Business incorporation: everything you need to know before taking the plunge

In Canada, business incorporation means the creation of a legal entity. The operation results in the creation of a joint-stock company, which becomes a legal entity distinct from its managers and owners. The administrative process transforms a simple company into a legal entity with its own rights and obligations. It enables the entity to open a bank account, sign contracts, operate businesses, pay salaries to employees and pay taxes legally. Given these advantages, how do you incorporate your company?

What are the advantages of incorporating a company?

Incorporating a company offers a number of tax, financial and legal advantages, despite some drawbacks.

Tax advantages

An incorporated company agrees to pay taxes on net income, i.e., on the profits from its business activity. The tax rate varies according to sales, but remains reasonable in relation to income from salaried employment.

A self-employed person setting up a small business can also claim a tax exemption on his or her earnings.

On the other hand, earnings distributed by a company in the form of wages and dividends are taxable, whereas shareholders and company directors benefit from tax exemption if the company’s funds remain within the company.

Legal advantages

Since an incorporated company is a legal entity with its own legal personality, it remains liable for its obligations and debts. The status thus offers limited liability for managers and shareholders.

What’s more, an incorporated company is perennial and enjoys continuity of existence. It is a distinct legal entity that can survive even after the death of its founder. It can, in fact, be sold to one or more other owners.

Financial advantages

Shareholders benefit from limited financial liability. The structure gives the manager control over all cash flow. The manager has the right to accumulate the company’s income and exploit or reuse it at a later date.

The company is under no obligation to set up a board of directors.

Disadvantages of incorporation

Business incorporation involves additional costs (legal and accounting fees) on top of administrative costs. In addition to these financial obligations, the operation requires annual preparation and filing fees. In fact, the production of annual reports is an obligation. It enables governments to keep a close watch on companies.

Administrative formalities increase with the size of the company.

A large company exposes itself to data confidentiality risks. The more employees know about professional secrets, the more their confidentiality is at risk.

L'incorporation d'entreprises permet de consolider la structure juridique d'une société.

How do I incorporate a company?

Incorporating a company involves a series of administrative steps.

Choosing the right timing

Incorporation becomes a necessity when your company is experiencing significant growth. It is advantageous to proceed when your company operates in a high-risk sector.

Some managers choose to incorporate their company in order to qualify for grants and tax credits. These help open the door to a number of tax benefits (such as investment tax credits).

Finally, incorporation is essential when the company is generating substantial profits, enabling its founder to build up substantial savings.

Choosing the company’s competence

The next step is to decide whether to incorporate your company under federal or provincial jurisdiction. This step determines how the company will operate, as well as the applicable rules. Each jurisdiction has its own laws and specificities.

A provincially or territorially incorporated company is subject to the Quebec Business Corporations Act. The company has a French name and its head office is in Quebec. This option has the advantage of imposing a minimum of administrative procedures. However, doing business elsewhere requires an “extra-provincial” permit.

A federally incorporated company requires that 25% of the members of the Board of Directors be Canadian residents. This means you can have your head office anywhere in Canada. If you obtain the necessary permits, you can even do business throughout the country.

In all respects, the jurisdictional decision is reversible, but averages out in cost and administrative effort.

Choosing the legal status

Entrepreneurs can choose from a wide range of legal forms in Canada. Each option has its own tax system and specific features.

The choice depends on your needs and your company’s activity. As a general rule, private for-profit companies are set up as joint-stock companies, but you are free to choose the Société en Nom Collectif (SENC), the société en participation or the Société en Commandite (SEC).

Choosing a company name

To put it simply, some entrepreneurs ask the federal or provincial agency to assign a number to the company (i.e., a numerical designation). The number is unique, accompanied by the state (Canada) and the abbreviation “Inc”. Others prefer to forge their reputation right from the start, choosing a unique name that’s easy to remember and pronounce.

By law, every company name must contain a legal notice, in this case “inc” or “ltée”. The name chosen must be carefully checked for availability and uniqueness, as this is crucial to the company’s credibility and the validation of the name.

Produce documentation

The next step is to produce specific information for the authorities:

    • names of shareholders ;
    • number of shareholders ;
    • names of directors;
    • the number of directors;
    • address of registered office;
    • type of share and associated rights;
    • field of activity;
    • company by-laws;
    • the start date of the financial year;
    • liquidation provisions;
    • provisions for dissolution of the company.

It’s true that standard documents abound on the Internet, and are useful for documentation purposes. However, professional advice is essential. In this respect, the presence of a business lawyer will facilitate this step.

Documents should be submitted to the Registraire des Entreprises du Québec or the Registre du Commerce et des Sociétés during the incorporation process.

Pay fees

The amount of fees to be paid depends on the location of the business. In most cases, a few hundred dollars will suffice. Federal incorporation, however, requires additional territorial or provincial fees.

Fees are payable to the Registrar. They cover the cost of receiving and processing the initial declaration. Obtaining a certificate of incorporation confirms approval of the application and receipt of the required fees.

Obtain certification

Once the application has been processed, the entrepreneur receives the permits and certificates needed to start up his new business. The next step is to go through all the information in the register with a fine-tooth comb, and validate that it is correct. If necessary, the applicant makes any necessary updates or corrections.

Depending on the jurisdiction, it may be necessary to fill in a few additional forms each year to update information or renew rights.

Fine-tune internal organization

Incorporation completes the process. The entrepreneur and shareholders subscribe to the shares and contribute to the share capital. Next, the directors work together to determine the company’s by-laws. They establish the registered office. They choose the financial year-end. Next, each company player is assigned a specific mission.

In the case of a company with several shareholders, the entrepreneur concludes a shareholders’ agreement to facilitate day-to-day management and speed up decision-making.

Expert advice is also essential at this stage. Seek the help of a lawyer specialized in business law, an accountant, a notary or a business consultant.

L'incorporation d'entreprises est une étape incontournable à la prospérité de votre société.

What mistakes should be avoided when incorporating companies?

The most common mistakes in incorporating a company include:

    • omission of appendices to the articles of association ;
    • negligence of legal organization;
    • the definition of a fixed number of directors.

Although optional, the inclusion of appendices to the articles of association is essential. Don’t overlook the description of a detailed share capital and the provisions concerning restrictions on the transfer of shares (restrictions on the transfer of securities or shares and other provisions) in your articles.

Company incorporation, like companyregistration, is an administrative procedure. Once the certificate has been obtained, the entrepreneur must put his legal organization in order (preparation of corporate registers, setting the fiscal year, election of directors, etc.). This is the most important step, as it puts your business on a solid footing.

Finally, it’s a fatal mistake to set a limit on the number of directors from the outset, since each time the situation changes, the number of directors needs to be modified.

Conclusion

Fortunately, these mistakes can be narrowly avoided with the help of an expert, in this case a business lawyer. The professional will provide you with the support you need to bring your business incorporation project to a successful conclusion.

 

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