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Majority of the businesses in Canada are corporations. While it is not required to have this status, it can bring certain protection for business owners, and potentially reduce your tax liability and personal asset protection. This article will help you understand how to incorporate a business in Canada when you're starting a business.
What is Business Incorporation?
A Corporation or an incorporated business is a legal entity that is separate and distinct from its owners and shareholders. Corporations have the legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own right, and to be held responsible for its actions. It enjoys most of the right and responsibilities that are representative for an individual, like hiring employees, owning assets and paying taxes.
As it is a separate legal entity, if the company gets sued or incurs debt, the owner will not be held liable. So, if the business goes south, then your personal finances and assets are protected. You don’t want your personal belongings to be at risk when a client breaches a contract. Satisfying claims against your business with your personal assets is distressingly bad.
Benefits of incorporating
There are several advantages of incorporating a business aside from personal asset protection. Entrepreneurs that are starting their business can enjoy the following:
- Tax Advantage – Corporations can take advantage of the Small Business Deduction which is currently at a reduced rate of 9%. Tax payment can also be deferred to benefit from new laws or lower tax bracket.
- Increased Credibility – Incorporation improves your credibility, as some businesses don’t enter contracts or agreements with an un-incorporated business.
- Greater Access to Capital – Funds can be raised by selling shares to entrepreneurs.
- Continuous Existence – As it is a separate legal entity, if you sell the business, or if a shareholder dies the business will continue to exist. You can plan its succession as it has unlimited life span.
- Business Name Protection – No one can use your business name on the province or territory you registered your business.
Where does your business need most help?
Registering a corporation could be challenging to small businesses as it has a more complex structure than a sole-proprietorship and partnership. It has more paperwork and record-keeping, including documentation filed annually with the government, and a higher start-up cost.
How can I incorporate my business?
Step 01: Choose a Business Name
Make sure the name you are going to use is special or unique, because a lot of ecommerce merchant’s online stores already have their names. A Nuans report is required for the name you choose to be reserved in the next 90 days while it is being reviewed for approval.The name must have the following elements:
- Distinctive element (John, Trojan, Max, etc.)
- Descriptive element (Manufacturing, Consulting, etc.)
- Mandatory legal element – (Corp., Inc., Ltd.)
If proposed name gets rejected, Corp Canada provides a letter for the reason of rejection. You can submit a revised application with the same name or different name with additional info described on the rejection letter. No additional fees, however Nuans may be required if it passes the 90 – day limit and you are proposing a different name.
On the other hand, a Nuans report will not be required if you ask for a number name when you apply the Articles of Incorporation. Corporations Canada will assign the next available number. If the branding name of your business is not important, you can go with this option.
Step 02: Articles of Incorporation
Articles of Incorporation – is a legal document to be filed with a provincial, territorial or federal government which sets out a corporation’s purpose and regulations. It is a required document in the incorporation process.The articles of incorporation consist of the following:
- Initial Registered Address (PO Box is allowed)
- First Board of Directors
- Structure or Classes of Shares
- Restrictions on shares and activities
- Number of Directors
- Other Provisions
The Articles of incorporation will need to be signed by the incorporator(s). If an incorporator is a company or other incorporated body, the articles must be signed by an individual authorized by that body.
Step 03: Business Number
Business Number – is a unique number the Canada Revenue Agency (CRA) assigns your business as a tax ID. It is a nine-digit number that is unique to your business and that is used when dealing with federal, provincial, or local governments.
Directors Residency Requirements for companies/ corporations for each Canadian jurisdiction
|ACCOUNT||BUS NUMBER||PROGRAM ID||REF. ID|
|REF. ID||REF. ID||RC||00001|
|HST - Acc 01||REF. ID||RT||00001|
|HST - Acc 02||REF. ID||RT||00002|
The Business Number (BN) may change if your business is sold or the legal structure changes; for example, you convert your business from a sole-proprietorship to a corporation or partnership.
Each program account is assigned a 15 character number that uses the Business Number as the first 9 characters, then a two letter identifier for the program identifier (RT for GST/HST, RM for import/export, and RP for payroll) followed by a 4 digit reference number for the specific account.
Step 04: Type of Registration
Type of Registration – You can either register your business Federally or Provincially. Federal Incorporation is much expensive and has more paperwork to maintain but it allows you to do business in all provinces with the same business name.
On the other hand, you can start your business with provincial registration and expand it to other territories when your business grows. Provincial Registration is perfect for e-commerce business owners that operate outside Canada.
Note: If your business does $30,000 or more in total revenue per year, you are required to register for a GST/HST account.
Other Business Structure
Sole Proprietorship – In this type of business organization, you are the sole owner, and fully responsible for all debts and obligations related to your business. All profits are yours to keep. Because you are personally liable, a creditor can make a claim against your personal assets as well as your business assets in order to satisfy any debts. It is easy to set up and inexpensive to register.
You could operate without a Business Number if you run a sole proprietorship, for instance, that qualifies as a Small Supplier and does not have any employees, but all businesses will need a business name.
Partnership – is a non-incorporated business that is created between two or more people. In a partnership, your financial resources are combined with those of your business partner(s), and put into the business. You and your partner(s) would then share in the profits of the business according to any legal agreement you have drawn up. Like a sole proprietorship, there is no legal difference between you and your business.
A Corporation is a legal entity that is separate and distinct from its owners and shareholders. Thus, it offers you personal asset protection and potentially reduces your taxes. It is the most serious form of registering your business that will make you eligible for collaborations with other businesses thanks to your credible status.
Sole Proprietorship, or Partnership, on the other hand, will make you fully responsible for all debts and obligations related to your business, as there is no legal difference between you and your business. There won't be many opportunities to enter contracts with other businesses, as these types of registration make your business look like a hobby with a more professional legal twist.
Before registering your business and deciding to incorporate, it’s always wise to seek legal advice prior to coming to any conclusions, as mistakes can be very costly.