fbpx

What is the Difference Between Registering a Business and Incorporating in Canada?

What is the Difference Between Registering a Business and Incorporating in Canada?

In this article, Toronto business lawyer, Antonio DiMinno of DiMinno Rizzi Lawyers, answers the question: “What is the difference between registering a business and incorporating in Canada?” 

Starting a business in Canada and then realizing you’ve picked the wrong structure can be a real headache. It’s a mistake that’s easy to make but can have big consequences. In this article, we’re diving into that crucial choice every Canadian entrepreneur has to make: should you register as a sole proprietorship or go all in and incorporate?  

We’re going to break down the pros and cons of each, from how they hit your wallet in taxes to the kind of legal safety net they provide. Whether you’re setting up a cozy café or dreaming big with a tech startup, getting this decision right is super important. So, let’s get into it and make sure you’re on the right track from the get-go. 

Key Takeaways

Here are some key takeaways from this guide:

  • There are many differences between registering a business and incorporating in Canada. As a business owner, you need to know them to make the best choice.
  • Business registration legally declares a business’s existence, covering sole proprietorships, partnerships, and corporations. 
  • The process involves selecting a unique name, choosing a business structure, registering provincially or federally, and obtaining permits. 
  • Incorporation creates a separate legal entity, allowing asset ownership and legal independence from shareholders. 
  • The incorporation process is much more complex than registering a business, but provides powerful benefits like liability protection and tax advantages.
  • Incorporation suits high-risk industries and long-term growth. Sole proprietorship is simpler and cheaper, ideal for local, low-risk ventures, but lacks liability protection and broader name protection. 
  • Entrepreneurs should weigh the following when deciding between registering a business and incorporation: liability protection needs, industry risks, scaling plans, taxes, name protection, geographic reach, costs, compliance, credibility, capital access, stakeholder expectations, non-resident operation, and long-term goals.
  • Seek the assistance of a business lawyer when making your decision. No exceptions!

Registering a Business in Canada

Business registration is the process of legally declaring your business’ existence, name, and nature of operations to the government. Most businesses that are registered are sole proprietorships. However, all businesses, including partnerships and corporations, need to be registered in the province they do business in. 

The Process of Registering a Business in Canada

Registering a Business and Incorporating in Canada - The Process of Registering a Business

Registering a business in Canada varies slightly depending on the province or territory, but the general steps are quite similar. It’s a relatively simple process and can be completed online or by phone. Here’s a simplified breakdown: 

  1. Choose a Business Name: This is your first step. Ensure your business name is unique and reflects your brand. In most provinces, you’ll need to conduct a name search to ensure it’s not already in use. 
  1. Determine the Type of Business Structure: Decide whether your business will be a sole proprietorship, partnership, or a corporation. This decision impacts your taxes, liability, and business operations. 
  1. Register Your Business: You can register your business through your provincial or territorial registration system, or at the federal level if you plan to operate across Canada. This usually involves filling out a form and paying a fee. Once registered you will obtain a “Master Business Licence”.
  1. Obtain Necessary Permits and Licenses: Depending on your business type and location, you may need specific permits or licenses to operate legally. 

Different Forms of Business Registration

In Canada, entrepreneurs have options for the type of business they can register. Each is a different legal structure with its unique characteristics. As someone who regularly advises on this choice, I can share insights that might help you decide which form suits your venture best. 

Sole Proprietorship 

The simplest form of business is a sole proprietorship. It’s ideal for individual entrepreneurs who want to start small. The key advantage here is simplicity in setup and minimal regulatory requirements. However, as a sole proprietor, your personal and business liabilities are not separate. This means your personal assets could be at risk if your business faces financial challenges. 

Partnership 

Partnerships are formed when two or more individuals decide to run a business together. This structure allows for shared responsibility and resources. There are two main types: general partnerships, where all partners share liability, and limited partnerships, offering some partners limited liability. The latter is more complex but provides a layer of protection for your personal assets. 

Corporation 

Incorporating your business creates a separate legal entity. This structure provides the most protection for personal assets, as liabilities are tied to the corporation, not the owners. While this option offers significant benefits in terms of liability and potential tax advantages, it also comes with more complex regulations and reporting requirements. 

For a more detailed discussion of incorporation, check out our article: “Should I Incorporate a Business in Canada?”.

Each of these structures has its merits and challenges. As an entrepreneur, your choice should align with your business goals, risk tolerance, and long-term vision. At Diminno Rizzi, our business lawyers can help guide you through the decision process.  

Incorporating a Business in Canada

In my experience working with numerous startups and established businesses, understanding the concept of incorporation is crucial for entrepreneurs looking to scale and protect their ventures. Incorporation is not just a legal formality; it’s a strategic business decision that can have long-term implications. 

What is Incorporation?

Incorporation is the process of legally forming a corporation, a type of business structure recognized as a separate legal entity from its owners. This means the corporation itself can own property, incur debts, enter into contracts, and sue or be sued. Generally, as an owner (aka a “shareholder”), you’re not held accountable for the corporation’s debts. This means if the corporation faces bankruptcy, your risk is limited to the amount you’ve invested, provided you haven’t given personal guarantees for the corporation’s debts. Additionally, creditors cannot pursue shareholders for liabilities incurred by the corporation, despite shareholders being the owners. 

The Process of Incorporating a Business in Canada

Incorporating a business in Canada is a more complex process than business registration. In my experience, it involves making several key decisions, which should involve a business lawyer and accountant.  

Some of the key steps of incorporating a business in Canada include:  

  1. Choose a Business Name: The first step is selecting a unique name, which often requires a NUANS (Newly Upgraded Automated Name Search) report to ensure the name isn’t already in use. 
  1. Decide on Jurisdiction of Incorporation: You can choose between a federal or provincial/territorial incorporation. This choice affects how your business operates and is regulated. 
  1. Prepare Articles of Incorporation: This document outlines the structure of your corporation, including the number of directors and the share structure. 
  1. File with the Appropriate Government Body: Submit your articles of incorporation and other required documents to the relevant government body, along with the necessary fees. 
  1. Set Up Your Corporate Records: This includes creating a corporate minute book and other mandatory records. 
  1. Obtain Necessary Permits and Licenses: Depending on your business type and location, you may need specific permits or licenses to operate legally. 

For a more detailed discussion of the process, check out our article: “How to Incorporate a Business in Canada”.

Key Differences Between Registering a Business and Incorporating in Canada

Key Differences Between Registration and Incorporation

In my years of guiding entrepreneurs through the complexities of starting a business, I’m often asked what the differences are between simply registering a business as a sole proprietorship and incorporating in Canada. 

Each path offers distinct advantages and challenges, and the right choice depends on your business goals and circumstances. So let’s compare registering a business to incorporating a business on the most important elements: 

When you register a business, essentially, you’re announcing your business’s existence under a chosen name. However, this doesn’t create a separate legal entity. In a sole proprietorship, the business and the owner(s) are legally the same. This means that business debts are personal debts, and personal assets are at risk if the business faces legal issues. 

Incorporation, on the other hand, creates a distinct legal entity. The corporation is separate from its owners (shareholders), with its own rights and responsibilities. This separation is crucial for protecting personal assets and creating a more structured business environment. 

2. Liability and Risk Exposure for Business Owners

The personal liability in a sole proprietorship can be daunting. If the business incurs debt or faces a lawsuit, your personal assets, like your home or savings, could be at risk. This is a significant consideration for businesses with high liability risks. 

Incorporation offers limited liability. This means that as a shareholder, your liability is generally limited to the amount you’ve invested in the corporation. Your personal assets are protected from business liabilities, which is a huge relief for many entrepreneurs. 

3. Business Name Protection

When you register a business, the name protection is usually limited to your province or territory. There’s a risk that a business in another province could operate under a similar name, potentially causing confusion. Business name registrations are valid for 5 years. Businesses must renew their registration before it expires to continue operating under the same name. Failure to renew can result in losing the exclusive right to that business name. 

Incorporation provides stronger name protection. A federally incorporated company secures its name across Canada, preventing other businesses from using a name that’s too similar. This nationwide protection is vital for businesses planning to operate across multiple provinces. 

4. Credibility and Brand Perception

Being an incorporated entity, rather than simply a registered sole proprietorship, can enhance the perception of your business. It often conveys stability, longevity, and seriousness. Customers, suppliers, and investors may view an incorporated business as more credible and reliable. This perception can be a significant advantage in business dealings and when seeking investment. 

5. Tax Benefits

Registered sole proprietors pay taxes on business income as part of their personal income, which could be at a higher rate compared to the corporate tax rate. Incorporated businesses often benefit from lower corporate tax rates and various tax planning opportunities, like income splitting and deferring taxes, which are not available to registered businesses. 

6. Access to Capital

Raising capital as a registered business can be challenging since you’re limited to personal funds, loans, or small investor contributions. Incorporated businesses have the advantage of issuing shares and attracting larger investments, providing greater opportunities for business expansion and growth. 

7. Flexibility to Change Business Structure

A registered sole proprietorship is closely tied to its owner, making structural changes more cumbersome. In contrast, an incorporated business offers greater flexibility in modifying its structure, such as changing ownership or share distribution, without disrupting the business operations. 

8. Continuous Existence & Ease of Ownership Transfer

A registered sole proprietorship ceases to exist upon the owner’s decision to stop business or upon their death.  

In contrast, a corporation enjoys perpetual existence, continuing to operate regardless of changes in ownership or management, making it easier to transfer ownership or sell the business. However, corporations require annual filings and failure to make these can result in the company being dissolved by the government.  

9. Set-Up Costs

Registering a sole proprietorship is generally far less expensive with minimal initial costs. Incorporation, however, involves higher start-up costs due to legal, administrative, and potential advisory fees. Incorporation also requires ongoing fees for corporate maintenance, tax returns, and accounting/bookkeeping. This might be a significant consideration for entrepreneurs with limited initial capital. 

10. Simplicity and Ease of Setup

Registering a sole proprietorship is straightforward, involving fewer steps and less paperwork, making it an attractive option for many new entrepreneurs. Incorporation, on the other hand, is a more complex process requiring more detailed documentation and legal formalities. 

11. Non-Resident Canadians’ Ability to Operate Business

Non-resident Canadians might find it more challenging to operate a corporation in Canada due to residency requirements. At least 25% of the directors of a federal corporation must be Canadian citizens or permanent residents.  Registered sole proprietorships can offer more flexibility and opportunities for non-residents to establish and operate a business within Canada. 

12. Ongoing Compliance and Governance Requirements

Sole proprietorships face fewer formalities and reporting obligations, making them easier to manage from a compliance standpoint. Incorporated businesses, however, are subject to more stringent compliance and governance requirements, including annual filings and maintaining detailed corporate records. 

13. Dissolution of a Corporation & Cancellation of a Master Business License

Dissolving a registered sole proprietorship is typically a simpler process, often just requiring the cancellation of the master business license and settling any outstanding debts. In contrast, dissolving a corporation is a more complex and formal process, reflecting the structured nature of a corporation and involving several legal and financial steps. 

INCORPORATION REGISTRATION OF A SOLE PROPRIETORSHIP
Limited personal liabilityUnlimited personal liability 
Business name protection in province and in country (if federal corporation) No business name protection 
Many tax benefits and investment opportunities Limited tax benefits and investment opportunities 
Flexibility to make changes to business structure and ownership Difficult to change business ownership or transfer ownership 
Requires periodic renewals of company minute book and tax filings  Requires periodic renewals of registration 
Federal Corporation requires 25% of shareholders to be a permanent resident or citizen, except Ontario and British Columbia Founders who are not a Canadian Citizen or Permanent Resident can operate the business 
Incorporation costs are higher Registration costs are lower 
Separate taxes from ownerSame tax return as owner 
Higher ongoing legal and tax maintenance costsLower ongoing legal and tax maintenance costs
The examples provided above are generic in nature and may vary widely based on individual circumstances. Obtain professional legal advice prior to incorporating.

Registering a Business or Incorporating in Canada: Considerations for Your Business

Registering a Business and Incorporating in Canada - Considerations for Your Business

When I work with small business owners, I often guide them through a series of important questions to help them understand the differences between registering a business and incorporating in Canada. The decision is crucial and can significantly impact your business’s future. Let me share these questions with you: 

  1. Limited Liability Needs: Do you need to protect your personal assets from business risks? Limited liability offered by incorporation can shield your personal finances from business debts and lawsuits. Alternatively, consider if business insurance might be enough for your needs. 
  1. Industry: Are you in a high-liability industry? Is there a lot of regulation in your industry? Different industries also come with varying levels of risk and regulatory requirements. For instance, if you’re in a high-risk industry like construction or food services, the liability protection of incorporation is a significant advantage. Similarly, industries that typically require substantial capital investment or have complex regulatory landscapes are better suited to the incorporated structure. 
  1. Short-Term vs Long-Term: Are you starting small and testing the market or an idea? If you’re starting small, with minimal risks and a tight budget, registering as a sole proprietorship might be the way to go. This option is simpler, less costly, and offers a straightforward way to start your business quickly. It’s ideal for entrepreneurs who want to test the waters before diving in. 
  1. Geographic Reach: Will your business be local or national/international?  If your goal is to maintain a small, local business, the simplicity of a sole proprietorship might suffice. But if you’re planning to do business nationally or internationally, the structure and protection offered by incorporation are essential. 
  1. Profit Distribution: Will you reinvest profits back into the business, or do you need to withdraw most earnings for personal use? Corporations offer flexibility in managing profits, which can be advantageous for tax planning. 
  1. Incorporation Costs: Are you prepared to invest in the higher initial and ongoing costs of incorporating? While it’s more expensive upfront, incorporation can offer long-term financial benefits. 
  1. Reporting Requirements: Are you ready to engage professionals like accountants and lawyers to help manage these tasks? Incorporation comes with more complex reporting and compliance requirements.  
  1. Stakeholder Expectations: Do your clients or financial partners prefer dealing with a corporation? Sometimes, clients, banks, or other stakeholders prefer or require dealing with a corporation. Also, a corporation can add credibility to your business, which might be important in your industry. 
  1. Long-Term Business Goals: Do you intend to build a lasting business to transfer in the future? If you’re planning to build a business that lasts beyond your involvement, incorporating can make transferring ownership easier, whether it’s due to retirement or unforeseen circumstances. 
  1. Special Purpose Entities: Is your business, such as a rental property, better suited as a separate entity? If you’re setting up a business for a specific purpose, like owning rental property, incorporation might offer more benefits in terms of liability and tax planning. 

Remember, these questions aren’t just procedural; they’re about aligning your business structure with your long-term vision and goals. Every business is unique, and the right choice depends on your specific circumstances. It’s always best to seek professional advice from a business lawyer to make the best choice for your business goals.  

Frequently Asked Questions

Incorporate a Business in Canada
How much does it cost to register a business?

Registering a business in Canada costs between $60-$80, varying by province. In Ontario, the cost is $60 to register. This fee is for basic registration, excluding optional services. Check with your provincial registry for the most current information. 

How much does it cost to incorporate?

Depending on the jurisdiction and complexity of the incorporation, expect to spend between  $1000-2000 CAD +HST. This amount includes government filing fees and legal fees.

If you fail to hire a lawyer in the beginning, the cost will end up being higher later to fix errors.

Do I need a lawyer to register a business in Canada?

No, you don’t need a lawyer to register a business. The process is straightforward. Selecting a unique name and complete registration forms, either online or at a provincial office. However, you should consult a business lawyer if you are trying to incorporate or determine the best legal structure for your business.  

Do I need a lawyer to incorporate in Canada?

It’s not legally required, but highly advisable. The process is complex and online companies only do the first step of filing with the government and obtaining a certificate of incorporation. Your corporation will not be complete, putting all your personal assets at risk and attracting legal penalties.   

For a more detailed discussion of this topic, check out our article: “Do I Need a Lawyer to Incorporate in Canada?”.

Is it better to be self-employed or incorporated?

“Self-employed” simply means that a person is an entrepreneur. An entrepreneur’s business can have the legal form of a corporation or sole proprietorship. “Incorporated” means that the entrepreneur runs his business through a corporation. Thus, one can be both incorporated and self-employed.  

Are there disadvantages to incorporating my business in Canada?

Disadvantages are mainly related to the costs and administrative burdens of creating and maintaining a corporation. But, there may be tax disadvantages to incorporating, especially if you have multiple sole proprietorships, some of which have losses and some of which are profitable.  

For a more detailed discussion of this topic, check out our article: “What are the Disadvantages of Incorporating in Canada”.  

What is required to incorporate in Canada?

To incorporate in Canada, you need a unique corporate name, at least one director who is a Canadian resident, an address for the registered office, articles of incorporation, and a minute book complete with bylaws, organizational resolutions and issued shares. A NUANS report is also required for name registration. 

Can a non-Canadian resident incorporate a business in Canada?

Yes, non-residents can be incorporated in Canada but must meet specific requirements, such as having a Canadian address and appointing a certain percentage of local directors.

What is the difference between a business name and a trademark?

A business name identifies a company for legal and administrative purposes, while a trademark protects brand identity, like logos or slogans, and signifies the source of goods or services to consumers. Trademarks grant exclusive rights to use distinctive signs to distinguish goods or services. 

Should I incorporate as an independent contractor?

Incorporating as an independent contractor in Canada can offer tax advantages and limited liability. It’s beneficial if you earn more than needed for living expenses and can defer taxes on retained earnings. Speak to your business lawyer and accountant. 

How an Incorporation Lawyer Can Help

When considering business registration or incorporation, a crucial first step is to speak to a business lawyer.  

At DiMinno Rizzi Lawyers, we offer free consultations to discuss whether incorporation is the best decision for you. We’ll work closely with you to help clear the fog and ensure that your business is sailing in the right direction! 


Antonio DiMinno

About the Author

Antonio DiMinno is a business & real estate lawyer, entrepreneur, and founder of the law firm, DiMinno Rizzi Lawyers. Antonio takes pride in working differently than most law firms. He doesn’t see himself as just a lawyer, but rather a trusted business and legal advisor in your corner. His focus is helping entrepreneurs and real estate investors through practical, business-savvy, and cost-effective solutions delivered in plain English.

Book a Free Strategy Session with Antonio

Related Posts

Leave a Reply