Corporation is a distinct and separate legal and tax entity from its owner(s). A corporation has its own rights, privileges and liabilities distinct from those its owners or managers. A corporation is owned by its shareholders and is managed and controlled by its board of directors who appoint the officers and agree on the policies and transactions to be undertaken by the corporation. A corporation can be a provincial (registered only in Ontario) or federal (registered all over Canada). We will be happy to discuss the details of each type of corporation with you, including the pros and cons of incorporating provincially vs. federally, and whether to incorporate as a numbered company or with a name.
Real Estate Corporations (PREC): Ontario Govt. (w.e.f. Oct. 01, 2020) has now allowed Real Estate Agents to incorporate themselves under the Personal Real Estate Corporation (PREC). There are some pros and cons you should compare before making the final decision. We will be happy to discuss these in detail with you.
This is the simplest form of operating a business. A sole proprietorship is an unincorporated business that is owned by one individual. The business has no existence apart from the owner. Only one owner is responsible for making all of the business decisions and, therefore, earns all the profits, but also assumes all of the risks and obligations. The owner includes the income and expenses of the business on his or her personal T1 tax return.
A partnership is a relationship between two or more persons carrying on a business with a view to making a profit. Some individuals choose a partnership as the manner in which to carry on a business because of its ease of formation and dissolution, as well as its overall lack of formalities. However, like a sole proprietorship, one of the primary disadvantages to choosing a partnership as your business form, includes the unlimited personal liability of each partner for all of the debts and obligations of the partnership. In other words, every partner is liable for all the debts incurred by the other partners while acting in the course of business, regardless of the capital contribution of individual partners. Also, the owner may be liable for the actions of employees in the course of their employment.
HOW TO REGISTER A BUSINESS OR INCORPORATE A COMPANY?
The first step is to decide what type of business you want to register: a corporation, sole proprietorship, or partnership. Once you have made that decision, we will help get your business registered.
Moreover, when you register your business or incorporate a corporation with the government’s registration division, you still have to register with the tax department (CRA). You may be required to apply for GST/HST number, payroll tax numbers (if you have employees) and/or Import/Export tax numbers.
TIMING: Federal company is registered usually within 24 - 48 hours. Whereas Ontario Company is registered usually within 2 hours in the same business day. Similarly Sole Proprietorship and general Partnerships are also registered in the same business day.
ANNUAL FILING FEE: There is annual return filing fee of $12 for Federal corporations every year, but there is no annual filing fee for Ontario Corporation. Master Business License is only valid for 5 years, after which it must be renewed.
WHY SHOULD I INCORPORATE MY BUSINESS
Well, while there may be several reasons not to incorporate depending on different circumstances revolving around a specific business, the only consistent reason not to incorporate would be that the business is a startup or is expecting operational losses in it’s initial year(s) of business. These losses can be deducted against other sources of personal income when they are from an unincorporated business. Losses arising from within a corporation can only be carried forward to apply against future profits from that corporation. If your business is already profitable or is expecting profits, then there is no reason not to incorporate.
The following are some of the advantages of incorporating a business. (Please note: Always seek professional advice before incorporating your business.)
Limited Liability : A corporation is a separate entity and distinct from its shareholders. It is the corporation that owns and operated the business and incurs the liabilities, not the individual proprietor. A shareholder’s liability to the creditors of the corporation is limited to the amount of his investment in the company. If a business venture involves a great deal of risk, it is preferable to incorporate the business so as to isolate and protect personal assets from corporate creditors and/or lawsuits. There are still statutory obligations and possible liability for major shareholders, directors and officers of a corporation to make sure that the corporation does not default in payments of such items as provincial and federal sales taxes, Canada pension and employment insurance contributions and employee income tax remittances. (Note: Any personal guarantees given by shareholders on behalf of the corporation to creditors will eliminate the protection of personal assets from corporate creditors.)
Lower Income Tax Rates : Reducing income taxes is generally the most appealing reason as to why businesses incorporate. While this item can be quite complicated and professional advice is always recommended, here are some of the basic tax benefits of incorporation: Lower tax rate for small business corporations (SBC’s) whose net income is less than $500,000 makes it more attractive to let earnings be taxed to the corporation as opposed to personally. (Please note, certain conditions must be met in order to qualify for the small business tax rates.)
Number of Owners : Incorporations can potentially have an unlimited number of different owners. If the business has or is planning on having a number of owners, incorporation is preferable. First, it is easier to transfer ownership in the business, as all the owners have to do is acquire or sell their shares in the company. A new partnership agreement does not have to be executed every time a new partner/owner is admitted. In addition, owners/shareholders are only liable to the extent of their shareholdings. They are not liable for the other owner’s personal debt or to their creditors as may be the case in a partnership.
Perpetual Existence: Partnerships and proprietorships cease to exist upon the death of a partner or the owner of a business. This can lead to undue hardship on the business. A corporation has a continual life of its own in spite a death or removal of a shareholder/director of the incorporation. Substantial estate planning benefits result from this aspect of incorporation.
Financing Requirements: There is potentially a greater source of capital available to incorporations. Due to limited liability, investors are more likely to invest in shares of the company providing the investment has merit, as opposed to another form of business where personal liability can extend beyond your investment into the business. Large amounts of capital can be brought in without affecting the managing control of the corporation by offering shares to the general public. The shares may be more marketable which benefits secondary dealings. Some financial institutions may require an equity position in the business prior to approving financing. Issuing shares to the lender makes this process easier.
Government Grants: Some government grants and programs are only offered to incorporated businesses.
Employees : Corporations can offer shares to their employees as a form of profit sharing incentive thereby sharing in the profits and performance of that corporation without affecting control. The performance of the company therefore affects all and is an incentive for employees to improve performance and thus improve the value of their shares and the profits the company produces.
Other Benefits : Income splitting, and estate planning are much easier to conduct from an incorporated business. Year-ends can be set to fiscal year as opposed to a calendar year, which can result in tax deferrals. Currently the capital gains exemption still exists on shares of a qualified small business corporation. Choices of receiving income in the form of salary or dividends or some combination can be made to your benefit.
COMMON QUESTIONS & ANSWERS
Q: What is a corporation?
Ans: A corporation, also known as a company, is a legally constituted entity, distinct from its owners, who are the shareholders, and the company is run by its officers with the aim of generating profits for distribution to its shareholders.
Q: What is a nuans?
Ans: A NUANS is a 5-6 page report that list all corporation, registrations and trade marks similar to your corporation. It is a mandatory filing with any named incorporation in Canada.
Q: Which jurisdiction should I incorporate in?
Ans: You can choose to incorporate federally or provincially.
Q: What are the disadvantages of incorporating?
Ans: Initial Costs - There are initial costs of starting up the company. For example, government fees are higher than other forms of business structure.
Corporate Maintenance - Companies must retain and maintain records of its business activities, hold regular meetings, elect directors and keep their shareholders informed.
Accountancy Fees - Financial statements and preparation of corporate tax returns normally require the appointment of an accountant.
Q: What is a named corporation?
Ans: Definition - A named corporation is one that is incorporated under a name, as opposed to a number.
Name Search - In order to incorporate a named corporation, a name search must first be performed to check the availability of that name. For Ontario and federal incorporations, the NUANS name report is valid for 90 days from the date of the report request.
Choosing a Name - If the name you have selected is confusingly similar to another company's name or contains words that are not permitted, for example obscene words, then it will be rejected.
Required Elements - The name you choose must have a distinctive element and a legal element. It may also contain a descriptive element but this is not compulsory.
Legal Element - For federal incorporations, you can choose from Incorporated, Corporation, Limited, Inc, Corp or Ltd. For Ontario incorporations you can choose from those for federal incorporations as well as Incorporee, Limitee, Ltee.
Q: What is a numbered corporation?
Ans: Definition: A numbered corporation is not incorporated with a name but with a number generated by the government.
Formalities: However, for all legal and government paperwork, the company will be referred to by its number rather than its operating name.
Advantage of a Numbered Corporation - It is usually speedier to process than an incorporation of a named corporation.
Disadvantage of a Numbered Corporation - It does not offer the benefit of a descriptive identity for your business.
Q: Do I need to hire an attorney to incorporate?
Ans: It depends - You do not have to hire an attorney to incorporate a company but it is advisable if you have specific requirements. We recommend that you seek legal advice from a competent attorney on any matters which you may be unsure of.
Q: What documents are required to incorporate?
Ans: Don't worry, we will prepare and file all documents either online or fax/send by mail (if necessary)
The information on this site is not intended to be a substitute for professional advice. Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage.