Is Incorporation right for me?
When you launch a business, the type of corporate structure you choose matters. Here’s what to consider when considering incorporating ie. creating a corporation:
You are creating a separate legal entity
When you operate a sole proprietorship, you are personally responsible for that business. There is no legal distinction between the owner and the business entity.
However, incorporating your business creates a new legal entity, separate and distinct from its members or shareholders, called a corporation. Members or shareholders may come and go, but the corporations will continue until it is dissolved or wound up.
In Canada, a corporation has the same rights as a real person. It can own property, get loans, enter into contracts, sue or be sued, and even be found guilty of committing a crime.
There may be increased credibility with the government, funders, and the public. The corporation can gain popularity and a valued “brand” similar to a famous individual.
It also means that a separate tax return must be filed for this separate legal entity and cannot be included in your personal T1 tax return filing. In Canada this tax return is a Corporate T2 return.
You will hold limited liability
When forming a corporation, owners transfer money, property, or services to the corporation in exchange for shares. The owners of these shares are shareholders, and accordingly, they have limited liability.
The most significant consequence of creating a limited liability corporation is that its shareholders are generally not responsible for the company’s debts or responsibilities. Shareholders are not affected by the corporations inability to pay their creditors, unless they have provided personal guarantees.
If a corporation goes bankrupt, incorporation protects shareholders from losing anything more than their investment.
Note: There are exceptions to the limited liability rule, for example, when the conduct of the shareholders is illegal or improper. An individual therefore cannot use limited liability to commit fraud or avoid the consequences of criminal negligence. Similarly, if a Corporation does not remit funds collected in trust, such as payroll withholdings, the Canada Revenue Agency may hold shareholders personally responsible for the repayment of these monies.
You may be subject to Lower Tax Rates
Corporate tax rates are generally lower than income tax rates for individuals.
The small business deduction is a reduction in corporate taxes for Canadian controlled private corporations (CCPC’s). The reduced rate of tax is available on active business income up to the corporation’s business limit for the year. The federal business limit is $500,000 for 2009 and later years.
Therefore, the higher your income, the more likely it is that you will benefit from Incorporation.
You can defer your taxes.
Depending on the financial year end selected, Incorporated companies may be vehicles for deferred taxes. Corporations generally have 6 months to pay out any declared income, often extending the taxes due on that personal income until the following calendar year.
There is better access to Capital and Grants
Compared to other kinds of business structures, corporations can often raise money and grow more easily because they:
- can issue bonds or shares to investors (rather than rely on their own money and loans for capital); and
- can borrow money at lower rates.
- Financial institutions see loans to corporations as less risky than those given to unincorporated businesses.
Your business will experience continuous existence
A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy. This is not the case for other types of business structures, which cease to exist when owners die.
There are additional costs and regulations/administration
There are additional costs associated with Incorporating. The cost to incorporate in Ontario can vary depending upon the structure of the company, legal complexity and whether you hire a company to assist you with your Incorporation needs (recommended).
Separate books and records must be kept up to date and accurate, often resulting in additional administrative and accounting costs.
Most jurisdictions require an annual corporate filing related to the location of the head office as well as director / shareholder information.
Annual costs to prepare financial statements and corporate tax returns must also be considered. There are several different types of financial statements (Notice to Reader, Review Engagement or Audit) and the costs vary significantly.
Please refer to our Corporate Tax tab in Client Resources for more information.
Considering the Details
Do I incorporate Federally or Provincially?
Incorporating provincially or federally have common benefits, however, if you are only intending to operate your business within provincial borders, you may decide on Provincial incorporation. In this case, the corporate name is protected within that province only. Provincial rules are usually more flexible in respect of the business name, which will generally be accepted if there are no exact matches to your choice.
If, however, you are looking to expand your business across Canada, or globally, you may choose to incorporate federally.
Advantages to Federal Incorporation:
You can use your name across Canada
- This is important if you are looking to expand your business to other Provinces or Territories and want to use the same name.
- Your corporation’s official address can be in any province or territory. A federal corporation can also hold its annual meeting outside of Canada or even digitally.
- Federal Corporations are recognized around the world. This is an important consideration if you plan to expand outside Canada.
- Canadian Government – Is Incorporation right for me?
What Name do I choose?
Would you like a numbered corporation or a named corporation?
What legal ending you would like?
- Corporation names are a combination of a distinctive element, a descriptive element and a legal ending
- The legal ending indicates that it is a legal corporation and not just a sole proprietorship or partnership.
- Most companies end in “Inc.”, “Ltd”, “Incorporated” or “Limited” but there are other legal endings to choose from, such as “Corp.” or “Corporation”.
- All corporations must have a distinctive element and a legal ending. A descriptive element is optional.
- For example, in the name “Betty’s Flower Shop Inc.”, the distinctive element is “Betty’s” and the descriptive element is “Flower Shop”. The legal ending is “Inc.”.
Prior to Incorporation, you will require a Name Search referred to as a NUANS Report. This report must accompany your Application to Incorporate as it provides you and the government with a list of any registered names similar to your proposed name. BizWize Inc. can perform this search for you and provide a detailed report within 2 hours.
How do I Incorporate?
Once you have decided whether to Incorporate Federally or Provincially, you will need to determine whether you wish to contract a company and/or lawyer to assist you with your incorporation and/or provide legal advice.
Incorporating is simple with BizWize Inc. It only takes a few simple steps to complete your Incorporation Application and we will do the rest!
If you require specific legal advice as opposed to general information, we can connect you with a lawyer who specializes in Corporate Law, and you will receive a preferred hourly rate or block fee.
Bizwize facilitates these referrals only to assist our clients. BizWize does not charge for these facilitations. We do not receive any compensation for this service as we believe that commissions or financial compensation negatively affects the integrity of the service we provide.
Once incorporated you will receive your Charter in the form of Articles of Incorporation. You may also choose to order By-Laws, Share Certificates, Shareholder and Officers Registers, and a Corporate Seal.
The Canada Revenue Agency will automatically send you a business number within approximately 10-14 days after you incorporate. You will be required to use this number when filing your corporate taxes. If you require an HST number or Payroll number, contact the CRA at 1-800-959-5525 and ensure you have your business number ready when you call. For more information on HST and Payroll please refer to our bulletins in the Client Resources page.
Deciding if and how to incorporate can be a complicated task with various nuances and challenges, but with some help it doesn’t have to be. Contact us today for more information on Incorporation and assistance throughout the process!
For More information see the CRA Website on Incorporation
For assistance deciding whether incorporation is right for you or starting your incorporation, contact us today! Staff at Bizwize are looking forward to assist you in this decision and process
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