How to Incorporate Your Business in Canada

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how to incorporate a business in canadaAre you ready to incorporate your business? If the answer is “yes”, then this post will show you how to incorporate a business in Canada.

First, you need to determine the business structure that is best for you, then register with the federal government or province.

Here are the four main business structures available.

Types of Business Structures in Canada

  1. Sole proprietorship
  2. Partnerships
  3. Corporations
  4. Co-operatives

Each business structure has its advantages and disadvantages. Let’s take a look at each.

Sole Proprietorship

With a sole proprietorship business structure, all debts and obligations are completely your responsibility. You keep all the income to yourself but if you get into any major legal problems, your property may be on the line too.

For example, your creditors can make a claim on your personal property in order to pay off your debts.

Advantages:

  • Cheap to register with your province (Newfoundland and Labrador must register federally).
  • Not highly regulated.
  • Many tax advantages, such as deducting expenses and losses from your personal or business income.
  • You don’t share the profits between a legal entity and yourself.

Disadvantages:

  • You’re responsible for all debts and obligations (unlimited liability).
  • Income is taxable at your personal rate, which may put you in a higher tax bracket.
  • Ownership of a business cannot be transferred if the business is sold.
  • May encounter some difficulties raising capital.

Partnership & Limited Liability Partnership

A partnership is good if you have a business partner but want to keep some of the benefits of a sole proprietorship.

A limited liability partnership may be used when one partner doesn’t want to be responsible for making decisions or performing daily activities. In a limited liability partnership, your responsibilities are limited. If you decide to go into a partnership, you should involve a lawyer. Get a lawyer to make a partnership agreement.

Advantages

  • Easy to start.
  • You share the startup cost equally between partners.
  • 50/50 share of profits, responsibilities and obligations.
  • Share deductions and taxes between partners.

Disadvantages

  • Just like Sole Proprietorship, you and your business partners are responsible for everything. Your personal property may come into play in a legal battle.
  • Unlimited liability to both partners.
  • You’re held responsible for the actions of your partner.
  • You’re taxed at the personal rate.

Corporations

You can incorporate your business as a provincial or federal corporation. Federal incorporation is for all of Canada, while provincial is for the province. This is probably the best type of business structure because your business becomes a separate legal entity.

With this type of structure, creditors cannot place claims on your personal property. All claims are limited to business assets only and you’ll not be liable for debts, obligations or actions of the company. Nor can the company be liable for your actions.

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Advantages

  • Your liability is limited.
  • The corporation continues to exist after you.
  • It is a separate legal entity.
  • Taxes may be lower for an incorporated business.

Disadvantages

  • Closely regulated.
  • It can be more expensive to incorporate.
  • Must file with corporations Canada yearly, which costs money.

Co-operatives

A co-operative is controlled by a group of members. It is the least common type and can be non-profit or for-profit. This is appropriate when a group of businesses or people get together to provide a service or product.

Advantages

  • The members control it.
  • Every member gets a vote.
  • Limited liability.
  • Profit is distributed among members.

Disadvantages

  • It may take longer to finalize decisions such as deciding on marketing budgets.
  • All members are required to participate.
  • The possibility of conflict between members is high.
  • Record keeping is extensive.

The information provided here is not legal advice and not tax advice. You can learn more about business structures from the Government of Canada.

Last Updated on May 10, 2020