Should you Incorporate Your Business?
When you start a business, you’ll be staring down a long list of tasks, and among the top items should be deciding on your business ownership structure. There are three main types of business structures in Canada, each with its own advantages and disadvantages.
Carefully considering your business structure and setting it up correctly from the beginning will save you time, effort, and money in the long term. Keep in mind, it’s possible to move between ownership types if your business changes.
In this three-part blog series, we’ll look at the pros and cons of the primary business structures: the Sole Proprietorship, the Partnership, and the Incorporated Business, covered below. We recommend meeting with a lawyer and accountant for customized and professional advice on which business structure is right for you.
A corporation is a separate legal entity that offers liability protection, potential tax benefits, and more. However, it is also more complex and requires more reporting than other business structures.
What is a Corporation?
A corporation is a legal entity that is separate and distinct from its owners, known as shareholders. It is one of the most complex business structures and offers various benefits, especially concerning liability and tax advantages.
Types of Corporations
Private Corporation: Shares are not publicly traded and are often held by a small number of shareholders.
Professional Corporation: (PC) allows certain professionals to operate their practice through a corporate structure while adhering to the regulations of their professional governing bodies. In Canada, professional corporations are commonly used by doctors, dentists, lawyers, accountants, engineers, and other licensed professionals.
Public Corporation: Shares are traded on public stock exchanges, and the corporation is subject to additional regulatory requirements.
What are the advantages of a corporation?
Limited liability: Owners (shareholders) are not personally liable for business debts.
Easier capital raising: Easier to attract investors and raise capital.
Perpetual existence: The corporation continues to exist even if the owners change.
Tax advantages: Potential for tax benefits and incentives, and income splitting among family members.
What are the disadvantages of a corporation?
Complex and Costly: More complex and expensive to set up and maintain.
Regulatory Requirements: Subject to more regulations and reporting requirements.
Double Taxation: Profits may be taxed at the corporate level and again when distributed as dividends to shareholders.
Administrative Burden: Requires maintaining corporate records, holding meetings, and filing annual reports.
How to set up a corporation
You can set up a corporation yourself, you can purchase an incorporation package online, or you can meet with a lawyer to incorporate your business. We recommend meeting with legal counsel to discuss your business plans and ensure you are choosing the best structure for your situation. Check out the Government of Alberta’s website for more information on incorporating an Alberta corporation.
Choose a corporate name
Ensure the name is unique and complies with naming regulations. Conduct a name search and reserve the name if required.
2. Prepare articles of incorporation
Draft and file the Articles of Incorporation, which outline the basic details of the corporation, including its name, registered office address, share structure, and any restrictions.
3. File incorporation documents
Submit the Articles of Incorporation and any other required documents to the appropriate government authority (provincial or federal). Depending on where you plan to do business, you can establish either a provincial or a federal corporation.
4. Obtain a business number
Register for a Business Number (BN) with the Canada Revenue Agency (CRA) for tax purposes.
5. Create corporate bylaws
Draft bylaws to govern the corporation’s internal management and operations.
6. Hold initial meetings
Hold the first meeting of shareholders and directors to adopt bylaws, appoint officers, and address other organizational matters.
7. Issue Shares
Issue shares to the initial shareholders and record their ownership in the corporation’s share register.
8. Obtain Necessary Licenses and Permits
Ensure the corporation has all required licenses and permits to operate legally in its jurisdiction.
9. Register for Taxes
Register for applicable federal and provincial taxes, such as GST/HST, payroll taxes, and corporate income taxes.
Summary
A corporation is a separate legal entity that offers limited liability protection to its shareholders, perpetual existence, and the ability to raise capital more easily. While it provides significant advantages, such as credibility and potential tax benefits, it also involves more complexity, regulatory requirements, and potential double taxation. Forming a corporation involves several steps, including choosing a name, filing incorporation documents, and setting up corporate governance structures.