Original Publish Date: Apr 12, 2017
First, congratulations. Your business has most likely grown or changed to a point where creating an incorporated company is a potentially better option for moving your business forward. Your current Sole Proprietorship registration would have a Master Business Licence issued by the Province of Ontario. When you incorporate your business, you will receive Articles of Incorporation for the new business entity.
There are a few reasons people decide to change their existing businesses from a Sole Proprietor or business license to an incorporated company.
Corporate Income tax and Business Tax
One of the primary reasons entrepreneurs decide to incorporate is that the business has grown to the point where paying corporate taxes would make more sense financially. The business structure of a Sole Proprietorship, as you are probably aware, has the individual pay any business revenues through their personal tax returns. As revenues increase, it may make more sense to switch over from sole proprietorship to corporation, where the business is a separate entity from the individuals who own it. Corporations also have a much better tax rate and flexibility that is not offered to individual tax filers. As a short example, if a business under an individual earns $100,000 after business expenses, the personal tax rate commonly would be about 25 to 30 percent or $25000.00 to $30,000.00, where if that same $100,000 was maintained within the corporation and not disbursed to the individual owners, the corporate tax rate in Ontario for 2020 between the Province and the Federal government is 13.5% or $13,500.00. This kind of tax savings can be a significant reason to switch the business over and file a separate corporate tax return.
One of the most significant disadvantages to operating a Sole Proprietorship is that you are personally attached to the business liability and risk. If your revenues have increased or you are getting into an area of business that offers more personal liability risk along with the changes to your business, it may be a reason to look at switching over to a limited liability protection position by incorporating.
Building Your Brand
When you first start a business, you are ecstatic with each new sale as you see your business take off. Over time, as your business grows, so does your business name and branding exposure to the world, including other business entrepreneurs who may like and want to use your business name for their venture. As a Sole Proprietorship, your business name has absolutely no name protection against any business start-ups registering your business name after you have registered. The more traction your business gains, the more you risk others seeing your business name, and there may be more opportunity for another entrepreneur to take flight with their business using your business name. If you incorporate your business, you have name protection for that business within Ontario. If another business uses your incorporated business name or something similar, you may have the legal ability to shut down their use of your business name.
If you are looking at purchasing a property for your business or intellectual property, you may be thinking it might be a good time to switch over to an incorporated business, where the assets, including real estate, are listed separately under the corporation instead of you personally. This may also provide tax advantages to you. It is best to gain an opinion of a professional accountant.
Opportunities to land a client may be partially based on whether you are incorporated or not. Many existing businesses will only accept a business-to-business relationship with other businesses that operate as a corporation.
Historically, professionals such as lawyers and chartered accountants could only register their own businesses as Sole Proprietorships or General Partnerships. Many professionals have continued to operate under this familiar structure but may be looking now to make the switch over to a Professional Corporation for the many benefits incorporation offers, including corporate tax savings and reduced personal tax.
Succession and Estate Planning
If you are considering the longevity of your business and passing it on to either your children or an employee, it’s important to consider and provide a succession plan to avoid heavy tax implications down the road. By incorporating, if a business qualifies, you will have a lifetime capital gains exception of $866,912 for the 2020 year. Each year the capital gains exemptions are increased. To qualify, the corporation must be in operation for a minimum of 2 years, and 90 percent of the assets must be for business within Canada.
An estate freeze is a way to lock in the gains and, along with that, the capital gains tax based on the corporation’s value at a specific date. This can be used to minimize any additional taxation in years to come if the assumed guidance is that the corporation will be worth more tomorrow than its current value. It is recommended that you seek professional assistance if your intention is to get the ball rolling towards this goal so you can start enjoying the rewards of your hard work and pass the business torch to someone else.
Incorporation, is it time?
There are many things to consider when looking at switching your business from a Sole Proprietorship to a Corporation. If you decide to incorporate, the great news is that the process to switch from one to the other is pretty straightforward and easier than you think.
We have compiled a list of commonly asked questions by our clients when they reach out, considering what is involved in making the transition to an incorporated company.
Can I use the same business name?
Yes, if you wish to use the same business name as you are currently operating, you will simply need to add a legal ending to the business name from these six options:
With an incorporated company, a NUANS report is required. This report shows similar names to your proposed corporate name and will display your current Sole Proprietorship. We will ask you to confirm the Sole Proprietorship displayed within the NUANS pre-search database is yours. As long as no other existing businesses appear to be conflicting, we simply proceed to incorporate.
What else is required to Incorporate?
The required information to incorporate is very similar to the information you have provided to register your Sole Proprietorship.
- business address
- your legal name and address
- share structure (we provide the options of either 1 or 2 classes of shares for you to choose from, or you can provide your own structure)
- minimum and maximum number of directors (this is an overall view, most businesses choose a minimum of 1 and maximum of 10 directors to leave room for expansion or reduction of directors over time)
- your telephone and email address (this is solely for us to be able to communicate with you)
Can I add another person to the incorporation?
Yes, if you wish to add someone to the incorporation as a director who was not part of your original business, now is the perfect time to add them. As a Sole Proprietor, you were not able to add other partners to your business registration; however, this is not the case with incorporating, and new directors can be added to an incorporated company at any time.
How long does the process take?
We offer same-day Incorporation services Monday through Friday with orders submitted before 3 pm. If you need assistance, we are available every weekday from 9:00 am to 5:00 pm. You can incorporate in Canada either at the Federal or Provincial level.
What will I need to change after the Incorporation has been completed?
- Bank account – incorporating puts your business in a new business category with most banks. A new bank account, credit card, and other banking items may be required
- Cheques – new cheques will be needed with the business name including legal ending
- Tax accounts – HST, payroll, WSIB, etc. will need to be set up or changed
- Business cards – to reflect the new corporate name
- Letterhead – to reflect the new corporate name
- Logo – if the business name is listed
What do I do with my Sole Proprietorship after Incorporation has been completed?
It typically will take a week or two to get everything set up for the new corporation including, business bank account, cheques, business credit card etc. Once completed, you may want to cancel the current registration to put an end date to the operation of the registration. If you have existing HST, WSIB, payroll accounts with the registration, these should also be cancelled and set up under the newly incorporated company.
Besides assisting you in completing the new incorporation, we can also complete the cancellation of your current Sole Proprietorship in Ontario.
If you wish to complete a cancellation for another province, please contact our friendly and knowledgeable staff to obtain a quote today! 1-800-280-1913 or email@example.com
Provincial Incorporation Vs. Federal Incorporation
Both jurisdictions for incorporation offer the following:
- Separate entity from individual owners
- Limited personal liability
- Tax rate advantages
- Greater access to capital
- Continuous existence
- Name protection within the jurisdiction
The differences between the jurisdictions available for incorporation are as follows:
|Federal Incorporation||Ontario Incorporation||Alberta Incorporation||British Columbia Incorporation||Saskatchewan Incorporation||Manitoba Incorporation|
|Government fee of $200||Government fee of $360||Government fee of $275||Government fee of $350||Government fee of $222.75||Government fee of $350|
|Yearly mandatory filing to remain active||Only one mandatory filing after incorporation||Yearly mandatory filing to remain active||Yearly mandatory filing to remain active||Yearly mandatory filing to remain active||Yearly mandatory filing to remain active|
|Higher name protection within Canada||Name protection in Ontario only||Name protection in Alberta only||Name protection in British Columbia only||Name protection in Saskatchewan only||Name protection in Manitoba only|
|Higher foreign recognition||Limited foreign recognition||Limited foreign recognition||Limited foreign recognition||Limited foreign recognition||Limited foreign recognition|
|Name approval process?|
|Name must be accepted by Federal Examiner||Easier name acceptance||Name must be accepted by Provincial Examiner||Name must be accepted by Provincial Examiner||Name must be accepted by Provincial Examiner||Name must be accepted by Provincial Examiner|
|Director residency requirements?|
|Federal – 25% of directors must be Canadian Citizen or Permanent Resident||Ontario – 25% of directors must be Canadian Citizen or Permanent Resident||Alberta – 25% of directors must be Canadian Citizen or Permanent Resident||There is no minimum percent/residency requirement. A Non-Resident may be the sole director.||Saskatchewan – 25% of directors must be Canadian Citizen or Permanent Resident||Manitoba – 25% of directors must be Canadian Citizen or Permanent Resident|
|Timeline to Incorporate|
|Federal – Typically takes 2 business days to complete||Ontario – If ordered prior to 3pm on a business day, completed same day.||Alberta – Tiered pricing. Depending on how fast you wish to receive it back.
1-5 business days
|British Columbia – Tiered pricing. Depending on how fast you wish to receive it back.
1-7 business days
|Saskatchewan – Tiered pricing. Depending on how fast you wish to receive it back
1-14 business days.
|Manitoba – Tiered pricing. Depending on how fast you wish to receive it back.
1-5 business days. (Completed documents are mailed out)
There are advantages and disadvantages to both legal entities. Depending on the importance of name protection within Canada, name accessibility to register the corporation in other Provinces, the interaction of foreign individuals/corporations, the administration requirements, each format of incorporation has its merits and limitations.
Ontario Business Central has been supporting entrepreneurs and new business owners to establish their businesses across Canada since 1992. We are here to assist you to make the process of changing from a Sole Proprietorship to an incorporated company a seamless and, easy process where we take you step by step through the incorporation process. If you have any questions please feel free to contact our staff for additional information and assistance.
Office Hours: 9:00am – 5:00pm
Monday – Friday E.S.T.
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. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.