What is an incorporated business?

An incorporated business enables company owners to operate their organization as a separate entity from themselves. This advantage can offer enterprises a lower corporate tax rate, their own income tax filings, name protection, and limited personal liability. Since there isn’t a limitation on the organization’s size, one can even incorporate a small business.

Federal versus provincial incorporation

Canadian business owners have the option of incorporating federally or provincially. When you choose federal, you must also register your company in the operating province of your organization. While the main differences between federal and provincial incorporation are often exaggerated, both enable your company to operate across Canada and service clients globally. The primary distinguisher is that federal corporations have increased name protection, meaning your business name is registered across Canada rather than just in your province. Another difference is the rule that the directors of your corporation must be Canadian residents. In a federal corporation, at least 25% of your directors must be Canadian residents. However, this requirement does not apply in all provinces and territories.

Related: A Guide to Business Rules

How to structure your organization

While the number of shares your shareholders own reflects the percentage of the company they own, this doesn’t mean all shareholders are equal. When you incorporate your organization, you can create various share classes, allowing different shareholder groups to have varying privileges and rights in the company. Differentiating share classes doesn’t mean you must issue shares in each category at the outset. For example, you might structure your company with three classes but only issue shares in the first class. Here is a breakdown of the different types of share classes:

Voting and non-voting

The main difference between share classes is the ability to vote on business matters. Voting shares are typically for shareholders who wish to actively participate in decision making (like founders, senior management, and directors). In contrast, non-voting shares are for those who want to benefit from the organization’s long-term growth but would rather avoid making high-level decisions (like employees).

Common

Common shares are the corporation’s standard shares. Your common shares value will generally increase as your company grows and becomes profitable. These shares don’t typically have special priority over your corporation’s assets. If your organization were to stop operating, you would pay out holders proportionately to their ownership stake.

Preferred

Preferred shares mainly entitle shareholders to be the first to receive a payout if a corporation stops doing business. These shares don’t necessarily carry more value than common shares and typically have a limit on how much they can increase in value over time.

Read more: 10 steps to starting a business

Benefits of business incorporation

Incorporating your business can come with many advantages, especially if you want to grow your business and hire more people. Some benefits include:

• Limited liability: Since corporations have a separate legal entity, business owners have the advantage of limited personal liability toward the organization’s creditors. For example, corporation shareholders are typically not liable for any company debts. If the organization goes bankrupt, shareholders generally remain protected, while the creditor’s recourse is limited to any company-owned assets. Creditors would likely not have the rights to the owner’s personal property to pay off debts unless they provided a personal guarantee.
• Ownership interests are more straightforward to transfer: Corporations typically don’t own their assets directly; they own shares in the corporation. This benefit can make transferring ownership interests and attracting investors much easier.
• Immediate credibility: An incorporated business is often a credible one. A corporation lets potential lenders, suppliers, investors, employees, and customers know you’re serious about the organization’s future. While incorporating your business requires additional costs and effort, these minor inconveniences can be worth it if your goal is to have a sustainable, long-term operation.
• Unlimited lifespan: A key advantage of an incorporated business is that if a shareholder passes away, their shares typically go to their heirs or are transferred through a sale. In contrast, sole proprietorships typically end when their owners pass away.
• Tax advantages: Incorporating can also provide tax benefits, like a lower tax rate, which may lead to paying less than the personal rate for individuals. It’s essential to maintain your corporation’s revenues within its bank account without transferring money to your personal bank account. When you transfer money from the corporation to a personal account, the tax implications may move to you at a higher tax bracket.
• Flexibility: Incorporated business owners typically have the flexibility to make business changes, such as the name, operating a secondary business, or extending a business name under the existing corporation, and accessing venture capital funds, loans, or grants.

Related: How to Get a Business Number in Canada

How to incorporate a business in Canada

You can establish your corporation in whichever province your business operates. While the requirements vary depending on your jurisdiction, there are some basic requirements you will need, such as:

• A corporate name (unless it’s a numbered corporation);
• A registered office address and mailing address;
• The name of directors and their addresses;
• A minimum and maximum number of directors;
• The share structure you’re using.

Incorporating your business federally is a four-step process:

Step one: Name your corporation

All incorporated businesses require a name that legally identifies them—this will be your corporate name. Your corporation’s name can be:

• A word name made up of symbols and letters;
• A numbered name, for example, 98765432 Canada Inc.

You can either create your numbered name or have Corporations Canada choose one for you. The numbered method is often the simplest way to name a corporation. A word name gives you the legal right to use it Canada-wide once you receive name approval. When applying for a corporation online, select custom incorporation when using a word name. While corporations typically have name protection in their jurisdiction (not all business types offer this), there are some factors to consider when selecting a name for your business that may be similar to another business name:

• Advertising: If another business has a similar name, your advertising may inadvertently promote their company.
• Bad reputation: A similarly-named company with a bad reputation can negatively affect your corporation.
• Protected names: Avoid violating other corporations’ trademarks when they have name protection.

Step two: Establish the structure of your corporation

You may consider applying for basic incorporation if you’re incorporating a small, private business. This pre-packaged option can eliminate the guesswork from your application by offering:

• One or two share classes;
• Pre-determined incorporation articles, which you can amend at a later time if necessary;
• A maximum of ten directors;
• An assigned, numbered name.

Conversely, you could customize your structure to suit your specific needs. If this is the case, you would apply for custom incorporation and include:

• Your corporate name;
• Any restrictions for your business or its activities;
• The number of directors in your corporation;
• Any other provisions.

You may choose your official language when listing your articles of incorporation, with your options being:

• Either English or French;
• Both English and French;
• Bilingual (using English and French equally).

Step three: Determine your registered office address and board of directors

Incorporated businesses require a registered office address and a board of directors. Your registered office is where you must store your corporate records and where government officials can send official documents to the corporation. Using an address where you will receive any documentation is essential since the government may legally assume that your corporation has received them. You must also know who will encompass your corporation’s board of directors. You can check the director requirements online to ensure your choices meet the eligibility criteria. When you incorporate your business, you must disclose each director’s first and last name, address, and whether they’re a Canadian resident.

Step four: Submit your application and pay the fee

One of the quickest ways to fill out and file your incorporation application and pay your fees is online through the Government of Canada’s online filing centre.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

This article is based on information available at the time of writing, which may change at any time. Indeed does not guarantee that this information is always up to date. Please seek out a local resource for the latest on this topic.