.
With a corporation, you also have the flexibility of choosing how you get paid. You can pay yourself in salary, dividends, or a combination of both depending on what will result in the lowest tax burden.
Other benefits of incorporating
On top of the limited personal liability and tax benefits mentioned above, here are four other clear benefits of incorporating your business:
- Raising capital
Funding a business as a sole proprietor can be a challenge. To have investors, your company needs to be incorporated, otherwise, you will not have shares to sell to investors.
- Professional image
When working with clients, your business comes across as more professional when it is incorporated. Invoices are sent with your incorporated business name (ending in Inc. or Ltd.). This communicates to your clients that you take your business seriously.
- Transfer of ownership
Corporations can be transferred among individuals by simply selling shares. This makes long-term succession planning considerably easier.
- Continuous lifespan
Corporations are not limited to the lifespan of the owners. They can exist indefinitely.
How to incorporate your business
Choose a business name
Choosing a business name can be a little stressful, but ultimately, it’s fun. Firstly, decide on what you would like to call your business. Remember that this is your formal legal name. It’s not necessarily the same as your brand. Next, make sure your business name satisfies three legal requirements. It must have:
- Distinctive element
- Descriptive element
- Legal ending
For example: Rhino Ice Cream Inc.
Bonus step: trademark search. Have a look through Canadian Trademarks Database to see if anyone else has registered a trademark on your desired name. You can conduct a free search with the Canadian Intellectual Property Office.
One final note about trademarks: they are tied to specific goods or services. This means that you may still be able to use a registered trademark, if that’s your desired name, so long as your intended use is in a different industry.
Before you register your business name, you’ll need to complete a NUANS search. It’s essentially a search of the country’s official database of incorporated and trademarked businesses which helps avoid two businesses registering under the same name. If you use Ownr to incorporate, all the NUANS search is covered for you.
Filing Articles of Incorporation
After you’ve decided on your name, you’ll need to file the Articles of Incorporation with the government. For this step, you’ll need to determine your share class structure along with deciding on the company’s initial directors. When you use Ownr incorporation services, your initial registration documents are automatically filled in, then filed with the government, which saves time and gives you peace of mind.
Set up company formation documents
Filing documents with the provincial or federal government corporate registry is only half of what’s required when incorporating your business. You also need to properly set up all of your company formation documents:
- Corporate by-laws
- Shareholder and director resolutions
- Director consents
- Share subscriptions
- Share issuances
There are significant risks and hidden expenses when a company is not set up properly from the start, most of which stems from the failure to prepare company formation documents. Risks include: having no owners in your business (because shares were never issued to shareholders) and the inability to have investors. These risks can increase over time and cost more to fix.
Creating these formation documents, or your minute book, is necessary. The Government of Canada has specific rules about the different documents that a corporation must prepare and keep. But by incorporating with a service like Ownr, all of these documents are created based on the information you provide during the onboarding process.
Federal or provincial incorporation
Canadian corporations have the option to incorporate provincially or federally. Those that are incorporated federally also need to register in the province where the business is located.
The differences in federal versus provincial incorporation are often exaggerated. Both allow the company to operate in all provinces and service clients from anywhere in the world. The main benefit to incorporating a federal corporation is that your business name gets increased protection, as it will and is registered throughout Canada, rather than just in one province.
One other difference could also be that a percentage of corporation directors must be Canadian residents. This is true for all federal corporations, as well as provincial corporations in Alberta, Ontario, Manitoba, Saskatchewan, and Newfoundland. In these instances, your corporation requires at least 25 per cent of directors to be resident Canadians. However, there are no Canada director residency requirements for the other provinces and territories.
The downside of federal corporations is that, in some jurisdictions, they can take extra work to register. A federal corporation can also cost more money, depending on the province they’re located in.
Understand roles in a corporation
There are three major roles in a corporation: Shareholders, directors, and officers. It’s common in a single-person corporation for one person to be the sole shareholder, director, and officer.
- Shareholder: A shareholder is a person that owns shares in a company. The unit of ownership is called a share. Shareholders are legally separate from the company. As a result, shareholders are generally not liable for the debts of a company (unless a shareholder has signed a personal guarantee on behalf of the company).
- Director: A director has overall responsibility for the corporation. Collectively, the directors are called the Board of Directors. A director is appointed by the shareholder(s) of the corporation.
- Officer: They actively operate and manage the business. A company can have several officer positions. Every company must have a President and Secretary (who can be the same person). Companies can create other positions like CEO, Vice-President, and Treasurer. These can all be held by the same person.
Officers are appointed by the directors to run the day-to-day operations of the corporation. Officers and directors owe a duty of care to the corporation. This means they must act honestly and in the best interests of the corporation. They must also avoid conflicts of interest.
Structuring a corporation
The number of shares owned by each shareholder reflects the proportion of the company they own. But that doesn’t mean all shareholders are equal. When first incorporating your company, you can create multiple share classes to allow different groups of shareholders to have different rights and privileges over the company.
It’s important to remember that you can choose to have multiple share classes when you incorporate, but you don’t need to issue shares in each share class at the outset. For example:
- Class A—Common voting shares
- Class B—Non voting shares
- Class C—Preferred shares
You could choose to have your company structured with all three share classes, but only issue shares in Class A.
What are the different types of share class?
The most common difference among share classes is the ability to vote on matters relating to the business. Here is a breakdown:
- Voting and non-voting shares: Voting shares will be held by those shareholders who want to actively participate in the decision-making process, for example, the founders, directors, senior managers, etc.
Non-voting shares are intended for shareholders who wish to benefit from the company’s long-term growth but don’t necessarily want to get involved in high-level decisions.For example, employees.
- Common shares: Common shares are the standard shares in the corporation. As the corporation grows and becomes profitable, the value of the common shares will increase.
Common shares do not have any special priority over the corporation’s assets. If the corporation stops operating, the holders of common shares will be paid out equally. The directors can declare and pay dividends on common shares at any time and in any amount.
- Preferred shares: Preferred shares are only called “preferred” because they entitle the shareholder to get paid out first if the corporation stops conducting business. However, it is important to understand that preferred shares are not necessarily more valuable than common shares. They usually have a limit on the amount they can increase in value over time, and are often issued for tax-planning reasons on the advice of an accountant.
After you incorporate
After incorporating, your business has an obligation to maintain certain documents and records. In exchange for the legal and tax benefits of incorporating, you are expected to keep your corporation up-to-date and in compliance with the law. Legally corporations need to:
- Keep company documents organized, you can do this via an old-fashioned binder or a secure online minute book.
- File the appropriate forms with the government and prepare resolutions anytime company details change (i.e. you want to add a new director or change your address).
- File an annual corporate return with the government and pay any associated fees. This also requires you to prepare annual shareholder and director resolutions.
Ownr can help you with all the paperwork associated with incorporating your business in Canada. From the initial incorporation process to managing your annual reports, annual return, and keeping everything organized.
Ready to start your business? Ownr has helped over 40,000+ entrepreneurs hit the ground running quickly—and affordably. If you have questions about how to register or incorporate your business, email us at [email protected]
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.