Are you ready to incorporate?

There are two main things to consider when deciding whether to incorporate or not.

Limited liability

The first is do you require a limitation of your liability.When you choose to incorporate, you establish a clear separation between your personal and business assets. This is important, as an Innovation, Science, and Economic Development Canada study concluded that only about 70% of all small businesses survive beyond their first five years.

By incorporating, if your company encounters financial difficulties, your personal assets remain safeguarded and unaffected. On the contrary, if you opt for a sole proprietorship or partnership without incorporating, you retain personal liability for the business debts, putting personal assets at risk.

It's important to also note that there are instances where directors can still be personally accountable for a business's debts, provided certain conditions are met.

Common examples include:

• Unpaid employee wages and vacation pay: Up to six months’ wages and 12 months’ vacation pay.

• Employee source deductions and remittances: Includes source deductions for employee income taxes, EI and CPP contributions.

• GST/HST Remittances: This includes GST/HST that has been collected by the corporation but was not remitted to the government.

How to incorporate your business in Canada

Establishing a corporation becomes more manageable when you break down the process into distinct tasks. To incorporate your business in Canada, let's examine the individual steps. By systematically following these steps, you can successfully incorporate your business while ensuring compliance with legal requirements from the outset. This approach helps you avoid the hassle of addressing mistakes later on.

Choosing a business name

Choosing a name for your business may initially seem daunting, but it's ultimately an enjoyable process. Keep in mind that you have the option to initially incorporate as a numbered company (e.g., 12345678 Canada Inc). This allows you the flexibility to choose a name later or, if your business doesn't have a public-facing presence, operate without a legal name. However, most entrepreneurs are enthusiastic about officially naming and registering their businesses.

To begin, decide on the formal legal name for your business, noting that it may differ from your brand name.

Ensure your chosen business name meets three legal requirements, comprising a distinctive element, a descriptive element, and a legal ending:

[Distinctive] + [Descriptive] + [Legal Ending]

For instance: Empire Mechanical Inc.

BAs a bonus step, conduct a trademark search to ensure your desired name hasn't been registered by someone else. You can perform a free search through the Canadian Intellectual Property Office.

A crucial point about trademarks is their association with specific goods or services. This means that you might still use a registered trademark if it's your preferred name, as long as your intended use pertains to a different industry.

Filing Articles of Incorporation with government

Once you've settled on your business name, the next step involves submitting the initial registration forms to the government. During this phase, you'll be required to establish your share class structure and designate the initial directors for your company.

Pay incorporation fees

The federal and provincial governments charge a fee for incorporation, so be prepared to pay this when you file your Articles of Incorporation.

Company formation documents

Submitting documents to the provincial or federal corporate registry is just one part of the process when incorporating your business. Equally crucial is the creation and signing of all your company formation documents, including Corporate Bylaws, Shareholder and Director Resolutions, Director Consents, Share Subscriptions, and Share Issuances.

Failing to secure these documents and establish your company correctly from the outset poses significant risks. These risks range from having no designated owners (if shares were not issued to shareholders) to encountering difficulties in attracting investors. Over time, these risks can escalate, leading to more substantial costs for correction compared to the initial setup.

A common query arises: Are company formation documents, also known as minute book documents, genuinely necessary?. This Government of Canada article goes into detail about the different documents that a corporation must prepare and keep.

Federal versus provincial incorporation

In Canada, you have the choice of incorporating provincially or federally. Opting for federal incorporation also necessitates registering the company in the province where your business is situated.

While distinctions between provincial and federal incorporation are sometimes overstated, both options empower the company to operate nationally and serve clients globally.

The primary advantage of federal incorporation lies in enhanced name protection. By choosing this route, your business name becomes registered across all of Canada, as opposed to just one province.

Another disparity between federal and provincial corporations pertains to director requirements. Federal corporations mandate that at least 25% of the directors must be Canadian residents. In contrast, several provinces and territories, including Alberta, British Columbia, and Ontario, do not impose Canadian director residency requirements.

Different roles in a corporation

There are three major roles in a corporation: shareholders, directors and officers. It’s common in small businesses for one person to be the sole shareholder, sole director, and sole officer.

Shareholder

A shareholder is an individual who possesses shares in a company, with each share representing a unit of ownership.

Legally distinct from the company, shareholders typically bear no liability for the company's debts, unless a shareholder has explicitly signed a personal guarantee on behalf of the company.

Director

A director bears the overarching responsibility of supervising the corporation's activities and strategic direction. Together, these directors constitute the Board of Directors.

The appointment of a director is carried out by the shareholder(s) of the corporation.

Officer

Officers play a vital role in actively operating and managing the business.

A company has the flexibility to establish various officer positions based on its specific needs. Common officer titles encompass roles such as President, Secretary, CEO, Vice-President, and Treasurer, and it's possible for a single individual to hold multiple positions concurrently.

Directors appoint officers to oversee the corporation's day-to-day operations, entrusting them with the responsibility of running the business efficiently.

After incorporation: Ongoing obligations

Following the incorporation of your business, there is a responsibility to uphold specific documents and records. To retain the legal and tax advantages associated with incorporation, it is essential to ensure that your corporation remains current and complies with relevant laws. The three key elements that every company must keep up-to-date are:

Minute book and share records

Maintaining your company documents in an organized manner is a legal requirement.

Company updates

Whenever there are changes in your company details, such as the addition of a new director or a modification of the registered address, you are obligated to submit forms to the government and draft corporate resolutions that formally endorse the company changes.

Annual return and resolutions

Annually, your company is required to submit an annual return to the government, accompanied by the associated fees (ranging from $20 for a federal corporation to $50 for an Alberta corporation).

Additionally, annual shareholder and director resolutions need to be prepared, even for single-person corporations. These documents are mandatory to maintain compliance, and failing to file the annual return may lead to the government dissolving your company.

Ready to start your business? Either get the process started directly via Ownr (this link provides 15% off) or contact us and we can take care of the process for you.