Business Incorporation in Ontario
If you’re thinking of starting a business in Ontario, you’ll need to know about the different types of business incorporation and how to choose the right one for your company. This guide will walk you through the benefits and drawbacks of each kind of incorporation.
By the end, you’ll be able to make an informed decision about which type is best for your business. So let’s get started!
Business Incorporation Definition
In Ontario, business incorporation is the process of setting up a new corporation. A corporation is a separate legal entity distinct from its owners, and it has its own rights, liabilities, and assets.
You create a new legal entity separate from yourself and your other business partners when you incorporate your business. This can be helpful in terms of protecting your personal assets if your business runs into financial trouble. A corporation can also offer its owners certain tax benefits.
If you’re thinking about incorporating your business in Ontario, there are a few things you need to know. Here are the basic steps:
- Decide what type of corporation you want to set up. There are two main types: a federal corporation governed by the Canada Business Corporations Act (CBCA) or one incorporated under your province’s legislation.
- Decide where you want to incorporate. Each province and territory has its own incorporation process, but nearly all are similar. Once you’ve decided where to incorporate, you’ll need to decide whether your business should be federally or provincially incorporated.
- Get ready for name approval. You’ll have to choose a corporate name that hasn’t already been registered in someone else’s name before applying for incorporation. To make this easier, start searching for alternate names now!
- Submit your corporate documents and pay the fees associated with incorporating. You’ll have to file your Articles of Incorporation, so make sure you’ve got them ready.
- Get your Corporation Number and account for GST/HST. Once you’re incorporated, you’ll need a corporation number so the Canada Revenue Agency (CRA) can track your business income. Finally, set up payroll deductions with the CRA to take advantage of corporate tax breaks in Canada.
Why Incorporate Your Business?
There are many reasons why you might consider your business on how to incorporate in Ontario. Here are some of the main benefits:
Protect personal assets: You may hesitate to incorporate because it costs money, but you’ve made that initial investment, which means you’re less likely to be sued by your creditors. A corporation is legally considered a separate entity, so that’s who they can sue. It also protects personal assets if something goes wrong with the business.
The corporation exists as a separate legal entity from its owners, and it can’t claim any wages or properties that aren’t directly connected with its success as a company. This helps protect you from losing everything because of financial problems with your business.
Lower taxes: Incorporating your business may help lower your tax bill each year. If you incorporate, you’ll be able to write off certain expenses since these are expenses related to running a legitimate business enterprise.
The CRA has an excellent guide on this topic and various informational resources to help you understand all the benefits of incorporating.
Raising money: If you’re thinking about expanding your business, it’s essential to understand that investors and banks will be more confident if there is some form of protection for their investment. Incorporating your business in Ontario provides this kind of security to those who provide you with financial support.
Limited liability trading: You may want to expand your trade and start trading outside Canada. When this happens, you open yourself up to new liabilities you never had before. The good news is that if you incorporate before engaging in international business activity, shareholders won’t have any personal legal responsibility for foreign trade.
Where Can You Incorporate Your Business?
There are a few different places in Canada where you can incorporate a business. The most common place to do so is in the province of Ontario, where the government offers several services for businesses. Other provinces that provide business incorporation services include Alberta, British Columbia, and Nova Scotia.
There are a few things to keep in mind when choosing where to incorporate your business. One crucial factor is the paperwork and red tape involved in setting up your company. Some provinces have more stringent regulations than others, so be sure to do your research before deciding.
Another thing to consider is the cost of incorporating your business. Some provinces charge higher fees than others, so it’s important to factor this into your decision.
When you incorporate federally in Ontario, you form a corporation recognized as a separate legal entity from its shareholders. This means that the corporation can own property, enter into contracts, sue, and be sued in its own name.
There are several benefits to incorporating federally in Ontario. For example, the Canadian Federal Government provides a range of incentives for businesses to incorporate federally, including tax breaks and reduced red tape.
Additionally, federally incorporated corporations are subject to a single set of federal laws, making it easier to do business across Canada.
If you’re interested in incorporating federally in Ontario, several resources can help you get started. The Government of Canada’s website offers comprehensive information on all aspects of incorporation, explaining the various types of corporations available.
However, if you would like personalized assistance with your application, you should consider contacting a professional corporation registration service or licensed legal professional for help.
Articles of Incorporation
The articles of incorporation is a legal document that establishes your Canadian corporation. If you are incorporating federally, the Canada Business Network provides an easy-to-use online wizard to get started on your articles of incorporation.
You will need to include general information about your new company, including:
- Name and address.
- Type of business it will be involved in.
- Shareholder details (including the number of shares, par value per share, total number of shares authorized for the issue).
- Directors’ names and roles within the corporation.
- Whether you want to have any restrictions on transfer or sale of shares in the future, etc.
When completing this form, you should consider consulting with a professional in incorporations to make sure you have considered everything correctly.
Often, a corporation’s articles of incorporation will need to be notarized before they are submitted to the registry office.
Here are some valuable guidelines from Government Canada about writing up articles of incorporation:
Purpose: The first section should describe what your company does. For example, if you want to start a video game development company, your objective might be “to design and develop video games.”
Shareholders’ Agreement: This is where you tell the corporation how many shares of stock you will issue. For example, if 20 people contribute $5,000 each to help get your business off the ground, they would each receive one share.
If another person decides to invest an additional $25,000 later on once your business starts earning revenue, they will get four more shares.
Directors: The names of the directors need to be included in this section of articles of incorporation. You can choose up to 9 directors for your corporation (but generally keep it between 3-5), and these individuals make business decisions on behalf of the company.
Directors Agreement: This part tells the corporation when and how meetings will be held, when members can be removed from the board, how often meetings are held, and when a quorum is needed to pass major decisions. It’s beneficial for all shareholders to know these guidelines to know their voting rights and responsibilities.
Officers: Each officer’s name and contact information must be included in this section. These individuals must meet specific requirements, such as Canadian citizens or permanent residents.
They also need to live in Canada (or own a business). Here is a list of other officers you may want to include:
- Chief Operating Officer
- Chief Financial Officer
Expenses and Remuneration: This section explains what the corporation can spend money on and how much each officer and director is entitled to be paid. You don’t need to include specific dollar amounts here, but it’s good practice to state what circumstances they would receive payment.
Directors should also sign a resolution stating that their services were provided in good faith and any payments made were reasonable.
For example, if you typically pay your directors $5,000 per month, then you wouldn’t want to give one of them $20,000 without explaining why this could set a precedent that other members could follow and may even lead to legal action against the company.
First Board of Directors and Initial Registered Office Address
When completing your articles of incorporation, you will also need to decide where your corporation’s initial registered office address will be located (this is the location where all official documentation about your company can be found).
You can pick anywhere in Canada that makes sense for your company. Many corporations choose downtown Toronto or Ottawa because these areas are home to several government agencies that process corporate filings.
The Canada Business Network will ask you who your first board of directors is. This is the group of people that will run your corporation on a day-to-day basis.
There are no limitations on who can serve as a director, but certain individuals are prohibited from acting as directors for any Canadian company. Once the articles of incorporation have been completed and submitted to the appropriate agency, you can issue share certificates and otherwise officially initiate business operations.
Nuans Name Search Report
When incorporating federally in Canada, you need to consider whether or not your proposed business name falls within any naming restrictions designated by either federal or provincial law.
Provincial restrictions are determined on a province-by-province basis (for example, Alberta does not allow names that contain the word “bank,” British Columbia law prohibits trademarks for use as business names). In contrast, federal laws deal with non-proprietary companies and business names.
You can search Canada’s Official Canadian Geographical Names Database (CGNDB) to see if your proposed corporation name falls within any naming restrictions before submitting your articles of incorporation.
A nuans name search report is necessary when incorporating federally in Canada. The Nuans Corporation provides an online service that allows you to request a free full name search against Canada’s federal corporate database, including detailed results of all matches found during the search process.
This will save time and ensure compliance with naming restrictions.
Provincial incorporation in Canada is a process by which a business can become a legal entity under the laws of a particular Canadian province. The benefits of provincial incorporation include:
Limited liability for shareholders: As long as the business remains incorporated under the provincial legislation, the shareholders are only liable to the extent of their investment in the company. This helps to protect personal assets in case of business failure.
Reduced registration fees and taxes: Provincial incorporation often comes with reduced registration fees and taxes than federal incorporation (under the Corporations Act).
Ease of doing business: Provincial regulations are often much less complex than federal regulations, making it easier for businesses to comply with regulatory requirements.
If you’re thinking about incorporating your business in Canada, you should consider which level of government offers the most benefits to your type of business. Keep in mind that all provinces provide provincial incorporation while only a few provide federal incorporation.
If you’re looking for higher liability protection and don’t mind dealing with some extra paperwork, then you should strongly consider forming a provincial corporation in Canada.
Advantages of Business Incorporation
There are many advantages to business incorporation in Canada. Some of the key benefits include:
One of the key advantages of incorporating a business in Canada is the limited liability protection afforded to shareholders. This means that shareholders are only liable for the amount of money they have invested in the company.
They are not responsible for any debts or liabilities incurred by the company. This can be a valuable protection for business owners if the company becomes insolvent or sued.
Easier to Raise Money
A valuable benefit of having a business corporation is that it will be much easier to raise money from investors or lenders than raising capital when operating as a sole proprietorship or partnership. It is much more common for people to invest in corporations because they know that there is limited liability protection afforded to the owners of corporations.
Optimize Your Taxes and Income
The income earned by the corporation is taxed at a lower rate than it would be if the business were not incorporated. This means more money is available to reinvest in the business or distribute as dividends without any immediate tax obligation for the owner/business person, who will only be required to pay taxes on their personal income tax return.
Corporations also have much more flexibility when distributing dividends or taking money out of the company versus unincorporated businesses, which are required by law to retain 90% of profits to pay future liabilities like wages and salaries.
Corporations Carry On
Most businesses in Canada are incorporated as corporations rather than sole proprietorships or partnerships. This means that the corporation itself is responsible for tax obligations and liabilities incurred by the corporation, not the individual business owner.
Corporations in Canada must prepare an annual income tax return each year, even if no profit was earned during the year.
Defer Paying Taxes
One potential benefit of incorporating your business is that you may defer paying taxes on retained profits if the corporation reinvests those earnings into its business activities. For example, if your corporation earns $100,000 of income and decides to retain it to invest in future growth, you will not pay any immediate tax on this income.
However, when the money is eventually distributed as dividends or taken out of the company (potentially several years later), there may be a tax liability associated with it.
Tax Savings With Small Business Deductions
If you are operating as an unincorporated business, one thing that you may be eligible for is the small business deduction which can offer some tax savings for Canadian small businesses that earn less than $500,000 of income each year.
For example, if the business earned $150,000 of income subject to federal/provincial corporate tax rates of 15%, this would result in a tax bill of $22,500.
However, by incorporating the business as an unincorporated entity and claiming the small business deduction on their personal income tax return, the owner may reduce their taxable income so that it falls below the threshold for taxation, which could result in a smaller tax bill or perhaps even no tax owed at all.
Increase Business Sales
One important thing to consider is whether your new business will experience an increase in revenue or earnings after incorporating your business. If you operate as an unincorporated business and your income increases by $100,000 after incorporating, this means that it will be subject to an immediate tax liability of $22,500 (assuming a federal/provincial corporate tax rate of 15%).
However, if you incorporate the business and receive no increase in taxable earnings after incorporation, there may not be any additional taxes associated with running the business as a corporation.
Business Name Protection
Corporations in Canada can register specific names with each province’s business registry, enabling them to use these unique names for their businesses without infringing upon existing trademarks or prior claims to those trade names.
This ability is known as “name protection” and can significantly benefit from utilizing an existing business name, brand name, or product line. It also prevents the risk of your current competitors from registering businesses under similar names to create confusion among their customers and potential clients.
Disadvantages of Business Incorporation
Incorporating a business provides many advantages regarding income taxation, paperwork, saving money on taxes, and more. Still, there are a few disadvantages that you must take into account before incorporating your business in Canada.
Another Income Tax Return
Although your corporation may be subject to lower tax rates, it is not exempt from paying income taxes to the Canadian government.
To be taxed as a corporation, you will need to file a corporate tax return each year which estimates how much of its income was retained for reinvestment and how much was paid out as dividends or taken out of the company by other means.
If your business is incorporated under Canada’s C-Corporation system, the first $500,000 in retained earnings can escape taxation if they are earmarked for reinvestment purposes (i.e., this money cannot be paid out as dividends).
However, any income distributed among owners after this point may be subject to an immediate tax liability upon distribution. This includes items like salaries and bonuses often paid in cash or through share redemptions for salaried employees.
Increased Paperwork Requirements
As a corporation, there are increased paperwork requirements for filing your taxes each year to report your income and expenses. You will be responsible for filing your personal income tax return and the corporate tax return, which can take more time and require professional assistance if you do not have prior experience generating these types of returns.
Additionally, even though you may be eligible for certain deductions or credits on your personal income taxes that are forbidden for corporations (such as the lifetime capital gains exemption), you will still need to file with the Canadian government using either Form T2 Corporation Income Tax Return or Form T2SCH40 if you have an annual income of $1,000,000 or more.
Personal Tax Credits Are Not Available
Although your corporation may be subject to lower tax rates, it cannot claim any personal tax credits that are not permitted for corporations under Canada’s corporate tax laws. As a result, you will need to file using the individual income tax return every year along with your personal capital gains and losses instead of filing as a corporation.
For this reason, it is vital to understand the benefits of each system before incorporating your business in Canada so that you can take full advantage of both systems depending on your particular situation.
Tax Flexibility is Reduced
When you incorporate your business in Canada, it is crucial to understand that you will lose some tax flexibility if your business has fluctuating incomes, requires significant capital expenditures, or frequently makes large equipment and property purchases.
The reason for this is related to Canada’s “capital cost allowance” rules which determine the value of new assets purchased by a corporation after they are first acquired (depreciated) over time until they become entirely written off.
As a result, if your business experiences many changes in net income on an annual basis due to these items, then you may be better suited with another form of incorporation that allows you to take advantage of certain tax deductions or credits that can save you money on your taxes each year under Canada’s corporate tax system.
What Should You Do After Getting Your Certificate of Incorporation?
Now that you have your certificate of incorporation, there are a few things you need to do to get your business up and running. Here are the most important:
Get a Corporate Minute Book
The minute book is often (but not always) provided by the incorporation agent who registered your business. It contains all the details of your business, such as:
- The date of incorporation.
- Your name and address.
- Directors and Officers.
- Copies of any special resolutions passed by shareholders or directors (for example, if there were unanimous shareholder agreement on some particular issue, this would be detailed in the minutes).
You can get a copy of your current minute book at no cost. Ask the person at the registry where you filed for it.
Buy a Corporate Seal
A corporate seal is used for authenticating documents that your company processes. The seal should be embossed or printed in green ink with the name and address of the company and should include “Incorporated” and “A Corporation Sole.” It depends on where you file for incorporation, whether you get one from them or if you have to buy it yourself.
Complete Corporate Bylaws and Organization
Once your business is incorporated, you must prepare any other required documents. For instance, if your articles of incorporation don’t indicate how many directors are to be appointed by the incorporation(s) or shareholders, you must prepare a resolution that specifies this information.
You may also want to consider other resolutions/documents you need to run your business correctly. The law requires all businesses to have two types of corporate bylaws: “articles” and “bylaws.”
Articles are statements of general rules about how your company is organized and operated. They generally include information on who owns or controls it (shareholders and directors), the number of shares issued, how they are distributed to shareholders, who can buy or sell them, as well as what information must be contained in each annual financial statement.
Bylaws contain detailed rules about management structure, meetings, and voting procedures.
Once you’ve done this, you should review them with an attorney to ensure they meet the provincial laws you incorporate. Once these documents are completed, file them with the provincial or territorial government office you incorporated (or filed for incorporation).
It usually takes several weeks after filing before they’re available for public inspection. If all goes well, you should receive a certificate confirming that everything is in order, and you can continue with the next step.
Create a Business Bank Account
Your business needs to have its bank account in most cases. Consider opening an account at a major Canadian bank because they are very familiar with what business accounts look like and how they need to be operated.
Depending on your needs, you could consider setting up several different accounts: One for cash receipts, one for money owed by customers (accounts receivable), one for paying suppliers or employees (accounts payable), and perhaps others.
Before you open any business bank account, be sure to ask yourself these questions about your projected costs and revenue structure so that there are no surprises down the road.
Obtain Any Additional Required Permits or Licenses.
Depending on the type of business you are operating, there may be other permits or licenses you need to get before opening your doors for business. For example, if promoting concerts, you might need to:
- Apply for a license from Industry Canada.
- Register as an employer with Employment Canada.
- Submit certain information to the Canadian Revenue Agency.
While it is possible to do this yourself via online applications or phone consultations, we recommend you speak with an attorney first since they will know exactly what documentation is needed and how things work at all levels of government.
Last but not least, once the basics are taken care of, you should think about hiring employees to help run the business.
If it’s a small company or you are not sure if your business will be successful, we recommend that you only hire independent contractors (self-employed people) initially and pay them based on an hourly or per diem rate rather than as regular salaried employees unless they are working full-time hours with no exceptions.
Generally speaking, it can be difficult to terminate an employee after working for more than three months, so make sure you really want them there before making employment offers.
Why Should You Hire JTT Accounting for Business Incorporation in Ontario?
Business incorporations are complex legal structures with serious consequences if not taken seriously. JTT Accounting provides Canada’s most comprehensive business incorporation services to ensure that all aspects of it are covered and protected when you incorporate a business in Ontario.
We take care of filling out the necessary papers & forms, filing them with government agencies, and keeping up-to-date on your company taxes at all times so that our clients can focus on their work instead of the structure of their company.
When you incorporate using our services, you can rest assured that we’ll be there every step of the way to keep things running smoothly until your company is ready to stand on its own.
JTT Accounting provides one of Canada’s most comprehensive business incorporation services to ensure that when you incorporate your business, all aspects of it are covered and protected.