How to Incorporate a Business in Canada

As a business owner, you’re likely wondering how to incorporate a business in Canada. Whether you’re a sole proprietor looking to incorporate, or you are starting your business as a corporation, it’s important to understand the process of incorporation to ensure all your accounts are in order. If you need assistance incorporating your business in Canada, trust Gallo LLP!

What is a Corporation (in Canada)?

In Canada, a corporation is where a group of people or a company is able to act as a single legal entity.  A corporation can enter into contracts and own property separately from its shareholders, making the corporation itself separate from the individuals within. Furthermore, income and losses incurred by a corporation do not flow directly to shareholders, removing some of the risk of investing in a corporation.  What limited liability means is that if the company is sued, personal assets of the shareholders cannot be seized to settle the claims.

Taxation is handled differently with corporations as the corporation’s business handlings are kept separate from individual shareholders. As such, corporations pay their own business taxes at a corporate rate to limit the liability of shareholders directly. Corporations can also choose a business year-end to file taxes, rather than working off a calendar year.

What is a Sole Proprietorship?

A sole proprietorship is an unincorporated business – meaning that the sole stakeholder . When it comes to the business, the sole proprietor holds responsibility for making decisions, receives all the profits, claims all losses, and does not have a separate legal status from the business. As a sole proprietorship, the owner assumes all the risks of the business, and these risks extend even to personal property and assets.

Unlike a corporation where stakeholders have a limited liability, a sole proprietor is responsible for all business risks and liabilities. 

As a sole proprietor, the business owner includes their business operations on their personal income tax return and is taxed at a marginal personal tax rate. Because sole proprietorships are filed within personal taxes, the sole proprietor must file based on the calendar year as an employee would file their personal taxes – before the end of April.

What are the Benefits of Incorporating in Canada?

There are several benefits to incorporating a business in Canada. First and foremost is the limited liability for stakeholders. Incorporating protects the personal property and assets of everyone invested in the business from corporate creditors. 

Another advantage to incorporating is you can choose a business year-end that is off-calendar, meaning you can align your taxation period with a less busy time of year. Corporate tax rates tend to be lower than personal tax rates, plus corporations can borrow money at a lower rate than individuals or sole proprietors. Corporations can also raise funds by selling shares and increasing stakeholder investment. A final advantage to incorporating is that if the business is able to generate income in excess of the owner’s needs, excess income can be retained within the company at a lower tax rate than would otherwise be paid personally.

Are there disadvantages to incorporating?

One of the primary disadvantages to incorporating is that the shareholders will also need to file and pay a separate income tax return – even if their primary income comes from the corporation that has paid a corporate tax. Furthermore, any losses the business incurs cannot be used by individual shareholders to reduce their personal taxes. 

What are the Primary Steps Needed to Incorporate a Business?

Incorporating is a straightforward process which can be completed at a provincial registry or through a legal representative.  There are four basic steps to incorporating a business. 

  1. Choosing a corporation name.
  2. Get an NUANs report which ensures there is no other corporation with your name. 
  3. Gather information for incorporation.  This includes shareholder’s names, Director’s names, corporate address as well as the number and class of shares to be issued by the corporation.  
  4. Submit information to your lawyer or Alberta Registries. 

Once your business is incorporated, you can open a bank account and have shareholders subscribe for their shares. Next, you will need to open all the relevant accounts with the Canada Revenue Agency.  

Ongoing obligations related to having a corporation can consist of filing annual income tax returns, filing periodic GST returns, performing employee payroll, as well as updating the corporation’s Minute Book on a periodic basis.

What Role Do Accountants Play in Incorporating a Business?

Gallo LLP can assist you through the entire incorporation process. Our team of expert accountants can advise on which shares to issue to stakeholders as well as handle opening Canada Revenue Agency accounts on your behalf. Navigating your taxes and books while accounting can be daunting, but our team has the knowledge to walk you through setting up the corporation bank account and selecting the right record keeping system for your needs.  

In addition to the incorporation process, Gallo LLP will help you with your year-over-year taxes and accounting needs. We provide year-end preparation services as well as can handle all CRA related filings and issues. Above all, Gallo LLP provides the expertise to help you run your business in the most efficient way possible.  

One of the best steps you can take to ensure your incorporation process is handled properly is to have a trusted advisor in your corner before you make the move to incorporate. We’ll provide you with all the necessary information you need for account set up and can assist you in anything you need along the way. If you’re looking for accounting help in incorporating your business, please contact us!

Related: Starting Out Right: The ultimate free guide to starting your business.

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