Incorporating Your Business: Provincial Or Federal?
As a business owner, you must register your business with the government. You may also choose to incorporate your business, rather than operating as a sole proprietor or partnership. Some of the benefits of incorporation are:
- Separate Legal Entity: By incorporating, your company becomes a legal entity with the same rights and obligations as a person. The corporation’s legal assets are then the property of the corporation, rather than the shareholders. Under the law, a corporation can sue or be sued, acquire assets, and enter into contracts.
- Limited Liability: In a corporation, the shareholders are not held liable for any debts, nor will they lose any more than their investment if the corporation goes bankrupt.
- Lower Tax and Loan Rates: Corporate tax rate is lower than individual tax rate. Corporations may also find it easier to borrow money at lower rates, since they are seen as lower risk.
Once you’ve decided to incorporate, you have to decide whether you want to incorporate federally or provincially. This decision should be made based on the type of business you do, and where you do it. Incorporating federally allows you to operate under the same name, nationwide. Considerations when it comes to incorporating federally include:
- You must choose a corporate name that is unique across all of Canada, where as when you incorporate provincially, your name only needs to be unique to that province.
- Shareholder rights can differ slightly between provincial and federal incorporation.
- Federal incorporations require that Canadian citizens makeup 25% of the board.
What’s the simplest way to determine what’s right for your business? If you are definitely planning to do business nationwide, then it is necessary to incorporate federally. However, if there is little to no chance you will be conducting business outside of your province, it is faster and simpler to incorporate provincially. When incorporating, it’s important to consult a corporate lawyer. They will be able to assist you in all matters, especially when it comes to shareholder’s rights and any other board issues.
