How to Incorporate a Business in Canada.
March 14, 2022
Below is a guest blog submission from H&R Block’s partner, Ownr.
Incorporation is a big decision for an entrepreneur, and there is a lot of advice out there that can make it seem more complex than it needs to be. But never fear, this article is an in-depth collection of Ownr’s insights on incorporating a business in Canada.
Let’s get started!
1) When are you ready to incorporate?
There are two main drivers when considering whether to incorporate your business: limited liability and taxes.
The benefits of limited liability can’t be stressed enough. By incorporating, you will separate your personal and business obligations. This is crucial, as an Industry Canada study found that only half of all small businesses survive past their first five years.
Generally, with limited liability, shareholders would be liable up to the amount that they invested in the company, since the company would be considered a separate legal entity. But keep in mind there are exceptions to this rule as well.
If you don’t incorporate and choose to operate your business as a sole proprietorship or partnership, there is no separation between you and your business, which means, as the owner, you will be responsible for all debts, losses and risks. This can also put your personal property like your home, car, etc. at risk.
NOTE: There are times when directors can remain personally liable for a business’s debts if certain preconditions are met. The most 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.
Corporations are taxed differently than individuals. In Canada, the tax rate on corporations is lower than the tax rate for individuals, and there are more tax reductions available to incorporated small businesses. Whenever you can leave some money in the corporation, rather than transferring it to your personal account, this can reduce the amount of taxes you pay. You also have the flexibility of choosing how you get paid. You can pay yourself in salary, dividends or a combination of both, depending on what will result in the lowest tax burden.
For example, in Ontario, a Canadian Controlled Private Corporation (a corporation owned primarily by Canadian residents) pays a tax rate of 12.2% on the first $500,000 of income each year and 26.5% for all income beyond that. As a business owner, if you can leave money in the company and not take it all out for personal expenses, you can increase the value of your company’s assets and pay less in taxes. This means that the money you leave in your company could be used to invest back into the business: for example, to spend on marketing, buy new equipment, purchase additional inventory or hire new staff. Also, keep in mind that you only pay personal taxes on the money you withdraw from the corporation.
2) What are the benefits of incorporating?
On top of the limited liability and tax benefits mentioned above, there are at least four other clear benefits of incorporating your business:
If you want investors to invest in your company, you’ll need to be incorporated. Without being incorporated, you won’t have shares to sell to investors.
When working with clients, your business comes across as more professional when it’s incorporated. Invoices are sent with your incorporated business name (ending in Inc., Ltd., or Corp.). This shows your clients that you have thought about the long-term life of your business and take your business seriously.
Corporations can be transferred among individuals by simply selling or transferring shares. This makes long-term succession planning much easier.
Corporations are not limited to the lifespan of the owners. They can exist and be passed down through multiple owners.
3) How to incorporate your business in Canada
a) Choosing a business name
Choosing a name for your business can be a little stressful, but ultimately, it’s a fun exercise. Keep in mind, you can always incorporate a numbered company (12345678 Canada Inc.). You can choose a name later or, if you don’t have a public-facing business, you can operate without a commercial name. But most entrepreneurs are excited to give their business a name and have it legally registered.
First, decide on what you would like to call your business. Remember that this is your formal legal name. It’s not necessarily the same as your brand name.
Next, make sure your business name satisfies three legal requirements. It must have:
- A distinctive element,
- A descriptive element,
- A legal ending:
[Distinctive] + [Descriptive] + [Legal Ending]
For example: Rhino Ice Cream Inc.
Bonus step: trademark search. Have a look through Canadian Trademarks to see if anyone else has registered a Trademark on your desired name. You can conduct a free search with the Canadian Intellectual Property Office here.
One final note about trademarks: they are tied to specific goods or services. This means that you may still be able to use a registered trademark, if that’s your desired name, as long as you intend to use the same name in a different industry.
b) Filing Articles of Incorporation with the government
After you’ve decided on your name, you’ll need to file the initial registration forms with the government. For this step, you’ll need to determine your share class structure (see #5 below) along with deciding on the company’s initial directors (see #4 below).
With Ownr, we automatically file your initial registration documents with the government by collecting all required information during your onboarding. Learn everything you need to know about articles of incorporation.
c) Company formation documents
Filing documents with the provincial or federal corporate registry is only half of what’s required when incorporating your business. You also need to create and sign all your company formation documents: Corporate Bylaws, Shareholder and Director Resolutions, Director Consents, Share Subscriptions and Share Issuances.
There are significant risks if you don’t to get these documents and setup your company properly from the start.
Some risks include:
- Having no owners in your business (because shares were never issued to shareholders)
- Not being able to have investors
These risks can increase over time and cost more to fix.
We often get the question: are company formation documents (otherwise known as minute book documents) really necessary? The short answer is yes. This Government of Canada article goes into detail about the different documents that a corporation must prepare and keep.
With Ownr, we automatically prepare all company formation documents. Based on the information you provide during the onboarding process, our technology customizes all documents for your business, sends them out for eSignature and, once signed, saves them all in your Ownr account.
How much does it cost to incorporate a business in Canada?
The total cost to incorporate on Ownr is between $499 and $699, depending on your location. This includes all government fees, name search fees, company formation documents, as well as 12 months on the Ownr platform. Get started and incorporate in minutes with Ownr.
4) Federal versus provincial incorporation
In Canada, you have the option of incorporating provincially or federally. If you choose federal incorporation, you’ll also need to register the company in the province where your business is located.
The differences between incorporating provincially or federally are often exaggerated. Both options allow the company to operate in all provinces and service clients from anywhere in the world.
The main benefit of incorporating a federal corporation is that it provides your company with increased name protection. Your business name will be registered throughout Canada (rather than just one province).
Another difference between a federal and provincial corporation is the requirement for the directors of the corporation to be Canadian residents. Federal corporations require that at least 25% of the directors of a corporation must be resident Canadians. There are no Canada director residency requirements for Alberta, British Columbia, Ontario and several other provinces and territories.
One of the downsides of federal corporations is that in some areas, they can take extra work to register and, depending on the province, can cost more money. With Ownr, however, we’ve automated all the additional paperwork for federal corporations in Ontario and it’s actually less expensive to incorporate a federal corporation than an Ontario provincial corporation.
5) 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.
A shareholder is a person that owns shares in a company. The unit of ownership is called a share.
Shareholders are legally separate from the company. As a result, shareholders are generally not responsible for the debts of a company (unless a shareholder has signed a personal guarantee on behalf of the company).
A director has overall responsibility to oversee the activities and strategy of the corporation. Collectively, the directors are called the Board of Directors.
A director is appointed by the shareholder(s) of the corporation.
Officers actively operate and manage the business.
A company can have several different officer positions. Companies can create whatever officer positions suit them. Common examples of officer titles include President, Secretary, CEO, Vice-President, and Treasurer. These can all be held by the same person.
Officers are appointed by the directors to run the day-to-day operations of the corporation.
6) How to structure your corporation?
The number of shares owned by each shareholder reflects the proportion of the company they own. But that doesn’t mean all shareholders are equal. When first incorporating your company, you can create multiple share classes to allow different groups of shareholders to have different rights and privileges over the company.
Also, it’s important to remember that you can choose to have multiple share classes when you incorporate, but you don’t need to issue shares in each share class in the beginning. For example, you could choose to have your company structured with three share classes: Class A Common Voting Shares, Class B Common Voting Shares and Class C Common Non-Voting Shares, but only issue shares in Class A.
So what are the different types of share classes? We’ve provided a basic overview below:
a) Voting and non-voting shares
The most common difference among share classes is the ability to vote on matters relating to the business. Voting shares will be held by those shareholders who want to actively participate in the decision-making process (like the founders, directors, senior managers, etc.). Non-voting shares are intended for shareholders who wish to benefit from the company’s long-term growth, but don’t really want to get involved in high-level decisions (for example, employees).
b) Common shares
Common shares are the standard shares in the corporation. As the corporation grows and becomes profitable, the value of the Common Shares will increase.
Common Shares don’t have any special priority over the corporation’s assets. If the corporation stops operating, the holders of common shares will be paid out in proportion to their ownership stake.
The directors can declare and pay dividends on common shares at any time and in any amount (with some exceptions regarding retained earnings).
c) Preferred shares
Preferred shares are shares that have specific privileges or restrictions. For example, some preferred shares can have a certain number of votes, can be eligible to receive dividends, can have certain values of shares and more.
However, it is important to understand that preferred shares aren’t necessarily more valuable than common shares. Preferred shares usually have a limit on the amount they can increase in value over time. They are often issued for tax-planning reasons on the advice of an accountant.
7) After incorporation: ongoing obligations
After incorporating, your business has an obligation to maintain certain documents and records. In exchange for the legal and tax benefits of incorporating, you are expected to keep your corporation up-to-date and in compliance with the law. There are three main things that every company is legally required to keep up-to-date:
a) Minute book and share records
You are required to keep your company documents in an organized manner. This can be in an old-fashioned paper binder or, like we do at Ownr, through a secure electronic minute book.
b) Company updates
Anytime your company details change (like when you want to add a new director or change your registered address), you must file forms with the government and prepare corporate resolutions, which officially approve the company changes.
Ownr automatically takes care of all this paperwork on an ongoing basis: automatically preparing and filing forms with the government, preparing the required corporate resolutions, gathering e-signatures and securely storing all documents back into your account.
c) Annual return and resolutions
Each year, your company will need to file an annual return with the government and pay the associated fees (which can range from $12 for a federal corporation to $50 for an Alberta corporation).
You’ll also need to prepare annual shareholder and director resolutions. These are all mandatory documents for your business to stay compliant. If you fail to file the annual return, the government can dissolve your company, which means your company will no longer have legal existence and be closed.
Ready to start your business? H&R Block has partnered with Ownr, and they have helped over 60,000+ entrepreneurs hit the ground running quickly—and affordably. Plus, they are offering H&R Block clients a 25% savings on digital business incorporation. If you have questions about how to register or incorporate your business, email us at firstname.lastname@example.org.