A Comprehensive Guide For Incorporating A Business In Canada

Business incorporation is always a big decision for an entrepreneur and a lot of people suggest a lot of different things and this sometimes overcomplicates things. This article contains all the information needed to know how to start a business in Canada.

When Should You Incorporate A Business?

There are two key factors to consider when you are thinking of incorporating a business which are limited liability and taxes. 

Limited Liability 

It is impossible to overestimate the advantages of limited liability. When incorporating a business, you have to avoid mixing business and personal issues. This is important because, according to a study by “Innovation, Science, and Economic Development Canada,” only around 70% of all small businesses last after the first five years. 

After you incorporate the business and it fails to perform well, your personal properties will not be affected. If your business operation is in a sole proprietorship or partnership structure, you will be legally responsible for the debts of the business organization, which can jeopardize your assets, including your house, car, and computers.  

NOTE: Sometimes, business directors do not get legal protection from a business’s creditors under certain conditions. Some examples include: 

1. Unpaid salary and vacation benefits for the employee: maximum 6 months of salary and 12 months of vacation pay.  
2. Employee source deductions and remittances: These include deductions related to employee income taxes such as EI and CPP payments. 
3. Remittances of GST/HST: This includes GST/HST that was collected by the corporation but not paid to the government.

Tax Advantages 

There are different taxes payable by corporations than those payable by individuals. In the Canadian tax system, corporate income taxes are lower than personal income taxes, and there are further tax exemptions for small business incorporation. It is always better that you keep some money in the corporation than transfer it to your account because, in this way, you save some amount of tax. 

What you decide to do about how you pay yourself also has tax implications. It is advisable to pay yourself some form of compensation, in the form of a salary or dividend, or even a mix of both, depending on which will attract the least amount of taxation. 

For instance, a Canadian Controlled Private Corporation, owned mainly by residents of Canada, pays a tax of 13.5% on all incomes over $500,000 for the given year and 26.5% on all incomes above that. If you are the owner of a business, you can retain money in the business instead of spending much on personal use or business necessities. This implies both raising the value of the company’s asset base and reducing taxes paid. This implies that the money that you leave in your company could be directed to various uses in the business. For instance, for marketing, buying new equipment, getting more stocks, or recruiting employees for the business.

What Are The Advantages Of Incorporating?

Apart from the shielding of shareholders from liabilities and lower taxes mentioned above, there are at least four other advantages to incorporating a business. 

Raising Capital 

If you are looking for investors to invest in your business, you must incorporate first. It would be rather difficult to sell the shares to investors without incorporation.

Improving Professional Image 

In terms of working with clients, your business is viewed as more professional when it is incorporated. Invoices will be issued with your incorporated business name (the end identification- Inc., Ltd., or Corp.). This informs your clients that you have planned your business for the long term and that you are very serious about your responsibilities. 

Transferable Shares 

Corporations can easily be transferred from one person to another through share sales or share transfers. With this method, long-term succession planning is less of a challenge as compared to other structures. 

Continuous Lifespan 

Corporations can exist indefinitely since they do not have a limited life span.

How Can You Incorporate Your Business In Canada?

It is possible to consider the formation of the corporation as a set of tasks, and, thus, you can handle them one by one. Now let us turn our attention to the procedure for business incorporation in Canada. By following each one, you’ll be able to incorporate your business correctly and follow the rules and regulations, not to mention that you will be secure from making mistakes in the future.

Choosing Your Business Name

Selecting the name of your business can sometimes be burdensome, but it can be a very fun experience. You can always include it in the title as a numbered company name (for instance, 12345678 Canada Inc.). Then you can decide on a name at another time, or if you do not have a business that needs to be publicly exposed, you can run your business informally. Still, most business owners eagerly anticipate giving their venture a name and ensuing legal recognition as a business. 

To start with, choose the name that you would like to give to your business. Notice that this is your formal legal name, and you will have to put it there whenever you have to sign it. Technically, it does not have to be your brand name. 

Next, the business name must meet the following three legal constraints. It must contain (1) An element of difference, (2) A term that describes the business type, and (3) A legal notice 

[Distinctive] + [Descriptive] + [Legal ending] 

For example: Rhino Ice Cream Inc. 

Bonus step: trademark search. Check the Canadian trademarks and find out if some other people have already taken the particular trademark name you intend to use. Another place where you can make a free search is the Canadian Intellectual Property Office. 

One final note about trademarks: They are associated with certain products or services. This means that despite finding that a certain name is a registered trademark, you may use it if that is the name you wish to use, provided you are in a different industry.  

When you incorporate your business with FastLane Group, all the necessary research is carried out by our team on your behalf, and there is no need to carry out your business name search before incorporating your business.

Choose Your Incorporation Jurisdiction

Filing can be at the federal level or the provincial level, depending on your preference. We will describe the differences in detail below, but for most entrepreneurs, both jurisdictions are suitable.

Articles Of Incorporation Filing With Government  

Once you have your name settled down, you will need to submit the basic registration documents to the government. In this step, you also have to decide on the mode of share capital division and the first directors of the company. 

Pay Incorporation Fees 

Since company incorporation is a formal process, the federal and provincial governments of Canada require you to pay a fee, so you should be ready to make a payment when you are filing the Articles of Incorporation. 

Company Formation Documents 

Registering with the provincial or federal corporate registry office is just one of the things that need to be done when incorporating your business. You also need to create and sign all of your company formation documents: the Corporation’s Charter and Bylaws, Stockholder and Director Resolutions, Director Ratifications, Stock Exchanges, and Stock Purchases. 

If you do not get these documents and do not establish your company the proper way from the beginning, there are considerable risks. There will never be owners in the business because no shares were issued to shareholders or investors. These risks are likely to worsen with time and are going to cost your business more than it would cost to set up the business appropriately in the first place. 

The company formation documents, also known as the minute book documents, are necessary. This article from the Government of Canada describes in detail the various documents that a corporation needs to create and maintain.

Is There Any Fee To Incorporate A Business In Canada?

The cost of incorporation in Canada will depend on the region you are in.

When incorporating, you can go directly to the government. In particular, it is worth specifying that the presented prices cannot be regarded as the total in most of the cases. Some filings may be done on your own, and this may also entail some paperwork and some other legal problems for which you might need the services of a lawyer to properly deal with every legal formality. 

Government prices will depend on the jurisdiction and the type of incorporation: 

British Columbia: The price of incorporation in British Columbia is $350 CAD plus a $30 extra fee for name approval. 

Alberta: The fee for incorporation is $275 CAD and there is also an additional name approval fee of $30. Filing of incorporation is done by agents who in most cases charge additional fees for the service although this may be slightly higher than $150. 

Saskatchewan: Saskatchewan currently has the incorporation fees at $265 CAD and has an additional $60 for the search report for named corporations. 

Manitoba: The government incorporation fee is $350 CAD in Manitoba, while the fee for the search report for named corporations is $45 CAD. 

Ontario: In Ontario, to incorporate a business online or by mail at a fee of $300 CAD. Additional $60 for the business name registration. 

Quebec: The registration in Quebec is $378 CAD but there is an extra $25 for business name searches. 

New Brunswick: The incorporation fee for New Brunswick is $290 CAD, where $260 CAD consists of the government fee while $30 CAD goes towards the fee of the name search report. 

Nova Scotia: The cost to incorporate in Nova Scotia is $200 CAD and the name search report costs $70. 

PEI: It is a total of $ 305 CAD to incorporate in PEI – the government fee and the fee for the name search report included. 

Newfoundland: In Newfoundland, the incorporation fee is $300 CAD while an additional fee of $30 CAD is charged for a name search report. 

Yukon: Yukon charges $345 CAD for incorporation, which includes a basic government fee and a fee for a search on the corporation name.

If you are seeking an easier way to incorporate your business, FastLane can help you get rid of extra charges for governmental submissions.

Federal Versus Provincial Incorporation

The option of incorporation in Canada can be either provincial or federal. If you have decided on federal, you will also have to register the company in the province of operation. 

Some of the differences that people consider between incorporating provincially or federally are usually magnified. Both enable the company to conduct its business in all provinces and serve clients wherever they are in the world. 

The major advantage of registering a federal corporation is that such a status enhances the level of name protection for your business. If you choose a business name for your business, that business name will be registered for the entire country of Canada instead of just the province. 

Another difference between a federal and provincial corporation is that the directors of the corporation must be Canadian residents. The federal corporations demand that at least a quarter of the directors of a corporation be Canadian residents. Canada director residency depends on the province or territory of formation, and, for example, there are no such residency requirements for directors of firms registered in Alberta, British Columbia, Ontario, and several other provinces and territories of Canada. 

There’s the fact that, in some parts of Canada, federal corporations can often require additional effort to incorporate and, depending on the province, can entail additional expenses.

Roles And Responsibilities In A Corporation

Federal corporations have many drawbacks, including the fact that their registration may require additional labor in certain jurisdictions and may incur higher fees according to the province.

Shareholder 

 A shareholder is an individual who has an investment share in a firm, particularly one who is the owner of company capital stocks. The ownership unit of a company is known as a share. 

The shareholders are quite distinct from the company according to the law. Hence, the shareholders are not held legally responsible for the debts of a company, although there may be some exceptions if the shareholder had guaranteed the company’s payments. 

Director  

A director has the general management responsibility for a corporation’s activities and overall plan. The collective term for the directors is the Board of Directors, though it can be known by slight variations depending on the company. The director is appointed byh a decision made by the shareholder or group of shareholders in the corporation. 

Officer 

The officer works and runs the business operations of the organization. 

There seem to be several officer positions that a company may provide. Companies can come up with any kind of officer position that they want. The popular examples of officer titles are President, Secretary, CEO, Vice-President, and Treasurer. All these can be vested in the same individual. 

Officers are hired by the directors to oversee the management of the corporation on a daily basis.

Structuring A Corporation

The total share of the company possessed by an individual shareholder gives the fraction of the share he or she owns. However, this doesn’t mean that all shareholders are equal in an organization or company that has issued the shares. When formulating the company, one can use many classes of shares, to give various parties differential control over the organization. 

Moreover, you should understand that when incorporating a business, it is possible to have more than one share class, yet, you do not need to issue shares in every class at the moment of incorporation. For example, you could choose to have your company structured with three share classes: There are three classes of shares; the Class A Common Voting Shares, Class B Common Voting Shares, and the Class C Common Non-Voting Shares, but the company only issues Class A. 

How can you differentiate between the types of share classes? Brief information has been described below. 

Voting and non-voting shares  

Among the common differences, these shared classes differ mainly in the aspect of their right to vote in business matters. Some of the voting shares shall be issued to those shareholders who wish to be involved in the company’s management decisions (founders, directors, key executives, etc. ). Non-voting shares are to be distributed to shareholders who want to gain from the company’s future success, but do not want to interfere with strategic management issues (for instance, employees). 

Common shares 

It normally consists of common shares, which are regarded as the regular shares in the corporation. In this case, with increasing corporation size and profitability, more profits will be attached to the common shares. 

Any preference is given to common shares, yet they do not enjoy any preference as to the corporation’s assets. If the corporation ceases operation all common shares’ holders will be fully paid off in accordance to their proportion of ownership. 

Common shareholders never have any restriction on when the directors can declare and pay them a dividend. 

Preferred shares 

Thus, preferred shares are only called ‘preferred’ because it means that the shareholder has priority if the enterprise ceases its operation. Nevertheless, you must acknowledge that preferred shares can never be considered more favorable than common shares. Shares of preferred stock often have limits as to how much they are allowed to increase in value over time. It is given mostly for tax optimization on the recommendation of an advisor who may be an accountant.

Obligations After Incorporation

After incorporating, your business is legally required to keep updating some particular papers and records. Always remember that for the legal and tax privileges of incorporation, you have to ensure that your corporation is up to date and compliant with the law. In particular, there are three major items that business entities are legally bound to update. 

Minute Book And Share Records Of The Company

You will be expected to manage your company documents properly. This may be in an old-fashioned paper file or  an electronic minute book. 

Company updates 

Whenever there is a need for the change of the company details, for instance, to incorporate a new director or to change the registered address of the company, there are forms to fill with the government and corporate resolutions which approve the changes. 

Our expert team at FastLane can take care of all this paperwork on an ongoing basis: filing all the forms to the government automatically, drafting the corporate resolution that is necessary, collecting e-signatures, and storing all the documents in your account. 

Annual return and resolutions  

Annual returns are to be filed with the government every year and fees also may cost as low as $20 by federal corporation to $50 for Alberta corporations and above. 

You also need to hold at least, an annual shareholders and directors meeting, even if you are a one-man business. This is because these are all compulsory papers that every business entity is required to keep. If you do not submit an annual return to the government then your company can be dissolved. 

Thinking of starting a business in Canada? Contact FastLane today for expert assistance and find out how we can help you.