Aja McClanahan is a personal finance writer who has a story of getting out of over $120,000 in debt. She's been featured in Yahoo! Finance, MarketWatch, U.S. News and World Report, Kiplinger and has written for publications like Business Insider, Credit Karma, Inc., and many others. Aja writes about investing and personal finance for Wealthsimple. In her spare time, she manages her own investment portfolios for herself, husband, and two kids. Aja double majored in Spanish and Economics and holds a Bachelor of Arts degree from University of Illinois at Urbana-Champaign.
Knowing how and why to incorporate your business in Canada can help you establish a good foundation for your enterprise.
The first official step is to make your organization a legal entity so that you can take advantage of the benefits incorporation offers. This guide will help you understand why you should incorporate your business in Canada and how to go about doing it.
What it means to incorporate a business
Incorporating a business is a way to make your income-generating activities known to local government authorities. Incorporation means that your business is officially recognized and allowed to conduct business in the jurisdiction where it’s been incorporated. Though incorporation sounds like you are alerting the government of your extra income activities for no reason other than taxation and regulation, there are some benefits to incorporating that we’ll discuss later in this article.
In Canada, you can choose between federal incorporation or provincial/territorial incorporation. The benefits of incorporating on the federal level include:
Name protection across all provinces and territories
The right to do business all over Canada
Global recognition as a Canadian company
Convenient access to online services without having to use an intermediary.
Why incorporate a business?
According to the Corporations Canada website, there are several benefits to incorporating including:
Creation of a separate legal entity
Lower corporate tax rates
Better access to capital and grants
Incorporating a business offers legal recognition of your business activities in Canada and its provinces/territories. This legal entity is separate from your personage and operates independently of you, which can be helpful from a financial perspective. For example, incorporation might meant lower corporate tax rates.
Having a separate entity can be cleaner and “leaner” from a financial perspective, but it can also offer you some protections that could reduce your personal liability should something go awry in your business dealings, protecting you from legal trouble that could jeopardize your personal finances.
Finally, as a corporate entity you are given clearance to operate on either a federal or provincial level (or both). Incorporation is a foundation that helps you secure certain business privileges like obtaining various types of business licenses, grants, business bank accounts, and business identification numbers.
For Federal incorporation, everything can be handled online through the Corporations Canada online filing center. Here, you’ll incorporate your business under the Canada Business Corporations Act (CBCA.) With federal incorporation, you may also be able to secure other registrations at the same time.
As part of this process, you can get:
Articles of incorporation
Federal business number
Federal corporation income tax program account
Option to register for other federal tax accounts
Option for extra-provincial or extra-territorial corporation registration
Once you get started with the federal incorporation process, you will be taken through five steps to finalize your business incorporation.
Step 1: Choosing a corporate name
You’ll have to choose a name that is unique and not misleading. Your corporate name shouldn’t be easily confused with another, similar name that another corporation might have in Canada. To make sure your name is unique, you can conduct a NUANS name search.
Corporations Canada will scrutinize your name selection thoroughly before granting the right to use it for your corporation. Choose carefully and research your options accordingly.
Step 2: Articles of Incorporation
The articles of incorporation establish the structure of your corporation. You’ll specify things like how many directors will serve on your corporate board along with any restrictions you might want to put in place for your business or business activities.
In this step, you should be prepared to specify the classes and maximum amount of shares your corporation can issue. Along with shares, you must address the rights and responsibilities of shareholders in your articles of incorporation as well.
Though you can change the structure of your company with amendments later on down the line, it will cost you $200 to do so. A professional can help determine the best type of share structure for your company’s needs.
Step 3: Establishing a registered office and directors
Your registered corporate office must be an address where you store corporate records. This address of record must also be able to receive official notices that come to your corporation. It’s important to know that this address will be made public, so you’ll need to choose one that you’re comfortable being published for anyone to access.
You’ll also need to choose a board of directors. There are certain requirements for your directors, should be sure to consult Corporations Canada board of directions documentation to make sure your directors meet the specific criteria outlined there. Again, you have the option to increase or decrease the number of directors you have for your corporation but you’ll have to pay the fee for amendments to do so.
Step 4: File forms and pay fees
Though the federal incorporation process is entirely online, there are two forms you must print out and sign to keep with your corporate records: The forms “Articles of Incorporation” and “Initial Registered Office Address and First Board of Directors” must be signed. You do not have have to send them off but they should be kept handy at the corporate address you indicated in step 3.
Finally, you’ll be prompted to enter payment at the final screen of the federal incorporation process. The only form of payment accepted for online transactions is credit or debit cards.
Step 5: Processing your application
Assuming your application is complete and your corporate name is approved and accepted, you should soon be receiving a certificate of incorporation from Corporations Canada. This certificate includes your incorporation date and corporation number. You’ll also receive a corporation information sheet that includes a corporation key which allows you to conduct certain transactions online for your company.
Even though you are incorporated federally, you may still need to complete provincial and territorial registration. Registration is separate from federal incorporation. You can incorporate once but you can register to conduct business in various Canadian jurisdictions. Many regions will require you to register within a few weeks of incorporation.
Registering in that region means your corporation can:
Run a business
Have an address, a post office box, or phone number
Offer services or products in order to make a profit.
There may be local, municipal licenses and provincial permits to obtain depending on your business type and the region you’re operating in. Consult with the authorities at the municipal, provincial, territorial, or federal level to make sure you understand any additional requirements for operating a business legally.
Last, be sure to file annual reports or other documentation according to the appropriate schedule. The Corporations Canada website has a schedule of filings that corporations must comply with to prevent the dissolution of their entity.
Incorporating at the provincial/territorial level
You might find that incorporating on the federal level isn’t what you need. In this case, you will you’ll have to visit the registrar website for the province or territory where you an incorporate your business.
The process to incorporate in a territory is similar to the process of federal incorporation. You’ll have to choose a distinctive corporate name, name your board of directors, and submit your articles of incorporation. The nuts and bolts of the incorporation process from territory to territory are the same but there are some differences in the ways that each province or territory handles certain aspects of incorporation.
For instance, while British Columbia and Prince Edwards Island don’t have a residency requirement for directors, Ontario and Alberta require at least 25% of the board of directors be composed of Canadian residents. Quebec’s official documents must be submitted in French. Ontario doesn’t require annual reports to be filed. Then, each province has different treatment for the Limited Liability Company (LLC) structure, as well.
As you can see, there’s much to consider and research when it comes to incorporation in a province or territory. You should know that provincial/territorial incorporation doesn’t exclude you from doing business in other provinces. For example, you could incorporate your business in Ontario, then register to operate in Alberta.
You would do this through the process of extra-provincial registration. There’s another process to go through for name approval for each province you’ll register in. If your corporate name is already in use in the province or territory, you’ll have to operate under an assumed name. Because of this, it’s generally recommended that you opt for federal incorporation.
However, some provinces have agreements in place that allow corporations from other provinces to operate there without extra-provincial registration. So if you incorporate in Alberta, you can operate as a corporation in British Columbia and Saskatchewan and vice-versa. The same goes for New Brunswick, Nova Scotia, Quebec, and Ontario.
Alternatives to incorporating a business
If you decide that incorporation is not for you, don’t worry. There are other business structures to choose from in Canada.
This structure simply means that you are an individual doing business in Canada. If you decide to operate under an assumed name (one other than your legally given birth name,) you will need to register in the province or territory where you are doing business. Keep in mind that you are personally liable for any business activities and there is no “corporate veil” separating your personal and business debts, assets, actions, and obligations.
This is a business structure for two people who want to go into business together. It still doesn’t afford the same protections as incorporation but it’s an option. Ideally, you’ll get a lawyer to draw up a partnership agreement that covers how operations and finances are handled under this arrangement.
This is, perhaps, the least common business structure used in Canada. The Corporations Canada website defines a cooperative as, “a body corporate that adheres to the cooperative principles.” This can be something like an association of people or business that come together for a common purpose. This purpose can be proving goods or services, so it is a legitimate business structure that works under the right circumstances.
Pros and Cons of Incorporation
Now that you know a little about how incorporation and alternative business structures, it might be helpful to see, at a glance, the pros and cons of incorporation:
Limited liability: Your liability is limited to the amount of money you, as a shareholder, has invested in your corporation. Your personal assets should not be affected.
Continuance: Your company can exist beyond the original company founders and existing shareholders. There can be continuity in your business even when key people leave.
Fundraising: You can raise money for your company by issuing shares—this is an alternative to going into debt. Even taking out loans and establishing business credit will often require you to incorporate your business.
Tax advantages: Corporate tax rates are lower than individual tax rates.
Fees: It can cost $200 or more to incorporate your business. Then there’s the cost of provincial/territorial registration and some licenses and permits.
Additional paperwork: You could be responsible for annual reports which will cost money and take time to complete.
Corporate tax returns: Having a corporations means you’ll have to file a tax return each year for your corporation even if there is no tax due.
There are many decisions to make when it comes to being a business owner in Canada. The question of whether or not to incorporate your business is a big decision that should not be taken lightly. The resources that go into completing the paperwork, paying the fees and maintaining your corporation represent a significant investment—especially if you are just getting started. Consult with a professional to make sure if and when incorporation might be the right move for your business.