Why You Should Incorporate in Ontario
If your business has grown to the point of generating more income than you or your partners need, incorporating your business might provide the tax breaks you’ve been longing for.
If this is the case, congratulations! In this post, we’ll explore why and how you should incorporate in Ontario.
Why You Should Incorporate Your Business
As your business grows, your business strategy must accommodate the changes in size and revenue.
Thankfully, business structure is a dynamic thing and can be adjusted to fit your needs.
Incorporating your business could provide numerous benefits and help your organization grow into the industry leader that you dreamed of during its inception.
A corporation is its own legal entity which is formed by submitting an application with the federal government or provincial governments.
Shares of the business are then issued to the owners of the business, the corporation’s shareholders.
Funding of the corporate business structure is performed by issuing shares at a certain price or value, which then fluctuates depending on the revenues of the business.
Corporations are also more easily able to borrow funding, sometimes directly from the company shareholders. This requires little initial investment in the value of the issued shares.
After the corporation collects the available cash funding, it is then repaid to the company shareholders. One of the reasons that make incorporation such an attractive option is that loans repaid to shareholders are not subject to personal income taxes.
Rather, the corporation itself becomes responsible for paying it’s own income tax.
Before you incorporate in Ontario, consider the following benefits:
Liabilities Are Limited
Unlike a sole proprietorship, liabilities of an incorporated company are limited.
For example, if your sole proprietorship fails to pay off its debts, creditors can take action and seize your own personal property.
However, with an incorporated company, the liability is redistributed and and the corporation would be responsible for it’s own debts, with the exception of a personal guarantee or negligence.
Longevity Is Extended
Corporations are persistent by nature.
They have the ability to carry on just fine, even without the original leadership.
Unlike a sole proprietorship or partnership, there is no limit to how long the company remains open.
The company becomes a legal entity of its own and will remain so until the corporation is formally closed.
Furthermore, a corporation is also equipped to survive changes in ownership as shares can be bought and sold, or even re-purchased by the corporation.
Fundraising Becomes Easier
As previously mentioned, a corporation can raise funds easier than sole proprietorships and partnerships.
By issuing shares of the company, the value of the company is distributed to the various owners of those shares.
Often times, a corporation will sell shares to angel investors and venture capitalists. As they purchase shares, more funds are at the disposal of the business to continue its growth.
This practice is commonly referred to as equity financing. This capital typically does not need to be repaid. Additionally, this capital doesn’t accrue interest.
The only downfall of this is that with issuing more shares of the company, your percentage of ownership, or stake in the company, will be reduced.
With an incorporated company, there are a number of possible tax advantages.
For example, a corporation could pays less income tax than an unincorporated business due to the small business deduction.
Other tax advantages include the capital gains deduction for the selling of shares, and the ability to payout dividends.
As a general rule, businesses with higher incomes will reap the most tax benefits from deciding to incorporate in Ontario.
Sharing The Profits And Controlling Income
With an incorporated company, you have the ability to decide when you receive a paycheque.
This is advantageous for many reasons, but it is primarily considered a tax benefit.
By choosing when your receive your income, you can avoid higher tax rates, and even exert some control over when taxes are paid.
Furthermore, financial earnings of a corporation can be paid out to its shareholders as dividends.
By giving shares to a family member, for example, household income can be split. With this strategy, many shareholders are able to redistribute their earnings and income within their family as a means to reduce personal income tax rates.
Improved Reputation And Business Growth
Your brand is the face of your company. And everyone is judging it.
By incorporating your business and adding a “Corp.”, “Inc.”, or “Ltd.” to the end of your company name offers a huge boost in consumer confidence.
It shows that your business is stable, and this may even create new business on its own.
Contractors may only work with corporations because of the decreased liabilities.
Additionally, incorporating your business guarantees your business name is secure and reserved for your use. Sole proprietorships and partnerships don’t receive business name protection.
How To Incorporate In Ontario
Now that we’ve outlined some reasons why you should incorporate your business, let’s discuss the steps involved in the process.
Corporations can be a complex business structure and require high levels of planning and commitment.
But if your business has grown to the point where you are considering incorporation, consider taking these next steps:
Incorporating Federally vs. Provincially
Incorporating on the federal level ensures your business name is available in all provinces if you intend to expand throughout Canada.
By doing so, your company can operate under the same name, even if it’s in different provinces & territories. But remember, you still need to register for an Extra-Provincial Licence in each province and territory you are operating in.
If you choose to incorporate on the provincial level, your companies head office will need to be in that province. If you wish to expand to another province or territory you will need to register an Extra-Provincial Licence and make sure your business name is available for use there.
This decision should be based on the scope of your business. Do you plan to keep it within Ontario? Or does your company have a grander scheme in mind?
Select A Corporate Name And Reserve It
What’s in a name? Well, when it comes to an incorporated business, quite a bit.
Your corporate name should be chosen very carefully, as there are rather strict guidelines for doing so.
The company name should first and foremost not be misleading in any way. It should also be distinct and indicative of what your business is about.
A corporation name should incorporate (no pun intended) the following traits: an identifying name, a description of what your business does, and a valid legal ending (i.e. Incorporated, Corporation, Limited, etc.).
The name cannot be the same as or similar to an existing company name. So choose your brand carefully. It can, however, be in either French or English, or a combination of the two.
After choosing a name, ensure it isn’t already taken. If it’s available, reserve it promptly.
Prepare And File Documents For Incorporation
Now comes the hard part of preparing the documentation and filing the Articles of Incorporation.
To incorporate your business you will need to set the company rules of conduct, document the corporation’s purpose and the regulations it will abide by, and state the locations of business operations.
Once you have all the proper documentation prepared, you’re ready to submit your application for incorporation.
This can be either online or mailing the forms and fees to the appropriate organizations.
Once completed, your Corporation will be formally registered and ready for business. Make sure to stay on top of all other filings, and register for any CRA tax accounts you need.
If your ready to get started, try our free NUANS Preliminary Search to determine if your corporate name is available for registration.