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.
When a corporation is created, each owner is issued shares proportional to the percentage of ownership. A corporation can be private or public. Public corporations (such as IBM, General Electric) trade shares on stock exchanges such as the Toronto Stock Exchange (TSE) or the New York Stock Exchange (NYSE).
Incorporation in Canada: Why Incorporate?
The big advantage of incorporation is the legal separation of individuals from their companies. Theoretically, no owner of an incorporated business can be held personally liable for the debts, obligations, or acts of the company. The limited liability protection is one of the main reasons that businesses choose incorporation over other forms of businesses such as sole proprietorships and partnerships. Normally a shareholder is only liable for the unpaid portion of shares owned.
However, there are situations where directors of the company can still be held personally liable even if the company is incorporated:
Debts - if your business is a startup and needs funding it is unlikely that any financial institution will provide debt financing without personal guarantees from the business owners. If your business fails and is unable to make the loan payments, whatever personal assets posted by the owners as collateral can be seized by the bank, including houses, vehicles, investment accounts, etc.
- Negligence - If in the course of doing business you commit an act of negligence that causes personal injury to someone else, you can be held personally liable (for example, as a carpenter you construct a deck that is unsafe and the customer is injured).
- Fraud - The directors of a company can be held personally liable for acts of fraud. Directors have a fiduciary duty to manage the company's finances in a responsible fashion - mishandling company funds or assets, inflating company revenues or assets in public statements, or falsely claiming expenses are examples of acts of fraud for which the directors can be sued.
- Failure to pay taxes, file annual reports, or hold directors meetings.
It may also be advantageous to have your business structured as a corporation when it comes time to retire. For instance, if you want to keep your business in the family, if your business is a sole proprietorship, you won’t be able to pass the business along to the next generation without transferring the assets. And having your business structured as a corporation makes it much easier to “divide” your business among your children, as you can then leave them various numbers of shares. See Family Business Succession Planning for more details.
Incorporation in Canada: Where Can You Incorporate?
While the basic procedure for incorporating is the same no matter where you incorporate in Canada, incorporation may be done provincially, giving a company the right to operate under its corporate name in a particular province. Federal incorporation gives a company the right to operate under its corporate name throughout Canada. Incorporation in Canada - Provincial versus Federal explains the disadvantages and advantages of these two basic types of incorporation. However, as you'll discover, the choice is not strictly an either-or situation; if you incorporate federally, you'll still have to incorporate provincially as well.
Federal Incorporation in Canada
If you choose federal incorporation you need to go through the procedure of incorporation through Corporations Canada. (Corporations Canada administers the CBCA (Canada Business Corporations Act). There are offices in Vancouver, Ottawa, Montreal, and Toronto.) You can incorporate your business online, or get the forms you need to file as part of the incorporation process by automatic fax, Internet or mail.
To incorporate federally you must submit the following documents:
- Articles of Incorporation
- Initial Registered Office Address and First Board of Directors
- A Nuans Name Search Report approving the name you have chosen for your company (unless it is a numbered company).
See the Corporations Canada website for a list of fees for incorporation, annual returns, corporate amendments, etc.
Provincial Incorporation in Canada
If you choose provincial incorporation, you need to contact the appropriate Provincial Registrar. All the provinces and territories have websites which offer online provincial incorporation. There are also companies that offer incorporation services, both federal and provincial.
Learn more about incorporating a Canadian business, including:
Examples: Tamara found that incorporation in Canada was necessary for her company, because other companies that she wanted to perform work for insisted that all contractors be incorporated.