STARTUP AND BUSINESS FORMATION

Introduction

So you have a great idea and are ready to start a business. We're sure that you have a lot of questions and we're here to help guide you through the start-up and formation of your business. 

Learn about the following:

What are the benefits of incorporating versus operating a sole proprietorship?

A sole proprietorship is a business owned and operated by an individual. It is relatively inexpensive and easy to set up. However, it has several disadvantages for start-ups, including:

  • The owner remains personally liable for the actions of the business 
  • All income is attributed to the owner and taxable at the personal tax rates 
  • Difficult to raise capital since you cannot issue equity 
  • Business does not exist without its owner and therefore can have no succession 

A corporation, on the other hand, is a separate legal entity and exists apart from its shareholders and those who operate the business. Some of the advantages include:

  • Limited liability - owners are not personally liable for debts, obligations, and acts of the corporation 
  • Equity (ownership) of the business can be issued (including in exchange for investment)
  • Can exist without a specific person
  • Possible tax advantages as taxes may be lower for a corporation 

Generally, for a start-up seeking to raise money, we recommend incorporating a new company instead of operating as a sole proprietorship. 

What are the differences between incorporating in Ontario or Federally?

Canadians can incorporate a business under the authority given by legislation passed at the Federal level or at the provincial level. Both types of incorporation have unique characteristics and might affect your business in different ways.

Every corporation is required by law to maintain corporate records. The collection of corporate records is referred to as the company's "minute book". The minute book must be maintained at all times during the existence of this corporation. The corporate records include:

  • Articles of incorporation and amendments, if applicable 
  • The by-laws and amendments, if applicable 
  • A copy of any unanimous shareholder agreement, if applicable 
  • Minutes of meetings and resolutions of both directors and shareholders 
  • Shareholder registers and ledgers 
  • Director and Officers Registers 
  • Certain accounting records 
  • Share certificates (if applicable)

What are Articles of Incorporation?

The Articles of Incorporation are a legal document filed with a government body; either provincial, territorial or federal, which legally establishes a business within Canada. The document outlines relevant information needed to form a corporation, including the following:

  • legal name of the corporation 
  • address of the registered office of the corporation 
  • a range of the number of directors permitted (or a fixed number) 
  • names and addresses of the incorporators/founding directors 
  • restrictions, either on the business activities or the powers of the corporation 
  • classes of shares and any maximum number of shares that the corporation is authorized to issue 
  • rights, privileges, and restrictions of each class of shares 
  • restrictions on the issue, transfer of ownership of shares
  • restrictions on the borrowing powers of the directors 

Once the Articles are filed and approved, a Certificate of Incorporation will be issued, identifying the date of incorporation and the corporation number. 

Which Articles can be amended?

The Articles of Incorporation can be amended by filing a legal document called the "Articles of Amendment". 

Depending on the jurisdiction of the corporation, federal or provincial, the process to amend the Articles of Incorporation may vary. Some usual changes made to the Articles of Incorporation include the following:

  • (INFOG) change of corporate name 
  • change of the registered office address 
  • change of the number of directors of a corporation 
  • addition of a new class of shares 
  • change of the rights, privileges, restrictions, and conditions attached to an existing class of shares
  • change or elimination of restrictions regarding the transfer of shares 
  • elevate any provision of the by-laws as being part of the Articles of Incorporation 

Before filing the articles of amendment, the corporation must obtain its shareholders' approval, obtained by special resolution, to proceed.

Is my business name protected if I incorporate? 

If you incorporate provincially, other companies who incorporate in the province will be prevented from incorporating under the same name. This does not prevent others from incorporating similar corporate names.

Federal corporations have slightly broader protection as the corporate name requires a distinctive element and permits the business to operate throughout Canada. 

Businesses who wish to protect their name against confusingly similar names should consider registering a trademark

Can my business operate in all provinces?

Typically, to "carry on business" in a particular province in Canada, you need to be incorporated in that province or have the business license to operate in that province. If your company is already incorporated in a different jurisdiction (another province or foreign country), you will need an "Extra-Provincial License". 

Each province has legislation (whether their corporate statute or a specific extra-provincial corporations statue) that provides a definition of what is considered "carrying on business". 

The process to obtain an extra-provincial license depends on the province. Federal corporations who wish to conduct business in multiple provinces must also "register" to do business in that province. The process for federal corporations to register to do business is also dependent on the province. Generally, it is easier (and cheaper) to register to do business in multiple provinces with a federal corporation that it is for a provincial corporation to obtain extra-provincial licenses. 

Federal corporations who wish to register to do business in Ontario may do so easily, at the time of incorporation directly through Corporations Canada. 

For help with extra-provincial licenses and provincial registrations, please contact Oziel Law

What is the difference between your business number and corporation number?

The business number is a 9-digit number assigned by the Canada Revenue Agency (CRA) and is part of a unique federal government numbering system. The business number is used to interact with other federal, provincial and even municipal authorities and/or regulators. The business number forms the beginning of your businesses payroll and sales tax numbers as well.
On the other hand, the corporation number refers to a number assigned by Corporations Canada or the provincial ministry at the time of incorporation. This number can be found in the company’s Certificate of Incorporation.

When are you required to register for GST/HST?

The Good and Services Tax (GST) and the Harmonized Sales Tax (HST) are taxes that apply to most supply of goods and services made in Canada. When you incorporate your business, you might have to register for the GST/HST tax if you provide taxable supplies in Canada and you are not a small supplier.
Examples of taxable supplies in Canada include sales and leases of automobiles; advertising; franchises; commercial ride-sharing services; clothing and footwear, amongst others.
According to the Canada Revenue Agency (CRA), small supplier refers to a person whose revenue was equal or less than $30,000 in a calendar quarter and over the last four consecutive calendar quarters.
Before you register, you need a business number provided by the Canada Revenue Agency (CRA) as well as a corporate income tax account. Then, you will be required to complete the forms and additional requirements established by Corporate Canada.
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