Have you ever wanted to start your own business? If you are based in Canada, then you should seriously look at incorporating under federal law. It’s incredibly easy to register a new corporation, and you don’t even need to go through a lawyer. File online, and you’ll be incorporated by the next day!
Before we get started, the usual disclaimer: I am not a legal expert, and this article in no way constitutes legal advice. It’s possible that this article contains factual errors or omissions. Follow this advice at your own risk, and do your own due diligence before taking any action.
What are the advantages of incorporation?
- Separate legal entity. A corporation acquires a life of its own that continues to exist even beyond the life of the founders. It can acquire assets, enter into debt, and enjoy many of the other rights and obligations of a natural person.
- Limited liability. Generally speaking, a shareholder of a corporation will not lose more than their initial investment. As a director and manager of the corporation, you may still be exposed to personal loss, since many banks will want personal assets as collateral. The corporate veil also does not protect you from criminal negligence and harm.
- Small-business tax rates. An incorporated small-business that keeps a significant amount of its income in the business may pay significantly lower taxes.
There are, of course, a few downsides as well, including higher startup costs and more paperwork to do.
Small-business tax rates
Let’s look at the small-business tax rates in more detail.
If you run a Canadian-controlled private corporation (a CCPC), and your business is based in and operates out of Canada, then you could be eligible for the small-business deduction. This allows you to save greatly on the tax rates that you would otherwise have to pay, up to $500,000 in income.
The federal small-business tax rate is 11%. See below for the provincial rates, and the combined rates (note that the provinces may have their own income limits and stipulations which apply to the provincial rate).
|Province||Provincial rate||Combined rate|
|Prince Edward Island||1.00%||12.00%|
|Newfoundland and Labrador||4.00%||15.00%|
Western Canada is the best place to run a small business in terms of tax rates, though Prince Edward Island is a good exception at a combined rate of 12%. Québec, as usual, is by far the highest-taxed province with a combined rate of 19%, even for small businesses.
1. How do I incorporate federally?
If you’ve decided to incorporate federally, then you’ll need to submit the following:
- A NUANS name search report.
- Articles of Incorporation.
- Board of Directors information.
You’ll also pay about $220.48 for everything.
The online process will guide you through all of these in detail.
- Come up with a name. The first thing you need to do is to run a NUANS name search, to ensure that your name is available for use across Canada. This will cost you $20.48 (April 2012). Once you have your NUANS report, you can then pre-confirm your name with Corporations Canada. This will ensure that you can use this name to carry out business in Canada. The responsibility will still be on you to ensure that you don’t violate any trademarks with your name; in addition, you also need to register a trademark if you want to trademark your business name. You’ll also need to be prepared to defend your trademark.
- File your Articles of Incorporation. Once you’ve confirmed your name, you can then go through the actual registration and file your application online. What this means is that you will file your Articles of Incorporation and submit your Board of Directors information.
I highly recommend reading the 2011 Guide to Federal Incorporation, which has a TON of information and valuable resources to help get you started.
When filing your articles of incorporation, here are the things you need to enter:
- Classes of shares.
- Restrictions on share transfers.
- Number of directors.
- Restrictions on business activities.
- Other provisions.
If you are incorporating yourself, none of this will be very complicated. The most important part is the restrictions on share transfers. If you want to be a private corporation and not subject to the onerous regulatory requirements of public trading, you need to be specific on what you put, here. Thankfully, the online registration website makes it very easy to fill this in.
You will also need to put the names and addresses of the incorporators; these are the founders of the corporation. They do not necessarily have to be the same people as the directors.
ARTICLES OF INCORPORATION
Acme Amalgamated, Inc.
Province/territory of registered office
Classes and quantity of shares
The corporation is authorized to issue an unlimited number of common shares.
Restrictions on share transfers
See attached schedule
Minimum and maximum number of directors
1 – 3
Restrictions on the business the corporation may carry on
See attached schedule
John Smith, [Address], [Signed].
SCHEDULE: RESTRICTIONS ON SHARE TRANSFERS
The right to transfer shares of the Corporation shall be restricted in that no shareholder shall be entitled to transfer any share or shares of the Corporation without the approval of:
1. the directors of the Corporation expressed by resolution passed by the votes cast by a majority of the directors of the Corporation at a meeting of the board of directors or signed by all of the directors of the Corporation; OR
2. the shareholders of the Corporation expressed by resolution passed by the votes cast by a majority of the shareholders who voted in respect of the resolution or signed by all shareholders entitled to vote on that resolution.
SCHEDULE: OTHER PROVISIONS
RESTRICTIONS ON SECURITIES TRANSFER: The corporation’s securities, other than nonconvertible debt securities, shall not be transferred without either (a) the sanction of a majority of the directors of the corporation, or (b) the sanction of the majority of the shareholders of the corporation, or alternatively (c), if applicable, the restriction contained in security holders’ agreements.
Any vacancy on the board of directors shall be filled by a vote of the shareholders.
You don’t have to worry about copying these provisions, since the online system will let you select them automatically from a template when you go through the process of registering online.
You will also need to file your Initial Registered Office Address and First Board of Directors. This is super-straightforward to do. All you need to do is enter your primary address of business, and enter the names and addresses of your directors. You can personally be a shareholder, director, AND an officer of the corporation, so there is no need for these to be different people.
2. How do I incorporate provincially?
After incorporating federally, you’ll also need to register the corporation provincially. Note that this usually does not mean you also incorporate in the province, so be careful about how you proceed! Usually what this means is that you have to register your federal incorporation in the province(s) where you plan to conduct business.
Unlike the Canadian government, some provinces also like to take their slow, sweet time. I’ve been waiting for more than a week for my registration to go through (and I never did receive the documents for my sole proprietorship).
3. Permits and other formalities
You’ll also want to register for a Business Number, which you’ll need for opening a Goods and Services Tax/Harmonized Sales Tax account. If you expect to sell more than $30,000 worth of goods and services in a year, then you’re required to collect sales taxes and remit them to the government. Each province has its own schedule of sales tax, and it also depends on whether you are selling the product within the province, or if you are selling from out of province.
See this guide to charging and collecting sales tax for more information.
You’ll also need to check with all other federal, provincial, and municipal regulations and bylaws to see if there are other permits required.
Congratulations, you are now incorporated!
In my next post on this topic, I’ll look at the formative activities when starting a corporation, as well as other duties you need to be aware of. Good luck! 🙂