The three main structures for setting up a corporation are sole proprietorships, partnerships, and corporations.
If you are unsure which form of business you are operating, and have not consulted a lawyer or an accountant, it is likely that you are operating a sole proprietorship or partnership. A common reason for incorporation is to protect oneself from liability. Unlike sole proprietorships and partnerships, a corporation is a separate legal entity and offers protection from legal actions being brought against a business owner personally. However, this protection is not as comprehensive as many believe, and a prudent business owner should purchase insurance to protect against legal claims whether or not their business has incorporated. Most often, the appropriate time to incorporate a business is when it becomes advantageous to do so from a tax perspective. Corporations are taxed separately from shareholders, and the corporate tax rate can be lower than your personal tax rate, depending on your income. It is best to consult with a lawyer and an accountant if you think it is time for your business to incorporate.
You can operate your business across Canada whether you incorporate federally or provincially. Federal incorporation is governed by the Canada Business Corporations Act (CBCA), while provincial incorporation is governed by each province’s incorporation legislation.
A common misconception is that incorporating federally allows your company to operate across Canada without any further registration. In fact, a federally incorporated company will require registration in each province the company operates; and therefore, federal incorporation is usually more expensive. However, there are several benefits to incorporating under the CBCA:
Incorporating federally provides a limited form of name protection for your business across Canada. A provincial registrar cannot refuse the extra-provincial registration of a CBCA corporation, even if a corporation with a similar name has already registered in that province.
There are several benefits to incorporating provincially:
The government fees for incorporating provincially are lower because you will not have to file an extra-provincial registration in the province that you incorporate in.
Your provincial business registration service is often easier to deal with than Ottawa.
Provincial corporations will require less annual filings, and lawyers tend to be most familiar with the incorporation legislation of their home province. This can help to reduce the legal cost and complexity of running your business.
The primary benefit of incorporating federally is a limited form of name protection across Canada, but incorporating provincially is usually easier and less expensive.