Canadian Articles of Incorporation – Part 1 of 4: **Introduction to Incorporation**Introduction- Incorporating a business can be one of the most important decisions any entrepreneur makes in establishing their business and it is usually one of the first decisions they have to make. When at the earliest stages of business development, cost is often a factor that deters entrepreneurs from incorporating immediately, as hiring legal counsel can be both expensive and intimidating. Lucky for you, this process can be completed at a fraction of the price when you utilize the tools and resources provided by Clausehound.com.
What is Incorporation? The incorporation process enables a business entity to operate independently from the individual. In the context of new venture formation, the incorporation process will usually convert a sole proprietorship into a corporation – providing both the business and its owner(s) many crucial benefits at a reasonable and proportional cost. A corporation (the end result of the incorporation process) is effectively recognized as a person under the law. An incorporated entity may come in many forms including for profit, not for profit, cooperative and governmental corporation.
How much does incorporating cost? If you were to incorporate your business either Provincially or Federally without the use of private incorporation portal, it would be $360 to mail or submit your Articles in person in Ontario, and $250 for a Federal incorporation complete by mail or in person. Therefore, it is not just cheaper, but much more convenient to use a private portal!
For Federal incorporations, the governmental fee amounts to approximately $200, while the Provincial fee in Ontario amounts to approximately $300. If you use a private incorporation portal to register your business, like the one offered by Cyberbahn, it will cost you slightly less than incorporating directly through the government. Additionally, companies like Cyberbahn make the incorporation process much easier!
It is important to keep in mind that there are additional fees required to operate a Federally incorporated business, so it is not necessarily less expensive than a Provincial incorporation.
Benefits of incorporating-**(A) Separate legal entity:** Incorporating a business provides the newly formed corporation with rights similar to those possessed by a person under Canadian law. The corporation (compared to the sole proprietor/individual prior to incorporation process) can acquire assets, take on debt, enter into contracts, be found guilty of a crime and sue or be sued. Prior to incorporating, the entrepreneur often has to fulfill these various roles and obligations under their own personal identity, adding significant risk to the individual. (B) Limitation of liability: Shareholder(s) of a corporation are not typically obligated to pay the corporation’s debts or judgments should the corporation become insolvent. If bankruptcy occurs, the shareholder(s) will not lose more than what they had already invested into the corporation. These financial protection, especially in the case of higher-risk ventures or if sued by a stakeholder, are especially important at all stages of the business, but especially in the venture’s early years. (C) Tax efficiency: Since corporations are taxed separately from the shareholders, corporations will typically pay lower tax rates than unincorporated entities. If a business entity is earning more money than the owners require for their lives, then incorporation offers the business tax advantageous methods to hold capital compared to the options available to an unincorporated business. In addition to the tax efficiency achieved for the earnings of the corporation, other opportunities for tax efficiency exist as a result of incorporating including: (i) issuing dividends (control over amount, timing, etc.), (ii) income splitting within a family unit, (iii) carry-forward of losses for future taxation reduction, (iv) flexibility in selling the business, among many other taxation and disbursement advantages.
It is evident that incorporation offers many advantages at every stage of operation and in both successful and less successful scenarios. Should your business become very successful, incorporation allows for reduced taxation through dividends instead of salary. If your business fails, incorporation enables the shareholder(s) to limit their losses to the funds invested into the corporation, and protects their personal bank accounts and assets.
Detriments of Incorporating-**(A) Inconvenience at time of growth:** When an entrepreneur is grinding away at creating a successful business model, petty legal concerns are often at the back of their mind. Although the timing is rarely good for the costs and effort of incorporating a business, the early stages of the business are often the best time to set up these processes so that all decisions made later on conform to the standards established in the constating documents. (B) Added costs: The setup and administrative costs of operating a business rise when the business becomes incorporated. The corporation must file annual reports, corporate registry, separate corporate tax returns, etc. When a venture has limited available funds or available time, such considerations are sometimes deemed to be overwhelming and cost prohibitive. This is likely the main drawback that entrepreneurs consider when weighing against the obtainable benefits. (C) No business loss offset: The shareholder(s) cannot offset business loses to their personal gains.
Should the company not be successful, the business losses must remain within the corporate entity. Comparatively, if the entrepreneur is operating a sole proprietorship (business without corporate classification), they can in fact offset their losses with other income generated. (D) Liability may be less limited than you thought: Although incorporated businesses are protected by a limitation of liability, this limitation is often mitigated by (i) exemptions to the limitation, or more often through (ii) personal guarantees for debt. There are multiple circumstances when a director of a corporation is not protected by the ‘corporate veil’ including issues relating to: environment, tortious actions of a director, entering into a contract without proper authority, breach of trustee duties, and other statutory liabilities (under both federal and provincial law). A situation experienced more often by entrepreneurs is the need to provide a personal guarantee for debt financing. As new ventures usually have limited finances, lenders often require the shareholder(s) to provide a personal guarantee for the debt. Should the business fail or be unable to meet its debt obligations, the lender can then go after the individual for the funds.
Federal vs. Provincial Incorporation- In Canada, entrepreneurs have the choice of incorporating their business either federally (according to the Canada Business Corporations Act) or provincially (In Ontario, under the Ontario Business Corporations Act). To determine which jurisdiction is preferred for the incorporation, the shareholder(s) must establish where the corporation will conduct its business, the importance of name protection across multiple provincial jurisdictions, and the cost implications of choosing an incorporating jurisdiction.
Based on the above description, one may wonder why someone would incorporate provincially in the first place when all of the benefits, plus more, are offered through federal incorporation. Firstly, a business must still register in any province they are operating in even if they are federally incorporating, reducing much of the advantage obtained through federal incorporation. Secondly, the filing requirements are greater for a federally incorporated business. The business must comply with federal corporate filing requirements in addition to the requirements from each province that the business is registered in. Thirdly, the costs of registering are slightly higher for a federal incorporation as the fee to incorporate, the added fees of registering in provinces, and the use of the NUANS system (to be discussed next) add up.
Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter. You can use Clausehound.com’s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!
When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:
Currently Live!1 of 4 – Introduction to Incorporating a business2 of 4 – Which Articles of Incorporation should my company use?3 of 4 – Selecting and protecting your company’s name4 of 4 – What to consider when selecting Directors for my business?
Coming Soon! Part 5 – What to consider when selecting the corporation’s share attributes? Part 6 – What type of restrictions should be in place? Part 7 – Other Important Information Part 8 – What’s else should I consider before developing my business?
For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.