How to Incorporate: The Entrepreneur’s Guide to Business Incorporation in Canada
There are a lot of articles on incorporating in Canada. Our goal with this guide is to be the best, most comprehensive resource for entrepreneurs looking to incorporate.
Let’s get started!
1) When are you ready to incorporate?
There are two main drivers when considering whether to incorporate your business: limited liability and taxes.
The benefits of limited liability cannot be over stated. By incorporating, you will separate your personal and business obligations. This is crucial, as an Industry Canada study 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 (like your home, car, and computers) 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 remitances: Includes source deductions for employee income taxes, EI and CPP contributions.
- GST/HST Remittances: This includes GST/HST that has been collected by the corporation but was not remitted to the government.
Corporations are taxed differently than individuals. In Canada, the tax rate on corporations is lower than the tax rate for individuals. And there are further tax reductions available to incorporated small businesses. Whenever you can leave some money in the corporation, rather than transfering it to your personal account, you can reduce the taxes you pay. 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.
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.
2) What are the benefits of incorporating?
On top of the limited liability and tax benefits mentioned above, there are at least four other clear benefits of incorporating your business:
If you want investors to invest in your company, you’ll need to be incorporated. Without being incorporated, you will not have shares to sell to investors.
When working with clients, your business comes across as more professional when your business 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.
Corporations can be transferred among individuals by simply selling shares. This makes long-term succession planning considerably easier.
Corporations are not limited to the lifespan of the owners. They can exist indefinitely.
3) How to incorporate your business in Canada
a) Choosing a business name
Choosing a name for your business can be a little stressful, but ultimately, it’s a fun exercise.
First up: 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 (1) a distinctive element, (2) a descriptive element, and (3) a legal ending:
[Distinctive] + [Descriptive] + [Legal Ending]
For example: Rhino Ice Cream Inc.
Bonus step: trademark search. Have a look through Canadian Trademarks 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 here.
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.
b) Filing Articles of Incorporation with government
After you’ve decided on your name, you’ll need to file the initial registration forms with the government. For this step, you’ll need to determine your share class structure (see #5 below) along with deciding on the company’s initial directors (see #4 below).
With Ownr, we automatically file your initial registration documents with the government, by collecting all required information during your onboarding.
c) Company formation documents
Filing documents with the provincial or federal corporate registry is only half of what’s required when incorporating your business. You also need to properly setup all of your company formation documents: Corporate Bylaws, Shareholder and Director Resolutions, Director Consents, Share Subscriptions, and Share Issuances.
There are significant risks with not setting your company up properly from the start, and most of this 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.
We often get the question: are company formation documents (otherwise known as minute book documents) really necessary? The short answer is yes. This Government of Canada article goes into detail about the different documents that a corporation must prepare and keep. With Ownr, we automatically prepare these company formation documents. Based on the information you provide during the onboarding process, our technology tailors all documents for your business, sends them out for eSignature, and once signed, saves them all in your Ownr account:
The total cost to incorporate on Ownr is between $499 and $699, depending on your jurisdiction. This includes all government fees, name search fees, company formation documents as well as 12 months on the Ownr platform. You can click here to create a free account.
4) Federal versus provincial incorporation
In Canada, you have the option of incorporating provincially or federally. If you choose federal, you’ll need to register the company in the province where your business is located.
The differences between incorporating provincially or federally 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 it provides your company with increased name protection. Your business name will be registered throughout Canada (rather than just one province).
One other difference between a federal and provincial corporation is the requirement for the directors of the corporation to be Canadian residents. Federal corporations as well as provincial corporations in Alberta, Ontario, Manitoba, Saskatchewan, and Newfoundland all require that at least 25% of the directors of a corporation must be resident Canadians. There are no Canada director residency requirements for the other provinces and territories.
One of the downsides of federal corporations is that in some jurisdictions, they can take extra work to register and, depending on the province, can cost more money. With Ownr, however, we’ve automated all the additional paperwork for federal corporations in Ontario, and it is actually less expensive to incorporate a federal corporation than an Ontario provincial corporation.
5) Different roles in a corporation
There are three major roles in a corporation: Shareholders, Directors and Officers. It’s common in small businesses for one person to be the sole shareholder, sole director, and sole officer.
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).
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.
Officers actively operate and manage the business.
A company can have several different officer positions. Every company must have a President and Secretary (which 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.
6) How to structure your 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.
Also, 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, you could choose to have your company structured with three share classes: Class A Common Voting Shares, Class B Common Voting Shares and Class C Common Non-Voting Shares, but only issue shares in Class A.
So what are the different types of share classes? We’ve provided a basic overview below:
a) Voting and non-voting shares
The most common difference among share classes is the ability to vote on matters relating to the business. Voting shares will be held by those shareholders who want to actively participate in the decision-making process (like 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 necessary want to get involved in high-level decisions (for example, employees).
b) 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.
c) Preferred shares
Preferred shares are only called ‘preferred’ because they entitle the shareholder to get paid back first if the corporation stops conducting business. However, it is important to understand that preferred shares are not necessarily more valuable than common shares. preferred shares usually have a limit on the amount they can increase in value over time. They are often issued for tax-planning reasons on the advice of an accountant.
7) After incorporation: ongoing obligations
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. There are three main things that every company is legally required to keep up-to-date:
a) Minute book and share records
You are required to keep your company documents in an organized manner. This can be in an old-fashioned paper binder, or, like we do at Ownr, through a secure electronic minute book.
b) Company updates
Anytime your company details change (like when you want to add a new director or change your address), you have an obligation to file forms with the government and prepare corporate resolutions which officially approve the company changes.
Ownr automatically takes care of all this paperwork on an ongoing basis: automatically preparing and filing forms with the government, preparing the required corporate resolutions, gathering e-signatures, and securely storing all documents back into your account.
c) Annual return and resolutions
Each year, your company will need to file an annual return with the government and pay the associated fees (which can range from $20 for a federal corporation to $50 for an Alberta corporation).
You’ll also need to prepare annual shareholder and director resolutions. These are all mandatory documents in order for your business to stay compliant. If you fail to file the annual return, the government can dissolve your company.
- Update December 7, 2017: Thanks to Pulat Yusanov of LawTO for the suggestion to add additional information on Canadian Director Residency Requirements. ↩︎
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.