Is Incorporating Your Business Worth It?
Exploring the Advantages of Changing from a Sole Proprietorship to a Corporation
For small business owners, the decision to change from a Sole Proprietorship to a Corporation is an important one. A Sole Proprietorship is the simplest and most common form of business structure in Canada, but it has limitations in terms of liability protection, name protection and taxation. A Corporation, on the other hand, offers greater protection from personal liability and can provide tax benefits along with business name protection. In this article, we will discuss the steps involved in changing from a Sole Proprietorship to a Corporation within Canada, and provide answers to commonly asked questions.
What is a Sole Proprietorship?
A Sole Proprietorship is a business that is owned and operated by a single individual. It is the simplest form of business structure in Canada and is relatively easy to set up. The owner of a Sole Proprietorship is personally responsible for all aspects of the business, including debts and legal liabilities. As a result, sole proprietors have unlimited liability and are personally liable for any debts or obligations of the business. A Sole Proprietorship does not offer the business name protection. Currently, thousands of new business ventures are created daily, a Sole Proprietorship does not offer any name protection for the business name leaving the Sole Proprietorship business name exposed for others ventures to use and protect.
What is a Corporation?
A corporation is a separate legal entity from its owners. It is owned by shareholders, who have limited liability and are not personally responsible for the debts or obligations of the corporation. In Canada, corporations are registered with the federal or provincial government, and are subject to specific rules and regulations.
Why Change from a Sole Proprietorship to a Corporation?
There are several reasons why a business owner might choose to change from a sole proprietorship to a corporation. One of the main advantages of incorporating is the limited liability protection that it offers. As a separate legal entity, a corporation can shield its shareholders from personal liability for the debts and obligations of the business.
In addition, corporations can provide tax benefits. As a sole proprietor, all income from the business is taxed at the owner’s personal tax rate. However, with a corporation, income can be split between the corporation and its shareholders, potentially resulting in a lower overall tax rate.
Another advantage of incorporating is that it can make it easier to raise capital. Corporations can issue shares of stock to investors, which can be an attractive option for those looking to invest in a growing business.
Steps to Change from a Sole Proprietorship to a Corporation in Canada
Step 1: Choose a Name for the Corporation
The first step in incorporating a business is to choose a name for the corporation. Typically, a Sole Proprietorship business name is provided along with a legal ending such as”Corporation” or “Inc. from the original registration. The hope is that the business name is available and you will be able to simply transfer the business name to the corporation with the selected legal ending.
The name must be unique and not already in use by another business such as a corporation or Trademark, If the Sole Proprietorship business name has already been protected by a third party, it is best to take the opportunity to rebrand and select a new business name to the incorporation.
Step 2: Choose a Jurisdiction
Next, you will need to choose a jurisdiction in which to incorporate your business. In Canada, you can incorporate at the federal level or in a specific province or territory. Each jurisdiction has its own requirements and regulations, so it is important to research the options and choose the one that is best for your business.
Ontario Business Central is a Canadian-based company that offers business registration and incorporation services in several provinces in Canada, including Ontario Incorporations, Alberta Incorporations, British Columbia Incorporations , Manitoba Incorporations, Saskatchewan Incorporations, and Federal/Canada incorporation.
The process of incorporation varies depending on the province you are incorporating in, and Ontario Business Central can guide you through the process and provide you with the necessary documents and support. We offer various packages that include name searches, articles of incorporation, bylaws, and other documents required to incorporate your business.
With most jurisdictions, there are a minimum percentage of directors who are required to be either Canadian Citizens or Permanent Residents. The jurisdictions that do not have this requirement and are available fully to incorporate with non-residents to Canada are Ontario and British Columbia.
Step 3: Choose Directors and Officers
Incorporating a business requires the appointment of at least one director and one officer. The director is responsible for managing the affairs of the corporation, while the officer is responsible for the day-to-day operations. These roles can be filled by the same person or by different individuals.
What are the most common officer positions used in a corporation?
The most common officer positions for a corporation within Canada are:
- President: The President is typically the highest-ranking officer in the corporation and is responsible for the overall management of the company’s operations.
- Vice-President: There can be one or more Vice-Presidents, and their responsibilities vary depending on their area of expertise. For example, a Vice-President of Finance would be responsible for the financial operations of the corporation.
- Secretary: The Secretary is responsible for maintaining the corporation’s records, including minutes of meetings, bylaws, and other important documents.
- Treasurer: The Treasurer is responsible for the corporation’s finances, including financial planning, budgeting, and reporting.
- Director: Directors are elected by the shareholders to oversee the management of the corporation and ensure that it is operating in the best interests of its shareholders.
These officer positions are not exhaustive, and some corporations may have additional officers or officer positions with different titles and responsibilities. It is important to ensure that the officers appointed by the corporation comply with the requirements under the applicable legislation and the corporation’s articles and bylaws.
Step 4: File Articles of Incorporation
The next step is to file Articles of Incorporation. This document outlines the basic information about the corporation, including its name, address, directors, officers, and share structure. There may be fees associated with filing the Articles of Incorporation.
Step 5: Obtain a Business Number and Register for Taxes
Once the Articles of Incorporation have been filed and approved, the corporation will need to be provided a Business Number automatically from the Canada Revenue Agency (CRA) If you require other applicable taxes, such as the Goods and Services Tax (GST) or HarmonizedSales Tax (HST) or payroll, once you receive the BN number, you can apply for the additional accounts where applicable.
The CRA will also provide the corporation with a Corporate Income Tax Information package, which outlines the tax requirements for corporations.
Step 6: Open a Corporate Bank Account
In order to operate as a corporation, it is important to have a separate bank account for the business. This helps to maintain clear financial records and ensures that personal and business funds are kept separate. To open a corporate bank account, the corporation will need to provide proof of incorporation with the Articles of Incorporation and other relevant documents. The director or directors of the corporation will be required to provide photo identification such as driver’s license or passport as well.
Step 7: Transfer Assets and Contracts to the Corporation
Once the corporation is established, it is important to transfer any assets and contracts from the Sole Proprietorship to the Corporation. This can include physical assets such as equipment and inventory, as well as contracts with suppliers or customers. It is important to consult with legal and financial professionals to ensure that these transfers are done correctly and do not result in any legal or tax issues.
FAQs Incorporating a Sole Proprietorship to a Corporation
Q: How long does it take to incorporate a business in Canada?
A: The length of time it takes to incorporate a business in Canada can vary depending on the jurisdiction and complexity of the business. In general with the availability of online processing, the incorporation can take place the same day to 3 or 4 business days.
Q: What are the costs associated with incorporating a business in Canada?
A: The costs of incorporating a business in Canada can vary depending on the jurisdiction and the complexity of the business. There are fees associated with filing the Articles of Incorporation, as well as ongoing fees for maintaining the corporation. The fees range from $450 to $750. You can reach out to our staff or check out our website to gain a full account of the fees required to incorporate in the jurisdiction you wish..
Q: Can I continue to operate my Sole Proprietorship while incorporating?
A: Yes, it is possible to continue operating your Sole Proprietorship business while incorporating. However, it is important to transfer over the business operations once the incorporation has been completed to ensure that you are following all of the legal requirements and are not engaging in any activities that could result in legal or tax issues.
What are the ongoing requirements for maintaining a corporation in Canada?
Corporations in Canada are subject to ongoing requirements, such as filing Annual Returns and maintaining accurate financial records. A corporation has the obligation to file a separate tax return as it is now a separate entity from the individual who owns the corporation. It is recommended to consult with legal and financial professionals to ensure that you are meeting all of the requirements.
Changing from a Sole Proprietorship to a Corporation can offer several advantages for small business owners in Canada, including limited liability protection and tax benefits. However, it is important to carefully consider the requirements and costs involved in incorporating a business. By following the steps outlined in this article and seeking professional advice, business owners can successfully transition to a corporation and take advantage of the benefits that it offers.
Why Use Ontario Business Central?
Ontario Business Central (OBC) is a trusted and experienced company that specializes in assisting small business owners with the process of incorporating a business in Canada. There are several reasons why OBC may be a good choice for those looking to change from a sole proprietorship to a corporation.
OBC has over 30 years of experience in helping businesses of all sizes and types to incorporate in Canada. This experience ensures that the process is smooth and efficient, and that all necessary steps are completed correctly.
We offer a comprehensive service that includes the completion of the cancellation of the Sole Proprietorship and the search for availability of the Sole Proprietorship name as a corporate name. This can save business owners time and money, as they do not have to navigate the complex legal requirements on their own.
A low-cost solution for business owners who want to incorporate their business. This can be especially beneficial for small businesses that may not have a large budget for legal and administrative expenses.
We are known for its professional and reliable service. They have over 700 five-star Google reviews, which is a testament to their commitment to providing high-quality service to their clients.