If you’re running a small business and have watched your success steadily grow over the years, it might be time to consider incorporating the business.
As with any business decision, there are both pros and cons to incorporating. One of the biggest benefits is that your business becomes a separate legal entity, meaning that any creditors or legal action will now go against your company, not you personally. Incorporating your business can also offer you some financial advantages because the corporate tax rate is generally lower than the individual tax rate. On the other hand, incorporating your business costs money and there’s a fair bit of paperwork both initially, and to maintain annually (for example, you’ll now have to complete both a personal and a business tax return each year). There are also some liabilities that incorporating won’t protect you from, since directors and shareholders are held personally liable for HST or source deduction payments.
If you do decide to incorporate, our top piece of advice is to talk to an expert (either an accountant or a tax lawyer) who can help advise you on the best course of action for your specific business. While it’s fairly easy and straightforward to incorporate online, consulting with an expert ensures you complete the process properly so that you don’t end up having to hire a lawyer a few years down the line to fix your costly mistakes.
Step-by-step guide to incorporating your business in Canada
- Name your business. Make sure the name you choose is distinctive and not likely to be confused with another corporation’s name. To get your name approved, the Canadian government requires that you do a Nuans corporate name search. Alternatively, if you prefer to simply use a numbered name for your company, you will have one assigned to you when you complete the articles of incorporation.
- Decide whether you’re going to incorporate federally or provincially. Do you plan to do business in more than one province? That’s the main question you’ll have to answer when deciding where to incorporate. If you’re running a small business out of your home province, it might be easiest to incorporate provincially. But should you decide to grow your company in the future, there are advantages to federal incorporation, such as operating your business under the same name across the country, and being recognized worldwide as a Canadian corporation.
- Complete the articles of incorporation. Different paperwork will need to be completed depending on where you choose to incorporate. Generally you’ll need to lay out several key decisions for your company, including who your board of directors will be, how your share structure will work, and where your registered office will be located.
- File your forms and pay the appropriate fees. Whether you’re incorporating provincially or federally, you can complete all the documents either online, or the old-school way by mail. Once your forms and payment have been processed, your corporation is officially “in business”!
One last thing that’s important to keep in mind: If you’re incorporating with a partner, make sure you have a shareholder agreement so that both partners are protected as your business changes or disagreements and/or unexpected events occur in the future.
Now that you know about incorporating, do you need a holding company? We’ll answer that question in our next blog post.