Common Questions About Incorporation

Written By: Jessica Kalmar, LawDepot

As the owner of a growing business, you have a lot to think about, including how to formalize your business structure. Many entrepreneurs know that incorporating is a good idea, but aren’t sure why, when, and how they should incorporate, or even what a corporation really is.

Essentially, incorporation is the process of turning a small business into a legal entity owned by a group of shareholders. The corporation acts on behalf of you and your shareholders, signing contracts, hiring employees, borrowing money, and paying taxes.

The incorporation process might seem intimidating, but in reality, it’s quite straightforward. In this post, we answer some common questions and take you through the steps of incorporating your business.

Why Should I Incorporate My Business?

It’s important to weigh the pros and cons before making the decision to incorporate, but in most cases, the gains offset any drawbacks.

Here are some of the benefits:

Limited liability

The main reason entrepreneurs incorporate their business is to separate their personal and business interests.

In a corporation, you and your shareholders aren’t personally liable for corporate debt or bankruptcy, aside from the amount you initially invested. Similarly, if you or a shareholder were to declare personal bankruptcy, any business assets would be protected from creditors.

Continuous life

Because a corporation is an entity separate from its shareholders, your company can remain in existence regardless of what happens to you or your business partners.

For example, in some business structures, the company dissolves if a shareholder leaves. However, in a corporation, shareholders can usually transfer their interest if they pull out of the business.

Tax advantages

Incorporating can provide many tax benefits, including:

• A lower tax rate, depending on the size of your company
• A reduced taxable income from capital gains exemptions on the sale of company shares
• Tax savings from income splitting with and paying dividends to family members

Improved ability to raise money

If you need a business loan, you can become more attractive to banks by incorporating. Due to their limited liability, corporations are normally regarded as lower-risk candidates for loans.

Venture capital firms and other investors favour corporations for that same reason, as well as the ease of transferring stocks to new shareholders.

Enhanced credibility

A company name ending with “Ltd.” or “Inc.” is usually viewed as stable and trustworthy. As a result, incorporating helps establish a professional identity and build legitimacy with customers.

When Is a Good Time to Incorporate?

To simplify your paperwork, you can file for incorporation at the end of the year. If your corporation comes into effect on January 1st, you’ll only have to file one set of tax forms for that year. On the other hand, incorporating mid-year means filing taxes for the sole proprietorship you operated in the first part of the year, in addition to the forms for your corporation.

Aside from that, there is no specific best time to incorporate your business, although there are a couple of factors that could sway you in that direction.

If you’re earning more than you personally need, incorporating allows you to defer paying taxes on surplus funds by leaving them in the company. You can then use those funds at a more beneficial time, such as subsidizing your income during a maternity leave or upon retirement.

If you have liability concerns (either from working in an unpredictable industry or running a business involving high-risk activities), it’s wise to protect yourself from any personal liability by incorporating.

How Do I Incorporate My Business?

While you can file the paperwork yourself or through an attorney, filing for incorporation online can be quicker, more convenient, and less expensive.

Regardless of where you incorporate, you can follow the steps below.

Step 1: Decide Where to Incorporate

In Canada, you have the option to incorporate federally or provincially.

The main difference is where you’re permitted to conduct your business. Incorporating provincially means you’ll only be allowed to operate within that province, while incorporating federally allows your corporation to operate across Canada.

Step 2: Choose a Business Name

A corporate name has three parts: a distinctive element (such as a name, a location, or even a made-up word), a term to describe the business (Consulting, Designs, etc.), and a legal suffix (such as Ltd. or Inc.).

Whether you’re just now choosing a name or already have one, you’ll need to request a corporate name search through NUANS (Newly Updated Automated Name Search), which will verify if your name is available.

Step 3: Prepare Your Documents

Before filing, you’ll need to create your Articles of Incorporation. This document is the blueprint for your business, and outlines your mission, location, business activities and restrictions, the number of directors and shareholders, share structure, and restrictions on share transfers.

Step 4: Submit Your Application

Ensure you have all of your documents in order before submitting your application online or by regular mail. These include your NUANS name search report, registered office address, board of directors list, and filing fee.

Step 5: Complete Additional Tasks

The process isn’t quite finished after receiving your certificate.

The federal government’s helpful guide describes the duties to fulfill after incorporating, such as drafting your corporate bylaws, issuing share certificates, creating a minute book, and registering your business provincially.

Investing in Your Future

As your business grows and changes, so do your financial and legal needs. There are many distinct advantages to incorporating, and depending on your current circumstances and demands, it could be the best investment you make in the growth of your company.