As a business owner, incorporating a small business is an important step in growing your business. Incorporating your business provides several benefits, including limited liability protection, tax advantages, and the ability to raise capital more easily. The decision to incorporate is a tough one and you can read more about the decision to incorporate here. Here is another article where we reviewed the business types (sole proprietor, partnership, and corporation).
Once you have made the decision to incorporate there are many other considerations you will have to make. In this blog, we’ll discuss what you need to consider when incorporating your business in Canada.
Type of Incorporation and Where to Incorporate
The first step in incorporating your business is to choose the type of incorporation that best suits your needs. There are a few options in Canada, and which you are able to choose also depends on in which province you incorporate (or if you incorporate federally). The various types and the nuances of each are best covered with your legal team to ensure you choose the right one.
Name of the Corporation
Once you’ve decided on the type/place of incorporation, you’ll need to choose a name for your corporation. The name of your corporation must be unique and must not be similar to the name of any existing corporations in the jurisdiction in which you are filing. Before you choose a name, it’s a good idea to conduct a name search to ensure that your desired name is available. You can also choose to allow the province or federal jurisdiction in which you incorporate to give you a number instead of a name. For example in BC, you would be given 6-7 digits followed by BC Ltd. This would then be your corporation’s legal name.
The process of incorporating your business in Canada involves filing articles of incorporation with the government and paying the required fees. You’ll also need to draft bylaws, appoint directors, and hold an organizational meeting. A lawyer can help guide you through the incorporation process and ensure that all necessary steps are taken.
Incorporating your business will have a significant impact on your tax situation. Corporations are taxed differently than unincorporated sole proprietorships and partnerships, and there may be tax advantages or disadvantages to incorporating your business. It’s important to speak with an accountant who can help you understand the tax implications of incorporating your business and help you make informed decisions.
For example, at incorporation, you may want to put a certain structure to the share capital which allows for future investment. You may also want to consider including family members as shareholders right from incorporation. These decisions should not be taken lightly as they can affect your tax positions down the road. They can also affect the flexibility of compensation decisions that are available. For example, dividends must be declared on a class of shares. If two spouses or partners have the same class of shares then the corporation would not be able to issue them different sizes (amounts) of dividends.
Once your business is incorporated, you’ll need to comply with ongoing reporting and filing requirements. Generally, we divide these into two buckets:
- your corporate filings such as your annual reports and dividend resolutions, and
- your tax filings.
Accountants generally take care of the tax filings while most businesses have a company lawyer that takes care of the legal requirements for maintaining the corporation such as the annual report.
In conclusion, incorporating your business is an important step in ensuring its success and growth. There are several factors you should consider when incorporating your business in Canada, including the type and jurisdiction of incorporation, the name of the corporation, the incorporation process, tax considerations, and ongoing compliance. An accountant can help you navigate the incorporation process and ensure that your business is set up for success. A lawyer is also an important professional to receive guidance from on the incorporation process. Setting it up right can save you from having to correct expensive errors later.
If you have any questions about incorporating your business, or if you’re ready to take the next step, please don’t hesitate to contact us. Our team of experienced accountants is here to help you succeed. Or if you would like to learn more on incorporating, we recommend these articles (depending on where you are located):
- Incorporating in BC
- Incorporating in Alberta
- Incorporating in Ontario
- Incorporating in Canada (Federal)
If you are in any other province, please reach out and we can refer you to the correct resource.
Virtual Heights Accounting is a CPA firm that operates in the virtual world. We provide virtual accounting and tax services to small business corporations in Canada. Contact us at www.vhaccounting.ca/contactus or follow our blog on your chosen social media source.