Corporations are the preferred legal structure for businesses. The principal advantages of a corporation include limited personal liability protection for its owners, that it can exist beyond the lifetime of the founder(s), offers the most flexibility to raise capital from investors and can provide tax flexibility and advantages.
A corporation is a legal entity that is formed to operate a for-profit business that has a legal personality which is distinct from its owners. The creation of a corporation occurs following the filing of “Articles of Incorporation” forms with the government.
Every corporation is made up of shareholders, directors and officers. In small corporations the same person is usually a shareholder, director and officer. Shareholders hold (i.e., own) the shares in the corporation. Directors and officers are people that manage and operated the business. Shareholders control the decisions made by the corporation with the votes connected to their shares and by electing and removing directors and approving or disapproving major corporate decisions. Shareholder agreements can also ensure that important decisions are made directly by the shareholders and not the directors.
Advantages of a Corporation
There are several features that are unique to a corporation which make it the preferred legal structure for many businesses.
- Limited Liability
- Perpetual Existence
- Access to Money/Capital
- Tax Advantages
- Credibility and Prestige
Choosing you Corporation’s Jurisdiction
Once you have decided to run your business as a corporation, you need to choose between a provincial or federal corporation. Most people will incorporate provincial corporations as they are usually less expensive and avoid duplicate ongoing compliance government filings.
Those who opt for a federal corporation usually do so because they plan on doing business in more than one province in Canada (other than website sales) or want better business name protection across Canada.
Below are the most common factors that are used to decide where to incorporate.
- Limited Liability. A primary advantage to incorporating a business is the limited liability conferred upon its shareholders. The shareholders are not liable, in most cases, for the debts and other obligations of the corporation. A shareholder’s liability for the debts of the corporation is limited to the amount of funds the shareholder has invested in the corporation. Creditors only have rights against the corporation itself and not against the shareholders.
- Perpetual Existence. A corporation has the feature of perpetual existence. It is not dependent upon the life of its shareholders, directors and officers and will not be affected by changes in, deaths or retirements of its members since the corporation is considered a separate “person”. This advantage allows for the orderly transfer of ownership of the corporation (i.e., its shares). Furthermore, due to its independent legal status, it may own property in its own right, enter into contracts and sue (or be sued).
- Access to Money/Capital. A corporation may offer greater potential sources of capital than other business forms (such as sole proprietorships and partnerships). Corporations can issue various classes of shares (in addition to other debt instruments such as bonds) to raise capital, which, typically, is more attractive to investors.
- Tax Advantages. There are tax advantages to incorporating your business, such as lower income tax rates and carrying forward losses of previous years to offset profits in subsequent years, among others.
- Credibility and Prestige. Incorporation may help provide your business with credibility and prestige in its dealings. Sometimes third parties will require your business to be a corporation to obtain government subsidies or conduct business with them.
On the other hand, incorporating your business is subject to the following formalities:
- Start-Up Costs. The initial start-up costs (i.e., government fees) may be expensive when compared to other business structures (sole proprietorships and partnerships). It’s on average about an extra $400 over other options but, most people feel that this extra initial cost is worth its advantages.
- Ongoing Compliance Management. A corporation is required to diligently maintain its corporate records and hold meetings, elect directors and provide shareholders with certain information. Nowadays, different apps and services can reduce this burden to satisfy the legal requirements.
- Taxation. Income generated by a corporation is taxed at both the corporate level and shareholder level. A corporation must pay taxes on its income and the shareholders must pay taxes on the dividends (i.e., profits they receive from the corporation). However, much of this double taxation may be minimized by offsetting the corporation’s business expenses (i.e., salaries) with its income.
If you intend on carrying on business only in one province, you may choose to incorporate a provincial corporation under the laws of that province or a federal corporation.
A federal corporation is generally entitled to carry on business anywhere in Canada under its name, subject only to registering in the province where business is carried on. There generally are provincial registration fees (except in Ontario and P.E.I.) that must be added to the incorporation fees of a federal corporation (will be detailed below).
Costs of Incorporation
One of the most important factors for small businesses when deciding to incorporate is the cost of incorporation. The jurisdiction of incorporation will automatically become criteria for decision because government fees are not the same.
Below are the current government incorporation fees Canadian jurisdictions:
|Prince Edward Island||$265|
Moreover, if you are incorporating a federal corporation, you must also register extra-provincially. Currently, the provincial fees for a federal corporation which has its registered office in that province are (these are in addition to the federal incorporation fee of $200 indicated above):
|British Columbia||$391 (including name search $39)|
|Manitoba||$349 (including name search $49)|
|Prince Edward Island||$260|
|Saskatchewan||$340 (including name search $75)|
As you can see, in most cases, it is more expensive to incorporate a federal corporation. The one exception is Ontario where there is no provincial registration fee.
IN FACT, IT IS LESS EXPENSIVE TO INCORPORATE A FEDERAL CORPORATION THAN AN ONTARIO CORPORATION IN ONTARIO.
Moreover, there are annual filings. With a federal corporation, there would be 2 annual corporate report filings ($20-40 per year). For provincial corporations there would only be 1 annual report.
Protection of Corporate Name and Its Use
The federal corporation has probably the most stringent criteria in granting the right to use a name as the corporation’s legal name. There are many factors that are taken into account by federal corporation examiners. Once the name is approved, it provides a significant amount of legal protection, although less than trademarks.
Most provinces offer very little protection of use, and will grant almost any name provided it is not identical. Moreover, if there is any protection, it is limited to that province, unlike federal corporations which afford Canada wide protection.
For example, a federal corporation with its registered office is Ontario is entitled to carry on business must file certain corporate information with the Ontario government. If the corporation uses a name other than its corporate name, this must be registered as well, under the Business Names Act. The Ontario government charges $60 for a five year registration.
Directors Residency Requirements
Another factor that can be important in deciding where to incorporate is the Canadian residency requirements of each jurisdiction. This is especially relevant to foreigners starting a business in Canada. If these requirements are not satisfied, you cannot incorporate in that jurisdiction.
Below are the current residency requirements for each Canadian jurisdiction:
|Federal||at least 25% must be resident Canadians|
|Alberta||at least 50% must be resident Canadians|
|Manitoba||at least 51% must be resident Canadians|
|Newfoundland||at least 51% must be resident Canadians|
|Ontario||at least 25% must be resident Canadians; However, if there are less than 4 directors, then 1 must be a resident Canadian|
|Prince Edward Island||None|
|Saskatchewan||at least 51% must be resident Canadians; at least one director must be ordinarily resident of Saskatchewan|
Timeline for Incorporation by Jurisdiction
Another important factor when deciding to incorporate is the time it takes. Some jurisdictions are significantly faster than others. Below are the standard processing delays (in business days) that it takes to obtain a certificate of incorporation following the submission of articles of incorporation. Please note additional delays may be due to name approvals.
(Additional fees apply)
|Federal||5 days||3 days|
|Alberta||5 days||3 days|
|British Columbia||10 days||7 days|
|Manitoba||15 days||6 days|
|New Brunswick||15 days||N/A|
|Nova Scotia||21 days||N/A|
|Ontario||5 days||2 days|
|Prince Edward Island||15 days||N/A|
|Quebec *||10 days||5 days|
|Saskatchewan **||30 days||15 days|
* Please be advised that the trade name will be filed at the time of incorporation, however, there is a government processing time of approximately 14 business days before the trade name is officially approved.
** Please be advised that the current government delay to obtain a name decision for Saskatchewan is approximately 15 business days. This delay is in addition to the processing times for incorporations and business name registrations.
Furthermore, there are other issues that you may consider in selecting where you incorporate your business, namely, determining the advantages and disadvantages of each jurisdiction’s corporate laws and tax structure. If you require additional information to make an informed decision as to where to incorporate your business we suggest you contact competent legal and tax professionals and discuss these matters with them.
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