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When should you incorporate? Why? And How?

ranacharif.ca > Business Law  > When should you incorporate? Why? And How?

When should you incorporate? Why? And How?

As a business lawyer and an immigration lawyer, we do a significant amount of incorporations for businesses across Canada. Have you been doing business lately without incorporating? This is how most small business owners start: they register a business name, apply for a Master Business License and start working on getting their names out there to start selling and doing business. Entrepreneurs are resourceful, and that also applies to the legal steps that they favor in certain stages.

However, once your business begins to generate a certain amount of revenue, it is important to start considering an incorporation. Here are a few reasons why:

  1. An incorporated organization has its own separate identity which means that lawsuits can be filed against its independent name and vice versa -without involving the personal assets of the persons working under it or their names. If your business has a high risk of liability, this is an excellent motivating reason.
  2. Incorporating opens new doors for saving on taxes when investing and purchasing assets under your corporation’s name, rather than your own personal identity. Think motor vehicles, real estate.. etc.
  3. If you are looking to create an income generating legacy to pass on to generations or to share with loved ones or business partners, it is quite simple to transfer ownership of the business to either other physical persons or even corporations by simply transferring shares!
  4. A corporation is immortal. It can survive generations which means that the hard work of the founders will pay off generations to come.
  5. If you are looking for investments from investors, these prefer incorporated businesses as they can offer a return to investors for their investments by simply issuing shares.
  6. In certain circumstances, taxes are lower for corporations.
  7. You can later shield your money further by creating a holding company to hold the extra profit of your new corporation, without incurring personal taxes on them just yet.

The reason entrepreneurs consider incorporating after generating a certain level of revenue is that the incorporation process costs more than other simpler business structures, and they require annual filings with the Government. Corporations are strictly regulated by the Canadian Government.

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The most prevalent question that business owners ask themselves is whether to incorporate provincially or federally. A Federal incorporation has different rules and a different law to abide by than a Provincial incorporation. It is therefore necessary to understand both before making a decision. Federal incorporations are governed by the Canada Business Corporations Act (R.S.C., 1985, c. C-44) (the “CBCA”), whereas Provincial incorporations are governed by Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”).

Given how each business is unique depending on the specific industry, the business owner’s short and long term goals, amount of revenue as well as the business history, it is best to seek a legal recommendation from a business lawyer regarding a Provincial or Federal Incorporation. You can book an appointment with a Business Lawyer, Rana Charif by clicking here.

For general information, the following are the main differences.

Federal Incorporation

  1. Provides international recognition and protection of the business or trade name abroad and throughout Canada.
  2. Allowed to do business across Canada. Usually best for businesses that operate throughout Canada and internationally.
  3. Corporations Canada offers clients an online service that allows you to send documents, pay fees, and receive documents and acknowledgments all via the internet without having to use an intermediary.

Provincial Incorporation (In Ontario)

  1. Provides local protection of the business or trade name within the Province only.
  2. Only allowed to operate within the incorporation Province. Requires a license to operate in other Canadian Provinces.
  3. Less filings than federal corporations.

The Canadian government provides some more insight on Federal Incorporations. For a more visual demonstration, you can watch the video below.

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