Starting a corporation in Canada can be a great way to establish a separate legal entity for your business and to gain access to certain benefits, such as limited liability protection and the ability to raise capital. However, it is important to understand the process and the right timing for starting a corporation in order to make the most of these benefits.
Before considering whether to incorporate, understand that a corporation is a more complex business structure than a sole proprietorship or partnership, and it typically requires more formalized management and record-keeping. If your business is relatively small and simple, it may not be necessary to go through the process of incorporating.
There are many considerations if you want to start a corporation, but they can all be summarized with 2 major criteria:
- Protection of personal assets
- Tax strategy
We’ll cover these in more detail below.
Protection of Personal Assets
Protection of personal assets simply means separating your personal and business assets. Incorporating a business can provide you with limited liability protection, meaning that your personal assets will not be at risk if the corporation is sued or incurs debt. If you are starting a business that poses a significant risk of liability, such as a construction or manufacturing company, incorporating may be a wise choice to protect yourself. So if you own a house, car, jewelry, etc. and your business gets sued, you’ll still be able to keep those assets and only the assets listed within the business can be at risk. In short, if you have few, low value or no assets, this criteria wouldn’t be met and you wouldn’t need to incorporate.
Taxation is the second major consideration. Corporations are taxed differently than sole proprietorships and partnerships, and they may be eligible for certain tax credits and deductions that are not available to other types of business structures. It’s advisable to consult with a tax professional to understand the tax implications of incorporating your business. In general, businesses generating under $30,000 of revenue don’t immediately need incorporation. However, if you have a full-time salaried job plus your side hustle and your total income crosses $100,000 or more annually, it may be time to consider incorporation. Or if your business is starting to grow from $100,000 to $1,000,000 you’ll need a different level of service. At either of these points, you should be discussing with a chartered professional accountant to make sure it’s what you need. If you are below the $100,000 mark for total annual income, the costs for tax accounting and incorporation are likely to offset any tax savings you’d get by incorporating.
There are further points to think about, including benefits and opportunities that incorporating can offer you and we’ll discuss just a few more.
Funding: Incorporating can open the door to more funding options such as issuing shares by offering equity in your company to attract more investors and partners. If you are planning to raise capital by issuing shares, incorporating may be necessary. Beware though, legal documentation is required every time you issue shares. If you plan to do multiple capital raises, discuss with a lawyer on the most efficient way to complete shareholder subscriptions.
Expansion: Additionally, if you plan to grow your business and expand into new markets or industries, incorporating can provide the flexibility and scalability you need to achieve those goals. Incorporation offers business name protection on a provincial or federal level so that your brand stays consistent wherever your expansion leads. On the other hand, if your business is content with a more local or modest growth, incorporating may not be necessary.
Paperwork: Keep in mind that the process of incorporating a business in Canada can be time-consuming and requires a significant amount of paperwork, as well as annual filings. You will need to choose a business name and file articles of incorporation with the appropriate government agency. You will also be required to adopt bylaws and hold organizational meetings, and keep accurate records of the corporation’s financial and legal transactions. And if you incorporate federally in Canada, you’ll also be required to complete and file an extra-provincial registration in each province where you conduct business.
So the best time to start a corporation in Canada is when your business has grown to a certain size and scale, you anticipate significant growth in the future, or when you need access to funding or want to limit your personal liability. It’s also important to consider how the change in structure will impact your taxes, and it’s always wise to consult with a professional, such as a lawyer or accountant, before making any decisions. In most cases, an accountant is best placed to advise you on tax saving strategies, after which you can discuss with a lawyer about creating the legal corporate structure. Note that these professional services can run you a few thousand dollars altogether, but if done correctly, they are tax deductible.
In summary, starting a corporation in Canada can be a great way to establish a separate legal entity for your business and gain access to certain benefits, such as limited liability protection and the ability to raise capital. However, it is important to carefully consider the size and scope of your business, the level of personal liability you are willing to assume, the tax implications, and your long-term business goals before making a decision. And it is advisable to consult with a professional before making any decisions to ensure that incorporating is the right choice for you and your business.