Incorporation Basics
How to Start a Corporation in Canada
Last Updated: May 13, 2024
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Key Takeaways:
- A corporation is a legal entity owned by its shareholders and operated by its board of directors.
- Incorporating a business requires thoughtful consideration of share structure, business location, and taxes.
- Proper paperwork, organization, and social responsibility are essential for a successful business.
Table of Contents
What is a corporation and how does it work?
A corporation is a legal entity owned by its shareholders and operated by its board of directors.
This business structure allows a company to act as a separate entity from its shareholders, providing limited liability for them. In other words, the owners aren't personally responsible for the corporation's debts or obligations, including legal liabilities. This is the biggest advantage of a corporation compared to other business entities.
In practice, that means the shareholders only stand to lose the amount of money they have invested in the corporation. If the corporation goes out of business and can’t pay its debts, the creditors of the corporation generally can’t go after the personal assets of the owners of the corporation.
A corporation also has legal capacity similar to a person. It can enter contracts, hire employees, own assets, pay taxes, sue or be sued, and borrow or lend money.
So, how do corporations work?
First, an incorporator or a group of incorporators (people who plan to share ownership in a company) create a corporation when they file Articles of Incorporation with either the federal or provincial/territorial government.
Next, incorporators (now called shareholders) elect a board of directors to carry out the corporation's Business Plan. Part of this responsibility includes hiring a senior management team to handle daily operations and updating shareholders on the corporation's successes and failures.
What are the roles within a corporation?
Incorporator
The incorporator organizes the corporation and files the Articles of Incorporation. The incorporator’s role is over once the filing is completed.
Director
Directors manage the corporation's affairs. They act as agents for the corporation, and their actions are binding on the corporation.
Directors must use due diligence when carrying out their duties because they are liable to shareholders and affected third parties if any negligence or fraud occurs.
Shareholder
A shareholder is a person, business entity, or organization that owns at least one share in a corporation. They're the actual owners of the corporation.
Chairperson
The chairperson is someone elected to lead the board of directors. They serve as a liaison between the board, the shareholders, and the company's management.
President
The president is an executive officer of the corporation, usually responsible for the corporation's daily operations. The president reports to the board of directors.
Treasurer
The treasurer is responsible for keeping accurate and current financial records and supervising the corporation’s accounting functions.
Secretary
The secretary is responsible for maintaining records, such as minutes of meetings, shareholders lists, etc.
In small corporations, these roles are often performed by one or two people with more than one title. For example, one person could be the sole incorporator, shareholder, and director. These are the only roles which are required under corporation law. The other officer roles only become necessary in larger organizations.
What are the different types of corporations in Canada?
Private corporations
As the name suggests, private corporations are privately owned. Private corporations do not trade their shares publicly on stock exchanges. Instead, ownership is typically limited to a small group of shareholders who decide when and to whom they wish to sell shares. Most corporations are small, private corporations.
Public corporations
Public corporations are corporations whose shares are publicly traded on a stock exchange. Public corporations are subject to strict regulatory requirements, transparency, and reporting obligations compared with private corporations.
Canadian-controlled private corporations
To be considered a CCPC, the corporation must be resident in Canada, and it cannot be controlled by non-residents or public corporations. If eligible, these corporations benefit from certain tax advantages (e.g., small business deductions).
Professional corporations
These corporations are specifically designed for people working in certain regulated professions, such as medicine, law, or accounting. To be eligible for forming a professional corporation, a person must be licensed to practice in that particular field.
Shareholdings in professional corporations are typically limited to active members of the specified profession. On top of that, the business of the corporation is limited to the practice of that profession (and any related business).
Professional corporations are subject to both corporate laws and the regulations of their profession’s governing body. For example, in Ontario, the Business Corporations Act outlines other pieces of legislation that apply to certain professions. This includes regulations for accountants, law societies, social workers, and veterinarians.
Note: LawDepot does not currently incorporate professional corporations.
Not-for-profit corporations
Rather than generating profit for shareholders, non-profit organizations dedicate their work to social causes. Not-for-profits can incorporate at the provincial or federal level in the same way that for-profit organizations do.
Often referred to as “societies”, they are governed by a board of directors and are responsible for complying with regulatory requirements (e.g., filing annual reports and financial statements).
Note: LawDepot does not currently incorporate not-for-profit corporations.
Subsidiary corporations
A subsidiary corporation is a distinct legal entity that’s controlled by another corporation (i.e., the parent corporation). In this case, the parent corporation holds a controlling percentage of the subsidiary’s shares. This allows it to control operations and business decisions.
The subsidiary corporation has financial independence from the parent corporation. However, they may consolidate financial statements for reporting purposes. Subsidiaries are helpful when corporations want to enter new markets, manage risk, or segregate their business activities.
Cooperatives
While still a form of corporate structure, cooperatives differ from the traditional shareholder-driven model. Instead, this structure emphasizes democratic control, member participation, and a focus on serving communities. For instance, co-ops are often owned and operated by consumers, producers, workers, credit unions, and housing developers. What’s more, these members often have equal voting rights, regardless of their level of financial contribution or involvement.
The laws governing cooperatives vary by province and territory. Some jurisdictions may also have specific laws for cooperatives in certain industries (e.g., British Columbia’s Financial Institutions Act).
Crown corporations
Different levels of government in Canada own and operate Crown corporations across all provinces and territories.
Unlike private corporations that serve private interests, these businesses strictly cater to public services. Simply put, Crown corporations exist to provide valuable public services in sectors which aren’t profitable enough for private enterprises to survive. For example, they may operate in industries such as utilities, transportation, agriculture, and the arts. They’re often viewed as a hybrid between a private enterprise and a governing body because they’re owned by the government but operated at arm's length.
Interestingly, it’s possible to privatize a Crown corporation (though it’s not a simple process). This decision is a policy choice made by the government, typically after public consultations, legislative changes, and regulatory approval. A prominent example was the former Trans-Canada Airline becoming a private company, Air Canada, in 1989.
What’s important to note is that Crown corporations are accountable to the provincial or federal government (depending on how they were incorporated). The degree of government control and regulation may vary.
What law applies to incorporation?
Each of the provinces and territories has its own business corporation act (or equivalent) which governs the formation and operation of a corporation under the law of that province/territory.
In addition, the Canada Business Corporations Act allows for incorporation under federal law. The main benefit of federal incorporation is that the corporation has the right to trade under its chosen name nationwide.
How do taxes work with corporations?
Canadian corporations are subject to corporate income tax, which is separate from personal income tax paid by the shareholders. Corporate tax rates vary by jurisdiction. However, if the corporation pays a dividend to its shareholders from its after-tax profits, that dividend is part of the personal income of the shareholder. In this case, the profits are thus subject to taxation a second time in the form of personal income tax.
Opportunities for tax savings
- Small business deduction: This tax program gives CCPCs a reduced rate on up to $500,000 of active business profits. These profits are taxed federally at a rate of 9%.
- Income splitting: Families who do business together can use a corporation to distribute income differently to each member. This can result in tax savings, especially if some family members are in lower tax brackets.
- Deferred dividends: By leaving profits in the corporation, owners can defer personal income on those profits until they’re distributed as dividends. Or, if the corporation makes a loss in a subsequent year, the withheld profits can offset those losses.
- Lifetime capital gains exemption: This tax program helps business owners avoid paying capital gains taxes on the total amount of profit earned when selling certain types of assets (i.e., qualified property). This exemption also applies to any money you set aside from the sale of these assets and include as income in a particular tax year.
- Professional accounting: Tax planning for corporations is complex. A professional can help optimize your plan for your specific situation. For example, properly timing the recognition of your expenses and income can minimize your tax liabilities.
Deadlines, compliance, and record-keeping
Corporate tax years may not always align with the calendar year. Instead, their tax year is typically its fiscal period, which can start and end on any date. A company’s fiscal year depends on its industry and business cycle. So, corporate tax returns are generally due six months after the end of the fiscal year.
With that in mind, it’s essential to maintain accurate financial records and supporting documentation. Depending on the size and nature of the business, you may also be required to collect and pay GST or HST and payroll taxes.
What is corporate social responsibility?
In addition to pursuing profits, businesses have an ethical obligation to contribute positively to the well-being of society. This involves considering the environmental, social, and economic impacts of their operations.
It’s essential for businesses to align their corporate social responsibility goals with their overall business strategy and values. Companies that prioritize social responsibility are increasingly seen as responsible, sustainable, and trustworthy—impacting their reputation and long-term success.
While incorporation documents and shareholder agreements provide a framework for company governance, they can also help foster a healthy corporate culture. For example, you can consider corporate social responsibility in the following documents:
- Business Plan: Include a mission statement, a list of company goals, and operational details in your Business Plan. This can include a commitment to certain principles and sustainable business practices.
- Incorporation documents: Consider using language in your Articles of Incorporation or Corporate Bylaws that emphasizes the long-term sustainability of the business. For instance, you may add policies on environmental stewardship, fair labour practices, diversity and inclusion, and ethical conduct.
- Shareholder Agreements: Acknowledge the interests of stakeholders, not just shareholders. For example, think about the impacts of business decisions on employees, customers, communities, and the environment. You may also want to include provisions for reporting on social responsibility activities and impacts.
Why should I incorporate my business?
Contrary to popular belief, incorporating shouldn’t be based solely on a specific level of profits. While profitability is an important aspect, it’s crucial to consider various business factors as well.
In summary, the main reasons for incorporation are as follows:
- Limited liability: The shareholders’ liability is limited to the amount of money they have invested in the corporation. If the corporation goes out of business, the shareholder’s personal assets are safe from creditors.
- Professional image: Some clients, customers, and trading partners may see a corporation as a more established and credible business.
- Talent recruitment: Employees are attracted to corporate structures because they allow for benefits, stock options, and an organizational hierarchy.
- Tax advantages: Corporations have access to certain tax benefits and deductions not available to sole proprietorships or partnerships.
- Succession planning: Selling a business or transferring ownership is often easier with a corporate structure. Shareholders can sell all of their shares to a buyer, who then takes over the business and becomes responsible for all contracts in the company’s name. This is much simpler for the seller (though not necessarily preferred by the buyer).
On the other hand, non-corporate businesses can only be sold by selling all of their assets to the buyer. This typically involves more paperwork because the shareholders must assign each individual contract to the buyer.
Ultimately, you’ll need to evaluate your overall business context, goals, and future plans before deciding whether incorporation is right for you.
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