How to Incorporate a Business in Canada

• Incorporating a business is a legal process that establishes a business in Canada as a separate legal entity. Incorporating a business offers business and legal advantages such as personal asset protection, tax benefits, and enhanced credibility with customers and investors. However, incorporating a business in Canada has some potential disadvantages, like increased paperwork, complexity, and total cost. One must weigh the pros and cons with their professionals.
• You can incorporate a business in Canada federally or provincially. Each business structure offers pros and cons, depending on your business goals and location.
• Before you incorporate a business in Canada, you should have a solid business plan, choose the right business structure, understand tax benefits, and understand the roles of directors, officers, and shareholders.
• When you incorporate a business in Canada, you should structure your small business for operational efficiency, professional image, and compliance with legal requirements. This requires the legal advice of a small business lawyer.
• The 14-step process to incorporate a business in Canada includes selecting jurisdiction, creating a legal name and business name, checking business name availability, establishing a corporate office address, corporate resolutions, and completing Articles of Incorporation.
• After you incorporate a business in Canada, the corporation must keep important information up to date and comply with legal requirements through annual corporate resolutions, filings, and income tax remittances. The small business must report any changes to Corporations Canada.
• You must retain a small business lawyer to weigh the pros and cons of a corporation, and if so, to guide you through incorporating a business in Canada. Otherwise, you will run into costly mistakes that will hurt your small business.

Incorporating a business in Canada may seem like a complex process. However, with my years of experience guiding small businesses and entrepreneurs, I will break it down into digestible parts. Let’s first explore what it means to incorporate a business in Canada.

What is Incorporation?

Incorporating a business in Canada is the process of forming a legal entity and business structure called a corporation. A corporation is business structure that is a separate legal entity from its owners, unlike a sole proprietorship, where the business and owner are the same person. This means that the corporation itself is recognized as a separate legal entity that can enter into contracts, own assets, and be liable for its debts and obligations. When I assist clients with incorporating a business in Canada, I emphasize that they are transforming their small business into a separate legal entity that has its own rights and responsibilities.

Types of Corporation

In my experience advising entrepreneurs and small businesses, I’ve navigated the nuances of various business structures in Canada. Understanding the different types of corporations is important for any small business owner looking to incorporate a business in Canada.

Despite its many great advantages, incorporating a business in Canada has its pros and cons. The disadvantages of incorporating a business in Canada include:

• Total Cost: Incorporation requires fees for filing and legal services. There are also ongoing costs for legal and accounting maintenance.
• Regulations: Corporations face more regulatory scrutiny and are required to keep records and filings up to date.
• Administrative Burden: The income tax and legal structure of a corporation is more complex than a sole proprietorship, which might require legal advice to navigate.

Click here to learn more about the Disadvantages of Incorporating a Business in Canada.

What to Know Before You Incorporate a Business in Canada

Before deciding whether to incorporate your business in Canada, your decision making should include all the legal, tax, and management details that come with running a corporation. As a business lawyer and trusted advisor, I’ve seen firsthand how important this early planning is. It sets the stage for a profitable and well-run legal entity. Let’s explore these pre-incorporation considerations.

Deciding on the Legal Entity of Your Business

There are numerous legal entities a business can have, and it’s essential to understand which one is best suited for you before exploring the incorporation process. This decision making is not just a formality; it’s a strategic choice that can influence every aspect of your business operations, from liability to income tax rate and more. As someone who has counseled numerous startups and established businesses, I’ve seen how this early decision can significantly impact your business’ future.

Sole Proprietorship

Starting as a sole proprietorship is the simplest way to run your business. A sole proprietorship means it is just you managing all aspects of the business, which means that quick decision making and lower administration. However, the simplicity of a sole proprietorship comes with significant personal liability for business obligations, which can threaten your personal assets. I always emphasize this vulnerability of personal assets to clients who have sole proprietorships, especially those in higher liability industries.

Partnership

Unlike a sole proprietorship, a partnership can be an attractive legal entity if you’re looking to collaborate with others. It allows you and your partners to pool resources and share the responsibilities of running the business. In my experience, partnerships work best when there’s a clear agreement in place that outlines each partner’s role, contribution, and how decisions are made. A partnership may pay tax at a more favorable rate as well.

The Corporation

When you incorporate a business in Canada, also known as a Canadian Controlled Private Corporation, you create a separate legal entity, which shields your personal assets from business liabilities. This legal entity can be more complex and costly to set up but, based on our observations, the pros often outweigh the cons. As a corporation, your business can access additional capital by transferring shares, and you may gain from tax benefits not available to sole proprietorships or partnerships.

Each legal entity has its own set of legal and tax benefits, as well as varying degrees of personal liability and control. Understanding the nuances of each is key to decision making that supports your business objectives and personal risk tolerance. I always recommend seeking legal advice from a business lawyer before making such a foundational decision.

Incorporating a Business in Canada: Tax Considerations

Based on our observations, the tax advantages are the top reason businesses choose incorporation.

Incorporating a business in Canada can lead to many tax benefits that are not available to sole proprietorships or partnerships.

Corporation income tax rates are lower than personal income tax rates, which can lead to significant savings. These savings can be reinvested back into the business, fueling the company’s long term growth.

The ability to defer income taxes is another key advantage. Unlike personal income, which is taxed as it’s earned, corporate income can be held within the company and taxed at a later date. You can strategically use tax deferral to improve your cash flow and plan for future investments.

Another important consideration is the lifetime capital gains exemption available to corporations on the sale of shares.

Corporations also have access to many tax credits and incentives that are not available to sole proprietorships. These include support for research and experimental development, among other activities.

However, these tax benefits mentioned come with increased responsibilities. Corporations face more stringent record-keeping, filing, and reporting requirements. You must keep accurate records up to date and comply with all tax laws to avoid penalties and maximize tax strategies.

Given the complexity of tax laws, I always advise entrepreneurs to obtain both legal advice and accounting advice when considering incorporation. Alongside your small business lawyer, an accountant can offer personalized guidance to ensure that your corporation is structured for tax efficiency.

When incorporating a business, you must understand the distinct roles of directors, officers, and shareholders. These roles have specific responsibilities and powers within the corporation.

Directors: The Governing Body

Directors are the governing body of a corporation and are responsible for overseeing the strategic direction of the business. Shareholders elect directors and the directors must make decisions that shape the future of the company. In my experience working with various boards, directors have a fiduciary duty to act in the best interest of the corporation. When you create an incorporated business, you must elect the company’s initial directors.

Officers: Executing the Vision

The directors appoint the officers to manage the day-to-day operations of the corporation. Officer positions suit the needs of the board. In my observations, I’ve seen the importance of officers who can effectively translate high-level strategy into operational success. They are often the face of the company and highest level employees.

Shareholders: The Owners

Shareholders are the owners of the corporation. They invest capital into the business in exchange for shares, which represent their ownership stake. Shareholders have the right to vote on major decisions, such as the election of directors or significant corporate actions. While they do not manage the day-to-day affairs of the corporation, their influence on the corporation’s governance can be substantial, especially in small businesses.

Planning Your Corporate Governance

When you first file your articles of incorporation, it’s common to find yourself wearing multiple hats, often taking on the roles of director, officer, and shareholder simultaneously. This is particularly true for solo entrepreneurs who are both the brains and the brawn behind their business operations. However, if you’re starting out with a team or more stakeholders, the distinction between these roles becomes more important.

As your business grows and you need to hire employees, understanding the distinct responsibilities and powers of directors, officers, and shareholders is essential. Think about who will fill these positions, their qualifications, and how they will work together to build the success of your small business. You should consult a business lawyer to provide clarity on these roles.

Structuring Your Corporation

Before you incorporate your business in Canada, you should understand the type of ownership structure you wish to establish. This decision can be straightforward or more complex, depending on your business goals. One corporation may be owned by 100 shareholders, and another corporation owned primarily by one.

The number of shares owned by each shareholder is indicative of the proportion of the company they own. However, this does not necessarily mean that all shareholders have equal status. When incorporating, you can create multiple share classes with distinct rights and privileges.

So, what exactly are the different types of share classes? Below is a basic overview of the most common share classes:

Voting Shares

In the landscape of share classes, there’s a key feature that sets them apart: whether they come with a say in the business’s decisions. Shares with voting rights are the go-to for individuals who are keen on shaping the business’s future—think the entrepreneurial spirits who planted the company’s seeds, the guiding hands on the board, and the executives steering the day-to-day.

On the flip side, there are shares without voting power. These are tailored for those who are in it for the journey and the potential financial rewards down the road. They’re perfect for team members who prefer to focus on their roles without dipping their toes into the strategic decision-making pool.

Common Shares

Common shares are the standard share classes for all small businesses. As your business starts making more money, the value of its common shares is likely to go up too.

Now, owning common shares is pretty straightforward: they don’t come with any special perks in terms of getting a cut of the company’s assets if things wind down. If the company ever has to close up shop, common shareholders line up based on how much of the company they own, and they’ll get their fair share of what’s left.

As for profits, that’s where things can get a bit exciting. The people running the show – your board of directors – have the power to give out dividends to common shareholders whenever they think it’s a good idea, and they can decide on how much to give. It’s a way for you to get a bonus for your investment in the company.

Preferred Shares

Preferred shares are like VIP passes in a company’s business structure, offering the advantage of being paid back first if the business winds down. But this doesn’t mean preferred shares are more valuable than common shares, as their growth in value is typically capped. Preferred shares are often issued for savvy tax strategies recommended by an accountant.

Hiring a Business Lawyer to Incorporate in Canada

Before you incorporate your business in Canada, you may ask: should I hire a lawyer to assist me? While a business lawyer is not legally required to incorporate, in my experience, not hiring a lawyer almost always leads to costly mistakes.

Why You Should Hire a Lawyer to Incorporate

As someone who helped many sole proprietorships incorporate, I can attest that business online services do not provide the complete services required for a proper incorporation. They may be tempting with their low costs and promises of quick turnarounds, but that is because they typically only file the Articles of Incorporation, which is just the beginning of the incorporation process. A business lawyer, however, will guide you through the entire process, ensuring that all important information is correctly drafted and filed. This includes the crucial step of organizing the company and issuing shares, which establishes the legal structure of your corporation. A lawyer will incorporate your company properly.

Consequences of Not Hiring a Lawyer: Incomplete Incorporation!

Incorporating through business online services often leads to a false sense of completion. When only the articles of incorporation are completed, the corporation is not legally valid, which leads to many problems. Without having a proper corporate legal entity, your business could face risks such as loss of limited liability protection, potential dissolution, and inability to perform essential business activities like income splitting or transferring shares. In my practice, rectifying such incomplete incorporations is common, but it comes at a high cost and inconvenience than if done correctly from the outset.

Why Hiring a Lawyer is a Better Deal

When you incorporate with a lawyer, you are not just ensuring that you incorporated your company properly. You also get the value of personalized legal advice and business advice. At DiMinno Rizzi, our business lawyers will assess whether a corporation is the right legal entity for you, advise on tax rates, and provide industry-specific guidance to avoid legal pitfalls. Additionally, we can draft necessary business agreements and offer strategic legal advice that business online services simply cannot provide. The initial investment in a business lawyer’s expertise can save you a lot of money and prevent legal troubles down the road. In fact, at our firm, we often provide these additional services at no extra cost!

For a more detailed comparison of federal versus provincial incorporation, check out our article “Federal Incorporation or Provincial Incorporation: Which is Better?”

For the purposes of this article, we will be assuming that you are incorporating federally.

Step 3: Check Availability of Your Proposed Corporate Name

While there’s flexibility in naming a corporation in Canada, each jurisdiction has specific guidelines for approval. Corporations Canada, which oversees federal corporations, imposes strict rules. It requires business names to have both distinctive elements, which identify the corporation, and descriptive elements, which describe its activities. Due to a high rejection rate of proposed names, it’s recommended that federal incorporators prepare at least three alternative names to avoid delays if their preferred name is not accepted.

Step 4: Choosing Your Corporate Office Address

When you file forms to set up your corporation, selecting a corporate office address is a crucial step. This address serves as the official location for receiving company formation documents and keeping company and income tax records up to date. It must be a physical location within the jurisdiction where your business is registered, not merely a P.O. Box.

Considerations of privacy and accessibility are important. Your registered corporate office is public information. Many business owners opt for a lawyer’s office or a professional service provider’s address to maintain personal privacy. Consistency across all company formation documents is essential, and any changes to this address should be promptly reported to the federal corporations registry to avoid legal complications.

Step 5: Complete Your Articles of Incorporation and Pay Government Fees

Incorporating a business in Canada involves filing articles of incorporation. Filing articles of incorporation requires you to make several key decisions about your new corporation:

1. Choose the location for the registered office.
2. Determine the number and types of shares the corporation can issue, including common shares and preferred shares.
3. Decide if transferring shares should be restricted to keep the company private.
4. Establish the number of directors, and whether there will be a fixed number or a range.
5. Consider if the corporation’s business activities need to be limited in the articles of incorporation
6. Think about any other clauses or restrictions to include in the articles of incorporation.

These decisions are unique to each business, so it’s crucial to seek legal advice tailored to your situation before finalizing the articles of incorporation.

The articles of incorporation, along with any necessary supporting company documents, must be signed by at least one incorporator who is legally competent, over 18, and not bankrupt.

Step 6: Obtain Certificate of Incorporation

After your articles of incorporation are filed, you’ll obtain a certificate of incorporation, which certifies that the corporation is registered in the government’s federal corporation registry. Note, however, that this doesn’t necessarily mean it exists legally.

You will need to complete all the steps below and file an annual return each year to keep your business information up to date.

Step 11: Have Your Lawyer Draft any other Required Contracts

In my experience, beyond the foundational company documents of incorporating a business in Canada, it’s crucial to consider other contracts that may be necessary for your business’s specific needs. Having a business lawyer draft these contracts is not mandatory, but it’s a step I highly recommend for several reasons.

Firstly, contracts such as employment agreements, non-disclosure agreements (NDAs), service contracts, and lease agreements are the backbone of your daily operations. They define the relationships and expectations between your company and its employees, clients, and suppliers. A business lawyer’s expertise in drafting these documents ensures that they are legally sound and tailored to your business’s unique circumstances.

Secondly, well-drafted contracts can protect your business from potential legal disputes. For instance, a solid NDA protects your intellectual property and trade secrets. When you hire employees, a comprehensive employment agreement can clarify roles, responsibilities, and compensation, avoiding misunderstandings.

Moreover, having these contracts in place demonstrates to stakeholders that you are serious about your business and its legal obligations. This can build trust and authority in your brand, showing that you are committed to professionalism and risk management.

Investing in properly drafted contracts can save you from costly litigation and provide a clear framework for your business operations.

Step 12: Set Up Company Bank Account

When you’re ready to open a corporate bank account, you’ll need to bring your articles of incorporation to your bank appointment. It’s important that all the signing officers—who have the power to sign checks and access the account—are there too, because the bank will need their signatures. Sometimes, the bank might ask that you prepare corporate resolutions before they can set up your account.

Banks vary in terms of plans and requirements. TD Bank, for example, often provides promotions for starting a small business bank account with them. BMO offers business bank accounts with no monthly fees. Services may change and vary, so be sure to do your research.

Also, consider discussing a corporate credit card with the bank. It’s handy for small purchases, like if you need to pick up office supplies without writing a check each time. Plus, using a credit card wisely means fewer bank fees and helps build your company’s credit rating. Remember, paying off that credit card on time is key to showing that your business is trustworthy and financially sound.

Step 13: Consider Purchasing Insurance

Managing the risks in your business is crucial, and insurance is a smart way to do that. The kind of insurance you’ll need depends on what your business does. There are pros and cons to insurance, with the main con being the cost.

The most common forms of insurance that businesses purchase include:

• General Liability Insurance: This covers legal fees and damages if your small business is sued for property damage, bodily injury, or associated medical costs.
• Property Insurance: This protects your small business’s physical assets, such as buildings and equipment, against loss or damage from a wide range of causes, including fire, theft, and natural disasters.
• Professional Liability Insurance (Errors and Omissions Insurance): This is particularly important for service-based businesses, as it covers claims of negligence, malpractice, or misrepresentation.
• Workers’ Compensation Insurance: Required in many places, this covers medical costs and lost wages for employees who are injured on the job.
• Business Interruption Insurance: This helps cover lost income and expenses if your small business is disrupted due to an unforeseen event.
• Commercial Auto Insurance: This covers vehicles owned by your small business and provides protection in case of accidents, damage, or theft.
• Directors and Officers Insurance: This protects individuals from personal losses if they are sued as a result of serving as a director or officer of your small business.

If you’re not sure where to start, our business lawyers at DiMinno Rizzi can help connect you with an insurance agent who’ll find the right coverage for you.

After Incorporation: Ongoing Compliance & Maintenance

After you incorporate a business in Canada, you must keep your corporation up to date by maintaining certain company formation documents and records. There are four main items that you must stay on top of:

Annual Shareholder and Director Minutes

Corporations in Canada are required to prepare annual shareholder meetings. During these meetings, shareholders review the company’s progress, financial statements, and elect directors. However, if all common shareholders agree, you can prepare annual shareholder resolutions and director resolutions. Similarly, the company’s initial directors must meet annually to address corporate affairs, but corporate resolutions are also acceptable. It’s essential to prepare corporate resolutions carefully, as they form a record of the decisions made by your company’s leadership.

Annual Return Filing Requirements

Each year, your corporation must file an annual return with Corporations Canada. This isn’t an income tax return but an update or confirmation of the corporation’s articles of incorporation, such as the address of the registered office and the names and addresses of the directors. Failing to file can lead to your corporation being dissolved.

Annual Tax Filing and Remittance to CRA

The Canada Revenue Agency (CRA) requires all corporations to file a T2 Corporation Income Tax Return every tax year, even if there is no tax payable. You must also remit the correct amount of corporate tax by the deadline to avoid penalties and interest. Working with a knowledgeable accountant can help you navigate income tax matters and take advantage of any applicable tax benefits or deductions.

Reporting Changes to Corporations Canada

If there are changes to your articles of incorporation, such as a change in directors or registered office address, you must report these changes to Corporations Canada within a specified period. Timely reporting of important information ensures compliance and accuracy of your articles of incorporation.

Remember, maintaining up to date articles of incorporation is not just about fulfilling legal requirements; it’s about protecting the integrity and reputation of your business. Keep these tasks on your annual checklist to ensure your corporation remains in good standing.

How an Incorporation Lawyer Can Help

When considering the pros and cons of incorporating a business in Canada, a crucial first step is to speak to an incorporation lawyer.

At DiMinno Rizzi, our incorporation lawyers will work closely with you to ensure that your company is sailing in the right direction!