Incorporation is a form of business ownership that creates a distinct legal entity separate from its owners (shareholders) unlike legal business structures such as sole proprietorships and partnerships.
Upon creation of a corporation, owners receive shares corresponding to their ownership percentage. Corporations can be private or public, with public ones (e.g., IBM, General Electric) trading shares on stock exchanges like the Toronto Stock Exchange (TSE) or the New York Stock Exchange (NYSE).
Incorporation in Canada: Reasons for Incorporating?
Incorporation offers a notable benefit by legally separating individuals from their companies. Essentially, owners of incorporated businesses cannot be personally held accountable for the company’s debts, obligations, or actions. The primary reason businesses prefer incorporation over sole proprietorships and partnerships is the protection of limited liability. Normally, a shareholder is only responsible for the unpaid portion of their shares.
However, there are instances where directors of the company can still be personally liable despite its incorporation:
1. Debts – Startups seeking funding usually face the requirement of personal guarantees from business owners as financial institutions are unlikely to provide debt financing otherwise. If the business fails to repay the loan, the bank can seize personal assets used as collateral, including homes, vehicles, investment accounts, and more.
2. Negligence – If an act of negligence committed during business operations leads to personal injury, the responsible individual can be held personally liable. For example, as a carpenter, constructing an unsafe deck resulting in customer injury would entail personal liability.
3. Fraud – Directors can be held personally liable for fraudulent acts. They have a fiduciary duty to responsibly manage the company’s finances. Mishandling company funds or assets, inflating company revenues or assets in public statements, or making false expense claims are examples of fraudulent acts for which directors can be sued.
4. Failure to fulfill tax payment obligations, file annual reports, or hold directors’ meetings.
Most businesses, whether incorporated or not, opt for insurance coverage to safeguard against damage claims resulting from negligence. This generally includes errors and omissions insurance and general liability coverage.
Structuring your business as a corporation can also prove advantageous for retirement planning. For instance, if you desire to pass the business down to the next generation, a sole proprietorship would require transferring assets, whereas a corporation allows for an easier division of the business among children through the allocation of different numbers of shares. For further information, refer to Family Business Succession Planning.
Incorporating in Canada: Where is it Possible to Incorporate?
Though the process of incorporating remains consistent across Canada, companies have the option to incorporate either provincially or federally. Provincial incorporation grants the privilege of operating under the corporate name within a specific province, while federal incorporation permits nationwide operation under the corporate name. “Incorporation in Canada – Provincial versus Federal” elucidates the pros and cons associated with these two fundamental incorporation types. Nevertheless, it is worth noting that opting for federal incorporation does not exempt the requirement for provincial incorporation.
Federal Incorporation in Canada
If you decide on federal incorporation, you must undergo the process of incorporation through Corporations Canada, which oversees the CBCA (Canada Business Corporations Act). Offices are available in Vancouver, Ottawa, Montreal, and Toronto. There are two options for incorporating your business: online registration or obtaining the necessary forms for submission through automatic fax, the Internet, or mail.
To incorporate federally, the following documents must be submitted:
1. Articles of Incorporation
2. Initial Registered Office Address and First Board of Directors
3. A Nuans Name Search Report that approves the chosen name for your company (unless it is a numbered company).
For a comprehensive list of fees related to incorporation, annual returns, corporate amendments, and more, kindly refer to the Corporations Canada website.
Provincial Incorporation in Canada
If you opt for provincial incorporation, you must get in touch with the appropriate Provincial Registrar. Each province and territory provides websites where you can access online provincial incorporation services. Additionally, there are firms that offer both federal and provincial incorporation services.
Gain further insights into establishing a Canadian business by exploring the following topics:
– Determining Share Classes for a New Corporation
– The Cost of Incorporating in Canada
– Evaluating the Need to Incorporate Your Small Business
– Next Steps Upon Receiving Your Certificate of Incorporation
Illustration: Tamara discovered that incorporating her company in Canada was imperative as other companies she sought to work with required contractors to have incorporation.
Incorporation is a type of business ownership that establishes a separate legal entity from its owners. It offers limited liability protection, shielding owners from personal responsibility for company debts and acts. However, directors can still be held liable in cases of personal guarantees on debts, negligence causing injury, acts of fraud, or failure to meet tax obligations. Incorporation in Canada can be done provincially or federally, with each option having its benefits. Federal incorporation requires submitting Articles of Incorporation and other necessary documents to Corporations Canada. Provincial incorporation involves contacting the appropriate Provincial Registrar.
CBES is here to assist you; feel free to contact us for expert guidance.