We've spent the past decade helping entrepreneurs to incorporate and set up their small businesses. Over that time, we've noticed that there are a few key questions business owners ask, or wish they had asked, prior to incorporating. In this post we'll take a look at those questions and provide some answers. Taking a few minutes now to consider these issues could save you a significant amount of time, money and stress down the road.
Should I incorporate my business?
Should I incorporate? is the first question you should ask before taking any steps to set up a business.
To determine whether you should incorporate a business, you need to first understand the pros and cons. You should also take a look at the alternatives to incorporating. Depending upon the facts, incorporating a business could make a whole lot of sense, very little sense, or something in between. Here are some of the things to consider when deciding whether you should incorporate a business:
- Whether you'll be in business alone or with others - Although there are many benefits to incorporating a business with one owner, it becomes even more important if there are multiple owners.
- The degree of risk associated with business operations - The riskier your business, the more important it will be to incorporate.
- Whether the business will have employees - If you have or plan to have employees, incorporation can provide significant protection for the business owners.
- The type of products and/or services to be offered and to whom - If credibility of the business is an issue, it might seem unprofessional for clients to deal with Joe Schmoe operating as ABC Transport rather than ABC Transport Ltd.
- The amount of income expected to be generated - The greater the value of the business (current or expected), the more important it will be to incorporate.
- Whether the business brand is important to protect - Incorporation can provide some protection for your business name. If name protection is important to your business, incorporating may be the right choice.
- Whether you plan to sell the business upon retirement or have ownership transfer upon your death - A business that's incorporated is usually easier to sell. Instead of transferring over each asset, contract, and account of the business to a new owner, the new owner simply needs to acquire shares of the corporation. Shares of a corporation can also be transferred upon your death. Despite ownership of a corporation changing, it can continue on operations as if nothing had changed.
- Whether you want access to the lifetime capital gains exemption on the sale of shares - Selling the shares of a corporation rather than just the assets can allow a business owner (assuming all requirements are met) to access the lifetime capital gains exemption for the sale of shares. If this is available, it can result in significant tax savings.
- Whether you intend to raise money for your business - Operating a business through a corporation not only makes it easier to borrow money from certain lenders, it also allows you to sell shares to qualified investors.
All of these factors can help you decide whether incorporation is right for you. Keep in mind not just what your answer is today, but what it will likely be in 5 and 15 years from now. Although you can incorporate a business at any time, it can be quite a hassle and expensive to transfer your business to a corporation after it's developed. That's because you'll need to transfer all of the business assets (which could be taxable), open new bank and government accounts, and revise all existing contracts. You'll also need to start operating under a new legal name among other things.
Click here if you'd like a FREE 30 minute consultation with an Alberta business lawyer to discuss whether to incorporate a business. It takes less than an minute to book and you'll get peace of mind knowing that you're making an informed decision.
Should I register a federal or provincial corporation in Canada?
The first question you should ask after deciding to incorporate, is whether you need a federal or provincial corporation. One of the most frequent mistakes we see being made by business owners that incorporate online is incorporating the wrong type of corporation for their circumstances. Many first time business owners think that because they sell stuff online or carry on business in more than one Province, they need a federal corporation instead of a provincial one. In most cases that's not true.
Choosing to register a corporation federally instead of provincially is almost always more expensive overall, and isn't necessary for most small businesses.
We've previously written about the differences between federal and provincial incorporation in Canada, so we won't go into too much additional detail here, however, the following are important facts to consider when deciding whether you should incorporate federally or provincially in Canada:
- Both federal and provincial corporations are required to register in each province in which they "carry on business". For federal corporations, this means that they must register federally as well as in at least one province (where the business is based). Provincial corporations will only require multiple registrations if they carry on business outside of the province in which they were incorporated.
- Because of the additional extra-provincial registration that is required for federal corporations, they are typically much more expensive to set up than provincial corporations. An extra-provincial registration in Alberta for example typically costs between $500-$1,000 including agent and government fees. This is in addition to the federal incorporation costs. The primary exception to this rule is Ontario, where extra-provincial registration of a federal corporation is both easy and inexpensive.
- Although incorporating federally gives you some extra name protection for your business, the protection is quite limited and is nowhere near the protection afforded by a registered trademark. If you're incorporating federally just for the added name protection, you should carefully consider whether registering provincially and applying for a trademark would make more sense.
Choosing to register a corporation federally instead of provincially is almost always more expensive overall, and isn't necessary for most small businesses. Although there are a few situations where federal incorporation makes sense (such as for large businesses with an international presence) most business owners would be better off incorporating provincially and considering applying for a registered trademark for their business name.
If you have questions about whether you should incorporate a federal or provincial corporation, we recommend that you speak with a business lawyer. Getting it wrong can lead to significant expenses that could have been avoided.
Should I choose a named or a numbered corporation?
One of the benefits to operating a business through a corporation is the ability to name your legal entity. Usually, this means coming up with an attractive name that you hope will be memorable for your clients.
Although named corporations are the most common choice, it is also possible to incorporate something called a numbered corporation. This means that you do not choose a name for your corporation, but instead, use a name that is automatically generated for you. Your corporate name would be made up of a unique and automatically generated number (you do not get to choose), followed by the name of the jurisdiction in which you registered and a legal element.
For example, 17654321 Alberta Ltd. is an example of a numbered corporation that would be registered in Alberta. 9876543 Canada Corporation is an example of a corporation that would be registered federally. The only part of a numbered company name that you get to choose is the legal element (Ltd., Inc., Corp.). You can read more about legal elements of a corporate name here.
In our experience, numbered corporations are rarely used for businesses with ongoing business operations. This is because it's less attractive (and arguably less professional) for clients to deal with 33414556 Alberta Ltd. than it would be for them to deal with a company called Uberfresh Laundry Services Ltd. The latter is much easier to brand, and is more likely to be remembered.
In our view, it's almost always better to choose a named corporation.
The one time that numbered corporations are common, is when the business does not carry on active operations, but instead acts as a holding corporation. A holding corporation is a legal entity that does not carry on active business operations, and therefore does not need to worry about their brand. In most cases they simply hold shares of another corporation (sometimes used for tax and asset protection purposes) or other assets.
In our view, it's almost always better to choose a named corporation, even if the corporation isn't being used for active operations. Here's why:
- It is very easy to mess up the name of a numbered corporation. For example, 1234567 Alberta Ltd. looks a lot like 1234657 Alberta Ltd. Where mistakes occur, legal issues can arise;
- Although you can use a registered trade name to help with branding, (ie 1234567 Canada Inc. operating as Dave's Dry Cleaning) it usually doesn't look very appealing as you should still clearly list the corporate name in order to maintain limited liability protection;
- The added cost to incorporate using a named corporation is very reasonable and it is a one time fee paid at the time of incorporation. Some incorporation packages (such as our all in incorporation package) include a named corporation for free.
If you want more information about the difference between a named and a numbered corporation you can read this article. If you still have questions, we recommend that you book a free lawyer consultation. You can have your questions answered by an experienced business lawyer prior to making important decisions.
What kind of shares should the corporation issue?
Shares represent ownership of a business. Shares can be issued by the corporation, transferred by shareholders, and used as security for the owner's debts, among other things.
There are many different types of shares that can and should be issued in different circumstances. For example, there are voting and non-voting shares, equity and non-equity shares, shares that are entitled to dividends and those that are not, preferred shares that are entitled to priority if the corporation is wound up or dissolved, and shares that are used for specific tax purposes.
The number and type of shares that should be issued at the time of incorporation will depend upon your specific circumstances, however, a corporation can only issue shares that have been properly authorized. For Canadian corporations, this means that the shares to be issued must be authorized by the Corporation's Articles of Incorporation.
This is where many do-it-yourself websites and registry offices make mistakes or fail to provide businesses with the flexibility they'll need in the future. They either limit the corporation to issuing 1-2 different classes of shares, or leave it to you to come up with a description of authorized shares. This often means that income splitting opportunities are not available and/or that the Articles of Incorporation need to be amended in near the future.
This is where many do-it-yourself websites and registry offices make mistakes or fail to provide businesses with the flexibility they'll need in the future.
When you incorporate with a law firm, your corporation will typically be set up with Articles of Incorporation that include a wide range of share classes. Often times there are 15-20 different classes of shares authorized at the time of incorporation. This is done to ensure that the business owners have flexibility to issue different classes of shares at the time of incorporation, which can be beneficial for tax purposes. It can also prevent the corporation from having to make expensive changes to the Articles if the business owners decided to issue additional shares in the future.
Once the correct share structure is set up in the Articles of Incorporation, a decision can be made as to which shares should be issued at the time of incorporation. If there is more than one shareholder, it may make sense to issue a different class of shares to each shareholder. Depending upon the circumstances, this can allow for income splitting that would not be possible if the Articles of Incorporation are not set up correctly.
Who should I involve in my business?
One of the biggest decisions to make when setting up a new corporation is who should be involved. Making a mistake at this stage in the game can have serious consequences. Unless you're going to be a one person business and act as the CEO, marketing department and chief bottle washer, you'll need to decide who should fill the following roles:
- Shareholders. These are the owners of the business. The number and class of shares issued to shareholders at the time of incorporation can determine how money earned is distributed. Where there is more than one owner, we recommend speaking with a lawyer prior to registration about who should hold what shares, whether they should have the same or different classes of shares, and how many shares they should each own. We also strongly recommend discussing whether it makes sense to prepare a Unanimous Shareholder Agreement. Without such an agreement, your business can be at significant risk.
- Directors. Directors are the primary decisions makers of the corporation. They're typically the ones that sign off on important documents such as contracts and cheques. They can also make decisions about hiring and firing, how money made by the corporation is to be distributed, whether the corporation will borrow money, etc. Directors can also be personally liable for certain acts or omissions of the corporation as well as employee source deductions, corporate taxes, and environmental liabilities. It's important to understand these potential liabilities and to ensure that the right persons are appointed to this position.
- Officers. Officers typically include a President, Secretary and Treasurer, but can also include positions such as CEO, Vice President, etc. Like directors, officers can be liable for certain acts and omissions of the corporation. For that reason, it's important that the right persons be appointed to fill the various roles.
In addition to determining who will fill the above roles, you'll also have to select various service providers for the corporation. The most common service providers are bankers, accountants and lawyers, however, there can be many more (think marketing professionals, business coaches, etc.).
Choosing the right partners for your business can make the difference between success and failure.
If you don't already have someone you trust that provides these services, try calling around. Don't be afraid to compare prices and services from several different providers. Most importantly, try to find someone that understands your business, and that can act as trusted partner in your quest for business dominance. Choosing the right partners for your business can make the difference between success and failure.
Do I need a Lawyer to Incorporate my Business?
It's rare to find a first time business owner that has plenty of cash to spread around. Most often, business owners are on a strict budget and are trying to stretch their startup funds as far as possible.
It's fair to ask whether it's necessary to hire a lawyer to incorporate. After all, a business owner can save a few bucks by registering their business with a do-it-yourself website online, or using a local registry office.
It's true that lawyers can be expensive and that you can register a business without one, however, it's important to compare the true cost of incorporating with or without a lawyer. If you choose to incorporate without one, you'll have your corporation registered, however, you won't receive legal advice and there's a very good chance that important steps will be missed. The problems created by trying to save a few dollars up front can be catastrophic for your business.
If you believe in your business, and you've decided that incorporation is right for you, you owe it to yourself to ensure that it's set up correctly. Starting a business is stressful, time consuming and expensive enough, the last thing you want is to deal with expensive problems that could have been avoided with proper advice and assistance of an experienced business lawyer
Trust your business to a professional. Get the advice and protection you need, without the headaches and uncertainty.