This article will help you understand how to incorporate a business in Canada when you're starting a business. I will tell you the benefits and disadvantages associated with incorporation, give you the step-by-step process of how to incorporate, and go over your other business structure options, like sole proprietorship, partnership and cooperative.
What is business incorporation?
An incorporated business (exact same thing as a corporation) is considered to be a legal entity that is separate from its owners and shareholders. Canadian businesses can be incorporated at the federal or the provincial level - and I'll go over the details on that further down.
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While incorporation isn’t legally required, it can bring a certain amount of legal protection for the business owner(s), potentially reduce your tax liability, and offer other benefits that can help your online business grow. Deciding on your business structure is an important part of the business planning process.
The benefits of incorporating in Canada
The primary benefit of becoming a corporation in Canada is the separation of your personal and business obligations. This means that you cannot be held personally liable for the debts or actions of the corporation. So, if your business goes south then your personal finances and assets are protected. You may not think now that you need protection against liability but what if you're a sole proprietor and a client holds you in breach of contract? Can you afford to put your personal assets at risk to satisfy any claims against your business?
Other advantages you should consider are:
- Continuous existence: A corporation has an unlimited life span; if you sell the business or shareholders die the business will continue to exist.
- Ownership of the business entity is transferable: Because the entity has an unlimited life span, you can sell your business or plan its succession easily.
- Raising money can be easier: Incorporated businesses can sell shares and equity to drive growth.
- Tax advantages: Each example is unique, but corporations can benefit from Canada’s small business deductions. You can also choose to defer certain tax payments and benefit from new tax laws or a lower tax bracket.
- Increase your credibility and business-worthiness: Some businesses won’t enter into sales or contract agreements with un-incorporated businesses. In which case, incorporation can improve your credibility and growth potential.
The disadvantages of incorporating
Money and paperwork. The process of incorporation and managing a corporate entity can be administratively challenging for many smaller businesses, requiring more paperwork and record-keeping than being a sole proprietor does.
It can also be a tax disadvantage to incorporate since you can’t claim any of the personal tax credits that you otherwise would as a non-incorporated business.
The term “limited liability” is also something to look out for, for example, if the corporation applies for a business loan but has insufficient assets to secure it, the lender may well look for the personal guarantees from the business owner(s) – which brings with it obvious liabilities.
How to incorporate your business in Canada
Step 1: Name your business
A lot of ecommerce merchants will already have a name for their online store or product. It's important to search to see if that name is available as soon as possible. If you don't have a business yet, be careful in deciding on a business name - it'll be with you for a long time (hopefully).
Step 2: Get a Business Number (BN) or a NEQ (Quebec only)
- A business number is a 9 digit account number that will forever identify your company to federal and provincial governments. Register.
- A NEQ (Quebec Enterprise Number) is required if you're incorporating in Quebec. Learn more.
Step 3: Decide to incorporate federally or provincially
All businesses in Canada have the option to incorporate federally or provincially. Federal incorporation lets you do business under the same name in all provinces and territories, but it's more expensive and a little more work to setup and maintain.
Provincial incorporation is likely sufficient for most ecommerce business owners operating out of Canada.
- Federal Incorporation: You can incorporate your business federally by filing online (for $200) or by mail, fax or in person (for $250). If you're ready to incorporate, you can apply online.
- Provincial Incorporation: You can incorporate your business with most provinces and territories online. Not surprisingly each has a different process, so you'll need to find your province's online portal.
Step 4: Register for GST/HST
If your business does $30,000 or more in total revenue per year, you need to register for a GST/HST account. Many merchants with less revenue volunteer to register because once you have a GST/HST account you can get the taxes you pay as a company refunded by the government. Get your GST/HST account.
If your business is registered in Quebec you need to register with Revenue Quebec.
Note: When making the decision to incorporate, it’s always wise to seek legal advice before coming to any conclusions. Mistakes can be very costly.
Other Canadian business structures to consider
As you weigh up the pros and cons of incorporation, remember you do have other options when it comes to officially structuring your business. Which one you choose really depends on whether you want to go it alone or go into business with partners or associates.
Here are three other popular business structure options in Canada:
1. Sole Proprietorship
Very easy to setup and run, with the minimal amount of paperwork, sole proprietorships are by far the most popular structure among new ecommerce store owners.
Essentially, a sole proprietor is not a legal entity (although you do need to register the business if you're doing business under a different name, or need to collect sales taxes, and you'll need to obtain the right licenses and permits) and there is no separation of the business owner’s personal and business assets.
Business taxes are paid on your annual individual income tax return, and you are personally responsible for the debts, actions and obligations of your business.
Going into business with a buddy? Looking to combine financial resources? A partnership might be the right option. Like a sole proprietorship, there is no legal difference between you and your business, but that doesn’t mean you shouldn’t cover your bases legally. Be sure to draw up a formal partnership agreement with the help of a lawyer to protect both your interests and ensure you have a mutual plan for the dissolution or succession of the business should either partner want to move on.
If the partnership is not equally split between partners, you might consider a limited liability partnership in the business which gives you profit-share but removes you from direct control or management of the business.
The least common business structure in Canada, a cooperative is a business is owned and controlled by an association of members typically a group or people or businesses who team up to provide goods and services.
The bottom line
Remember, incorporation requires careful planning and the right advice. Not all businesses need to take this step and not all will incur the perceived tax benefits. So take the time to consider incorporation as part of your wider business goals – not just because the next guy tells you need to do it.
Also check out your region’s Business Service Center or Chamber of Commerce – these centers offer information, seminars, and networking opportunities to help you make the right decisions about your business.
Curious about incorporating in the United States? Check out our comprehensive guide on forming a business in the United States.