Incorporating in Canada
There are certain advantages of incorporation in Canada, whether you are a Canadian citizen or a resident or non-resident Canada alien.
Factors to consider are the benefits of incorporating (rather than operating your business as a sole proprietorship or partnership) and the implications that incorporating may have on your business. Canada is different than the United States of America as it allows you to choose how to incorporate. You will have to choose between either federal or provincial/territorial incorporation.
Your choice really depends on the circumstances facing you at a particular time, and these may change over time.
The federal business law in Canada is the Canada Business Corporations Act (CBCA). When the CBCA was first made law in 1975, it introduced the notion of "incorporation as of right." In other words, when you properly complete the application form, known as the articles of incorporation, set out in the CBCA, provide certain information, such as: acceptable business name, directors and address of registered office then pay the appropriate fee, you will be issued a certificate of incorporation.
Federal incorporation services are available through the Internet, making federal incorporation a very simple and less expensive process.
The act of incorporation gives life to a legal entity known as the corporation, commonly referred to as a "company". It has the same rights and obligations under Canadian law as any natural person. A corporation can acquire assets, go into debt, enter into contracts, sue or be sued, and even in some situations be found guilty of committing a crime. A company's money and other assets belong to the company and not to the shareholders. The same principle applies to debts.
Once incorporated, the company's separate legal status, property, rights and liabilities continue to exist until the company is dissolved, even if one or more of its shareholders or directors sell their shares, die or leave the company.
The act of incorporation limits the liability of a company's owners or shareholders. As a general rule, shareholders of a company are not liable for the company's debts. If the company goes bankrupt, then a shareholder will not lose more than his or her investment. A creditor cannot sue shareholders for debts incurred by the corporation, even though shareholders are owners of the corporation.
The Canada Business Corporations Act, as well as many other federal and provincial/territorial statutes, imposes various duties on directors. In general, these duties or liabilities are imposed where the legislature has decided that a certain act or failure to act is of sufficient importance to warrant going beyond the general rule of limited liability.
A corporation is taxed separately from its owners and generally at a lower tax rate. Once dividends are paid out to the shareholders of a company, those dividends are taxable in the hands of the shareholders at the shareholders' personal tax rate. The corporate structure does permit some measure of tax deferral, since you decide when to pay out the company's earnings by way of dividend. Until you do so, this money is taxed only at the lower corporate rate, not at the personal rate.
Note that losses from the business cannot be written off against other personal income the owners or shareholders may have.
Raising capital is often easier for corporations than for other forms of business. For example, corporations are entitled to issue bonds or share certificates to those who invest money in the company. Other forms of business must rely solely on their own money and loans for capital. Reliance on these latter means of financing often limits a business's ability to expand.
Corporations often are able to borrow capital at a much lower rate than other forms of business. This is probably because financial institutions and other sources of financing perceive loans to corporations as being less risky investments.
Unlike a partnership or sole proprietorship, a corporation does not cease to exist upon the death of its owner(s). Even if every shareholder and director were to die, the corporation would still live on, and ownership would transfer to the shareholders' heirs. This assurance of continuous existence gives a business greater stability, allowing it to carry out planning over a longer term and to obtain more favourable financing terms.
