Table of Contents
What is a Corporation? 2
Incorporation vs. Registration 2
Advantages and Disadvantages of Incorporating 3
Tax Considerations When Incorporating in Canada 4
Incorporating in Canada: Costs, Timeline, and Requirements 6
Canadian Government Fees to Incorporate 6
Agency fees to Incorporate in Canada 7
Is Incorporating in Canada More Expensive than Registering? 7
When Should You Incorporate Your Business? 7
Do You Need a lawyer to Incorporate in Canada? 8
What do you need to Incorporate in Canada? 8
Where Should You Incorporate Your Business? 9
Selecting Your Corporation’s Name 10
What is a “Named” Corporation? 10
What is a “Numbered” Corporation? 10
Should You Incorporate a Named Corporation or a Numbered Corporation? 11
Different Roles in a Corporation 11
After Incorporating in Canada: Ongoing Obligations and Costs 12
Rapidly growing businesses often outgrow their founder and require additional structures like shareholder rights, directors, and separate accounts to support further growth.
Incorporating a company in Canada is the best way to turn a business into a separate entity from its founder and provide these additional structures.
Whether you are just starting or looking to formalize your current business, incorporation can be a good idea.
But what exactly is incorporation, and what is the cost to incorporate in Canada?
These are valid questions because the answers can help you decide whether to incorporate and when to incorporate.
This article answers these two questions and covers additional areas like how to name your corporation and the different roles your corporation will have.
What is a Corporation?
The Canadian Government defines a corporation as:
“A legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. It is a separate and distinct entity from its owners and can enter into contracts, sue and be sued, own assets, remit taxes, and borrow money from financial institutions.”
A corporation is formed through incorporation, a set of steps that establish the company’s name, registered location, number of shares allocated, ownership structure, and bylaws.
An essential characteristic of a corporation is that it separates the company’s liabilities from those of the founders.
For business owners, limited liability means that your liability is limited to your share capital contribution if your company runs into debt or becomes bankrupt. Similarly, if a founder runs into debt or bankruptcy, it will not affect their business.
Incorporation vs. Registration
Incorporation is one way to formalize your business, but you can still do so by registering a Sole Proprietorship or General Partnership. However, it’s essential to know the difference as each type might suit various businesses differently.
Here’s a brief breakdown of the difference between incorporation and registration:
|Limited personal liability||Unlimited personal liability|
|Business name protection||No business name protection|
|Broad tax benefits and investment opportunities||Limited tax benefits and investment opportunities|
|Flexibility to make changes to business structure||Rigidity makes it challenging to make changes to business structure|
|Founders who are not a Canadian Citizen or Permanent Resident cannot operate the business and need at least 25% shareholding by a citizen or permanent resident with the exception of British Columbia.||Founders who are not a Canadian Citizen or Permanent Resident can operate the business|
|Does not require periodic renewals||Requires periodic renewals|
|Incorporation costs are higher||Registration costs are lower|
In general, business registration works for small businesses just starting and provides basic provisions to run a business. For example, with business registration also known as Master Business Licence, MBL’s or Master Business License, you can open a separate bank account for your business.
However, as the business grows and starts taking on more considerable liabilities, it is usually recommended to pursue incorporation to protect the founder/founder’s from liabilities and offer the business access to more significant opportunities for growth.
Advantages and Disadvantages of Incorporating
Although incorporating has many benefits, it also has some drawbacks. As a business owner, looking at both sides of the coin will prepare you for both the advantages and disadvantages.
As you analyze the pros and cons of incorporating, do so with your business in mind, and ask yourself what impact each will have on it now and in the future.
Advantages of Incorporating
- Protect your assets: Corporations are separate legal entities that can enter contracts, sue and be sued, and even go bankrupt. Incorporation protects your personal assets from the liabilities your business incurs.
- Access to capital and credit: Incorporated businesses can sell shares or equity to raise money from venture capitalists and private equity funds. They can also qualify for higher and more diverse credit terms from banks and other financial institutions like lines of credit, overdrafts, secured loans, guarantees, and trade insurance.
- Stronger brand image: Incorporation signals a more robust brand image that might give other businesses more confidence to do business with you. As a separate entity from the founders, a corporation can build a larger-than-life image of itself that transcends any image an individual can attain.
- Tax benefits: Corporations enjoy a wide range of tax facilities that can be used to benefit the founders. For example, a founder can decide to retain their earnings in the corporation and let the value grow until a future date. In this way, they can defer any taxes they would have paid annually.
- Perpetual existence: Corporations do not need to be renewed to remain in existence. Once incorporated, a corporation can exist in perpetuity.
- Separate identity: Incorporating a business can afford its owners a level of anonymity in running the business. Since all contracts, bank accounts, and other obligations appear in the business’s name, the owners can retain a separate identity from the company.
Disadvantages of Incorporating
- Increased legal and procedural obligations: The Canada Business Corporations Act provides a long list of obligations corporations must meet to remain within the law. These obligations include areas like accounting and reporting, registered office, security certificates, and financial disclosure.
- Separation of ownership and control: In a corporation, owners might have no control over the company. As your company grows and takes on more investors and issues more shares, your control over the company can diminish, especially in situations where your stake shrinks significantly.
- Complex winding down process: Closing a corporation is not as simple as shutting all the offices and sending everyone home. The liquidation and dissolution process must follow regulations and can take time and money, especially if the company is relatively large or has many shareholders. Articles of Dissolution are required to end the operation of the corporation with Corporations Canada. This process is fairly simple and can be completed when the business affairs of the corporation have ended.
- More paperwork: Corporations come with a host of formalities that increase the amount of paperwork required. Besides annual financial reports, other paperwork increases include human resource documents, various registers, shareholder meeting minutes and resolutions, and contracts with suppliers and customers.
- Higher startups and running fees: Although not a significant drawback, especially if your company is profitable and growing, the cost to incorporate in Canada is higher than the cost to register a business. You will also have running fees related to filing the necessary paperwork and ensuring the corporation remains compliant with various corporate regulations.
Tax Considerations When Incorporating in Canada
Incorporating a company in Canada has more tax advantages than business registration. For instance, corporate tax is generally lower than personal tax, which can help offset the cost of setting up and maintaining a corporation.
However, reaping the full tax benefits takes time and planning, primarily to ensure everything is done by the book.
Here are the main tax considerations when incorporating:
Tax savings are a significant factor when incorporating a company. If you register a business, the business will have the same tax rate as you do, placing it at a higher tax bracket if your personal tax bracket is higher.
An incorporated business attracts lower taxes, but these savings only kick in if it makes significantly more than what you take out to pay yourself. For example, if your incorporated business earns $100,000 and you take out $60,000, you’ll still have to pay personal tax rates on what you pay yourself.
The best time to maximize tax savings in a corporation is when the business is making significantly more than you pay yourself.
Shareholders earn dividends on the profits a corporation makes, which can greatly increase the corporation’s overall tax efficiency. One method to take advantage of dividends is to make your family members dividend-earning shareholders.
If their individual tax brackets are lower than the corporate tax bracket, you can benefit even more from the tax breaks a corporation offers. For company founders, dividends are a crucial aspect to consider as it allows the distribution of income and profits in a tax-efficient way.
Most businesses incur losses before going on to make profits, especially when starting up. If your business incurs such losses before incorporation, you can apply the losses against your personal income.
However, this might only reduce your tax liability slightly because of the higher tax rate. Another option is to incorporate early and apply all losses towards any future income the company has.
This option is often better as it allows more flexibility in how the losses are applied. Plus, when combined with a lower tax rate, it can translate into significant savings.
Exiting the Business
Corporations offer excellent options when you choose to exit the business. Since a corporation is an independent entity, selling the company or liquidating is often more straightforward as it can be sold as a unit.
If you have a registered business, selling it might involve selling individual assets since they are independent items. A corporation also allows you to sell a portion of your business through an equity sale, which is helpful if you want to unlock resources without selling the company outright.
Lastly, you can claim a capital gains tax exemption of up to $800,000 in Canada, which is another tax incentive to incorporate your business as early as possible.
Incorporating in Canada: Costs, Timeline, and Requirements
If you plan to incorporate a company in Canada, the cost might be one of the factors you consider, besides the timeline and requirements. Weighing these factors can help you decide whether to incorporate now or wait while giving you all the details needed to plan your company incorporation.
Let’s first look at the government fees to incorporate in Canada.
Canadian Government Fees to Incorporate
Government fees when incorporating in Canada depend on whether you are incorporating federally or provincially. Federal incorporation fees in Canada are charged by the Federal government and are fixed throughout the country. Provincial incorporation fees differ from province to province.
Federal incorporation fees range from $200 for up to 5 business day turnaround to $300 for 4 hour turnaround on a same day if submitted before 1pm. There are additional fees for performing a NUANS name search fee. Provincial incorporation fees vary. For example, the cost to incorporate in Ontario is $300 not including the NUANS name search fees.
|Jurisdiction||Government Incorporation Fees
|Prince Edward Island||$265|
In general, you can expect to pay a few hundred dollars to incorporate in Canada. Still, this figure can go up if you decide to use a lawyer, incorporate in multiple provinces, or add other services like trademark registration.
Agency Fees to Incorporate in Canada
An agency is an entity that helps incorporate companies in Canada and can provide a registered address for the newly incorporated company. For example, Ontario Business Central is an agency that provides business incorporation services. The government authorizes agencies to register and incorporate businesses on behalf of business owners.
Working with an agency makes the incorporation process faster and easier because they handle all aspects of the incorporation process. In exchange for this convenience, agencies charge a small fee in addition to the government fees mentioned above.
The best agencies only add a small fee on top of the government fees to ensure the overall cost of incorporation remains well within reach of business owners.
Is Incorporating in Canada More Expensive than Registering?
Incorporating in Canada is more expensive than registering a business. The higher cost of incorporation accounts for the additional requirements provided for in the Canada Business Corporations Act.
In addition, the higher cost acts as a deterrent against people incorporating companies with no apparent business in mind or for speculative purposes. That means entrepreneurs that incorporate a company do so with a clear understanding of what business they will carry out.
Also, keep in mind that if you initially register your business and choose at a later date to incorporate, there is a winding down of the registered business including tax accounts, bank account, client notifications etc. that may be time consuming and challenging and have to go through the long process of winding down.
Before you decide to incorporate, ask yourself whether the higher cost of incorporation is worth it or if a business registration might be enough in the short term.
When Should You Incorporate Your Business?
When to incorporate a business in Canada depends on various factors.
Here are some reasons why you should incorporate as soon as possible:
- Your business has been running for a while and has grown to include employees while bringing in significant revenues annually.
- You want to register a trademark or patent before starting to market your products or services.
- You are planning to raise equity funding or take on more institutional debt.
- The business has more than two founders.
- You are getting upfront investments from multiple investors as you start the business.
- You are expanding to multiple offices across the country or internationally.
- You want protection for the business name and brand only available through incorporation
- Your business has liability that may be of concern to protect your personal assets
On the other hand, here are some of the main reasons to delay incorporating:
- You are just starting, and you want to wait and see how the business fares.
- Your business makes only enough to pay you.
- Your business is not yet profitable.
- You are uncertain whether you want to grow the business further or move on to something else.
- You are considering switching to a different business.
- You have limited funds to further invest in your business.
Although these two lists are not exhaustive, they give a general idea of when to incorporate and when to wait.
In most cases, incorporating is recommended when a business is preparing for growth, having established its business model and market position.
Do You Need a lawyer to Incorporate in Canada?
In the past, incorporating was considered a legal procedure, and so most incorporation services were offered by lawyers. Since lawyers charge by the hour, incorporation was an expensive process.
Today, you do not need a lawyer to incorporate in Canada, although many lawyers offer the service. Instead, you can complete the entire incorporation process online using a service like Ontario Business Central and receive a digital incorporation certificate sent to your email.
We assist you with changes to your corporation as time goes along such as director or address change and Articles of Amendment to change the corporation name or structure.
What Do You Need to Incorporate in Canada?
Incorporating in Canada has several requirements, all of which should be provided in the articles of incorporation at the time of incorporation.
Note that you will have pre-packaged articles of association if you choose basic incorporation that you only need to fill in. If you pick a custom share structure, you will need to provide a complete share structure you would like to use.
The main details of the basic articles will include are:
Corporation name: You need to provide a unique name during incorporation unless you opt for a numbered corporation, in which case a name isn’t necessary. If you choose to name your corporation, a NUANS name search is needed to determine if the proposed name is available. It’s advisable to pre-search the proposed name before starting the incorporation process to save time.
Registered office address: All corporations must have a registered office and mailing address. If you currently don’t have an office, you can use your home address, a registered agency, a service that provides these two addresses at a fee, and then amend these details later when you move to your own office.
The first board of directors: The first board of directors can be anyone you want. However, you must be careful that Canadian citizens or foreigners with permanent residency status represent at least 25% of the board. If you are incorporating in British Columbia, this rule does not apply.
Share structure: Share structure determines what types of shares are issued and the characteristics of each share class. When incorporating in Canada, the ministry provides two share class examples for entrepreneurs to use, or you can alternatively provide your own structure wording.
Where Should You Incorporate Your Business?
In Canada, you have two options when incorporating: provincial incorporation and federal incorporation. Each option comes with different requirements, filing costs, and other obligations.
The option you pick will depend on your business’s area of operation, the scope of the market, and available resources to incorporate.
Let’s look at each.
Federal incorporation incorporates your company at a federal or national level, allowing you to operate nationwide. The most attractive benefit of federal incorporation is the protection it affords your company. With federal incorporation, all businesses looking to register or incorporate in any jurisdiction will view the federal incorporation and are more likely to avoid choosing a similar business name to avoid infringement.
The most significant drawback is that you must file returns with your local Director of Corporations office plus any additional provincial fillings. In addition, you will need extra-provincial incorporation for each of the provinces and territories your business operates within.
For more information on Extra-Provincial registrations or incorporations, feel free to reach out to [email protected] for additional details, or call our office at 1-416-599-9009 to see which options are available.
Provincial incorporation incorporates your company in your selected province or territory. Since it is considered local incorporation, the business must maintain a local registered office and file returns to the provincial government.
The primary drawback is that it does not provide strong protections against similarly named businesses in other provinces or at a federal level. Provincial incorporation can do business with people or other businesses anywhere in the world. When your business is looking at importing or exporting or forming business relationships with foreign corporations, typically federal incorporation is more easily recognized globally.
Selecting Your Corporation’s Name
Selecting your corporation’s name is perhaps the most crucial part of the entire process of incorporating in Canada, albeit one of the least expensive.
If you are incorporating federally, your selected name must be unique enough to qualify for reservation. That means no other business, either at a federal or provincial level, should have an exact or similar name.
If you do not want to go through the hassle of picking a name, you can choose a numbered corporation.
Here is a brief comparison between “named” and “numbered” corporations.
What is a “Named” Corporation?
A named corporation has a distinct name that has been approved for reservation by the federal or provincial government. For example, corporations like Google, Microsoft, MasterCard, and Airbnb are named corporations. Named corporations offer a unique, brandable, and memorable name, but they do have some drawbacks.
The main drawback of a named corporation is finding a unique name that will pass a NUANS search, which compares your selected name to a list of over 8 million corporation names, business names, and trademarks. Ontario Business Central takes the guesswork and anguish out of finding an available name by pre-searching the proposed corporate name for availability and assistance if the name is not available to finding a name that is.
If your proposed name is like another name in the database, it won’t get approval. If the names you provide get rejected multiple times, the costs can run up quickly.
One way to work around this challenge is to perform a NUANS Pre-search, which provides a list of names from the NUANS database similar to what you propose, offering you an opportunity to amend the name before requesting a NUANS Reservation Report.
What is a “Numbered” Corporation?
A numbered corporation is a corporation identified through a unique number followed by Canada Incorporated or Canada Limited (e.g., 123456 Canada Inc.).
Choosing this option makes it easier and faster to get your certificate of incorporation because you do not need to go through the process of finding and reserving a unique name.
Since a numbered corporation has an uninspiring name (it’s just a number, after all!), you can register a trade name by which to conduct business. Although all your official documents will have the numbered name, you can use your trade name for marketing and branding purposes. The trade name however does not have name protection as your named corporate name would.
Should You Incorporate a Named Corporation or a Numbered Corporation?
Choosing a numbered corporation might cut down the time it takes to incorporate, but it can leave your business with a dull and uninformative name.
So, which should you choose?
At Ontario Business Central, we recommend named corporations for businesses that need to interact directly with customers and build a brand. These include consumer companies that would benefit from brand recognition.
On the other hand, we see numbered corporations working well for companies that do business with other companies or those set up as special purpose vehicles to fulfill a particular business role.
If you cannot make up your mind about choosing one or the other, we can help. Contact us using our toll-free number 1-800-280-1913, and one of our friendly agents will help you decide.
Different Roles in a Corporation
As part of the incorporation process, you will be required to name the first board of directors. While the board plays a vital role in the overall structure, there are other roles you might consider during incorporation.
Here are the leading roles a basic corporation has:
Shareholders own the company through the shares they are assigned. As the founder, if you own 60% of the shares, you effectively own 60% of the company. However, shares are not equivalent to control. For instance, if you issue 100 non-voting shares but retain ten voting shares, you can control the company even if your ownership stake is smaller.
Directors are appointed by shareholders and are responsible for the corporation. Directors can be shareholders or non-shareholders. In addition, you can nominate executive directors with management oversight powers or non-executive directors without such capabilities. In constituting your board, remember to appoint individuals who will add value to the corporation.
Officers are the senior-most managers in a corporation. The board appoints them to run the organization and ensure it succeeds. Officers can include the chief executive officer (CEO), chief financial officer (CFO), and chief technical officer (CTO). In some companies, the CEO will also sit on the board of directors as the managing director (MD).
After Incorporating in Canada: Ongoing Obligations and Costs
After incorporating in Canada, you will now enter the maintenance phase of running a corporation. Besides running the business side of the business, these are some of the ongoing obligations and costs you will need to address:
Federal Annual Return
Every federal corporation must file its Annual Return with the government at a cost of $12 (online) and $40 (email or mail) per filing. Ontario Business Central can assist you with filing the Annual Return online. File your Federal annual return today!
Minutes and Records
You must maintain all company records in an orderly manner, especially minutes and financial records like share records and books of account. You can use paper records for this or use a digital record-keeping tool like Google Docs to save all required documents.
The cost of legal compliance will vary depending on the type and size of the business. Some of the legal requirements you will need to comply with include tax laws, labor laws, and credit laws. You might need to hire a CPA or other professionals to assist with this.
Shareholder and Board Resolutions
Any decisions made by shareholders or the board must be recorded and included in the corporate minute book. Some changes included in the Notice of Change such as director, officer, or address changes are required to be filed with the government. Ontario Business Central can assist with Notice of Changes to the province or Federal government to add/remove directors, change addresses, or update positions.
The cost to incorporate in Canada includes a combination of one-off costs and recurring costs besides non-tangible costs like time and due diligence. As a founder or small business owner, preparing for direct costs as well as incidental costs of incorporating can help you weigh whether you are ready to incorporate or not.
If you choose to incorporate, remember that you can include the cost of incorporation in Canada as a tax-deductible business expense. In this way, you can absorb the cost and transform your small business into a corporation that can grow with no limits.
We hope you find this information useful in your pursuit of entrepreneurship. Feel free to reach out to us directly if you have any additional questions.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. When you have legal or accounting questions, it is always recommended that you speak to a qualified professional.
Laura Harvey is an entrepreneur herself as the owner of Ontario Business Central Inc. Her passion has always been about supporting the entrepreneurial spirit and advancement within Canada.
Laura authors in-depth blogs for Ontario Business Central assisting entrepreneurs and business owners to start, manage and grow their businesses. She has almost 30 years of expertise as a corporate specialist and 25 years of being an entrepreneur. Laura has the unique position of supporting a community that she also belongs to. She walks the walk right along with you.
You can find Laura on Linkedin and Twitter.