Starting A New Business | Incorporating

Starting a business can be overwhelming. There are so many practical and legal decisions to make. Perhaps you already have an ongoing business but now you are thinking about incorporating. Consulting a lawyer can help you make proper decisions and get the work done. Here is some information I hope you will find helpful. Keep in mind that it relates to Saskatchewan and Canada. If you are in a different jurisdiction, some of this information may not apply to you.

What are your choices?

Not incorporated: You don't have to be incorporated to operate a business .. although there can be some advantages to a corporation. Except for some unusal exceptions, your typical choices are:

  • You may operate a business by yourself without a corporation. That is commonly called a proprietorship.
  • If you are not incorporated but there are more than one of you, that is a partnership. A partnership essentially means you agree to share the profits or losses according to a formula.
  • If you operate your business with others under a common name, you may appear to the public to be a partnership. However, you may have agreed among yourselves to simply be associated with each other. You share the expenses but keep your own individual accounting records and keep your own profits or losses. It would be difficult for a store or restaurant, for example, to work this way. However, many professionals work under this type of arrangement.
  • Incorporated: If you decide to incorporate, the corporation is a separate legal entity. It has its own legal name. It can sue or be sued under that name. It has its own income or losses, separate from those you have as a person, and must file its own tax return. It must also file an annual return and pay an annual fee to a government office to keep this standing. The corporation can be incorporated through the provincial government or the federal government. It is by far more common to incorporate provincially as most people are only doing business in one province. However, if nation wide protection of your business name, for example, is important, a federal Canada Corporation may be the way to go.

    Other Business Entities: In a few special situations, such as where a group of people decide to purchase a commercial building, a tax professional may suggest using something called a limited partnership. Without going into the details, it is sort of a mix between a corporation and a partnership. Most people would not need or want to operate a business this way. It requires special circumstances. If you are a charity or other non-profit association, you may decide to incorporate as a non-profit corporation. Many of the concepts are similar to business corporations, but not all.

    Should You Incorporate?

    A corporation (a company) can have certain advantages and disadvantages over a non-incorporated business. As a general rule, the larger the business, the more urgent it becomes to be incorporated. Some considerations are:

  • Limited Liability: If you operate your business so that it is apparent to those you deal with that you are incorporated, you usually cannot be held personally liable for debts or liabilities of the corporation. For example, if you are a restaurant and someone slips and hurts themselves in your entry, the lawsuit would need to be made against the corporation rather than you personally. If the business becomes unable to pay its debts, you cannot be sued personally for the unpaid bills. There are some special exceptions, though. For example, Revenue Canada (CCRA) has the ability to pursue directors for employee deductions and GST that is not remitted. Another example is that provincial legislation makes directors of a corporation liable for unpaid wages up to a certain limit. Also, most banks and many suppliers require the directors or key persons in a corporation to sign a personal guarantee as a condition of extending credit.

  • Income Tax Advantages: This question requires the help of a tax professional. Beware that many basic accountants and bookkeepers do not have the expertise needed to advise you on this issue. However, in some cases, a corporation may be able to pay a lower rate of income tax on the company's income that you keep in the company if you don't need to take it all out for yourself. You may be able to include a spouse with lower income than you as a shareholder so that some profits can be paid as dividends to them and taxed at their rate which may be lower than yours. That can make incorporating more attractive but again you need to review that with a tax professional for accurate information. For example, the CRA will expect the spouse to be actively working for the company in a realistic way if they are an employee, rather than only doing it as a means to divert what is really your income to your spouse.

  • Disadvantages to incorporating: If you are a new business and expect to have losses for the first year or two, you may prefer to keep your business as a proprietorship or partnership so that you can offset your losses against other income you earn personally. Also, if you don't expect to earn a great deal of income from the business and are not overly worried about the liability aspect, you may feel that keeping an extra set of books, paying annual filing fees and filing another tax return is not worth the time and expense. There can be other disadvantages as well, but the point is, incorporating is not necessarily the best route for everyone.
  • Is incorporating/creating a company expensive? In the long run, incorporating is not very expensive. The legal costs of incorporating can be broken down into two components. One cost is the fee that the lawyer charges. The other is called disbursements. A typical fee charged by a lawyer might be $700 for a provincial corporation without special circumstances (plus corporate registry charges). This fee is for more than just creating the corporation. A lawyer will prepare all of your incorporating documents and resolutions and probably give you a certain amount of legal advice about it if you have questions. Your corporation will have more classes of shares so that you have flexibility built in for something your accountant may suggest that you do. A federal corporation may be a bit more expensive as you still have to register it in Saskatchewan as well. The other component is called disbursements. That's the out of pocket expenses the lawyer has to pay, such as the government registration and name search costs. In Saskatchewan, the government charge to register a new corporation is $255.00 at the time of updating this article, depending on certain variables. The government also charges another $50.00 for the name search. These are the major costs. There are a few other miscellaneous costs such as the cost of a minute book, corporate seal if you want one, etc.. I'd be happy to provide you with a quote. Keep in mind that the corporation I would create would have many classes of shares with different rights. Even a small business corporation often needs more than one or two classes of shares.

  • What other agreements should I consider? You may also want to enter into other agreements at the time you set up your business or incorporate. If you are a partnership, you should have a partnership agreement prepared for you to set out how you will make decisions, share profits or losses, etc. It's a lot easier to avoid or resolve a dispute if your agreement is set out in writing. If you have a corporation, you may want to enter into a shareholder agreement that deals with disposal of shares in the event one person wants to sell, death, disability, marital breakup, etc.. If you don't have an agreement, you might find yourself dealing with a new business partner (shareholder) that you don't want if another shareholder sells his or her shares. Whether you are incorporated or not, you may decide to buy life and/or disability insurance to fund the payout of a disabled or deceased person's interest in the business so as to avoid the cash crunch if you had to come up with the money in other ways. These are only some examples of the other agreements you may want when you set up your business or as it grows.
  • Names for Carrying on Business:

    Business & Corporate Names: If you are a doctor, you may decide to operate your business as Dr. Peter Smith, M.D.. There may not be any need for a business name. However, if you are a restaurant or other business, you likely would want a unique name to identify your business. The law requires you to register your business name with a government registry to ensure that the public has access to know who they are dealing with. This means that a special type of search needs to be made to ensure the name or something too similar to it is not being used elsewhere. You need to go through this procedure whether you want to be incorporated or unincorporated. You are not allowed to use names that are misleading or too similar to someone else's name. The name also needs to be unique and descriptive of what you are doing. For example, the name "Shoe Repair" would likely be descriptive because it tells the public that you repair shoes. However, it is not unique. That's why you need to also have a unique element as well, such as "John's Shoe Repair" or "Reliable Shoe Repair".

    If you are a corporation, the words "Inc.", "Incorporated", "Ltd.", "Limited", "Corp." or "Corporation" (or the French versions) need to be added to the end of your name to tell the public that there is limited liability.

    If you want a corporation but you do not care about the name, you can let the corporations branch assign one by default. That's why you see names such as 123456 Saskatchewan Ltd.. It just means that the business name is not particularly important so the person incorporating was able to save the expense of the name search.

    If you are not incorporated, the name of your business is a "Business Name". If you have a corporation but you want to carry on business using something other than the corporate name, you can also register a "Business Name" for the corporation. For example you may be 123456 Saskatchewan Ltd. but if you want to carry on business using the name East Side Auto Rentals, you would register that as a Business Name which would be owned by the corporation. You cannot have a phrase such as "Inc." at the end of an business name.

    Trademarks: A trademark is a federal registration of a name but it won't have "Inc." or any similar phrase at the end. For example, you may have a company that manufactures dish soap in Canada. Your company name might be Canadian Household Consumer Products Inc.. Since that would not be very suitable for advertising or the label on your bottle, you might trademark the name "Dishelle". If you register the trademark, no one else will be allowed to register or start carrying on business under that name after the date of your trademark. However, you can't use that to block someone who is already using the name.

    Key Concepts in a Corporation

    Directors, Officers & Shareholders: If you have a business corporation/company, you will have shareholders, directors and officers. Shareholders own a stake in the business but they do not automatically have the right to operate the business. If your shares are voting shares, you typically have the right to cast your vote in deciding who will be directors of the company. However, not all shares carry the right to vote. Some shares are non-voting.

    Directors are the people elected by shareholders to operate the overall business of the corporation. Officers, are the directors with titles such as "president", "secretary", "treasurer", etc. This last group of people is determined by the directors. An officer usually is a director as well, but does not need to be. In a non-profit corporation, the rough equivalent of a shareholder (but with many differences) is a "member".

    Articles of Incorporation and Bylaws: The articles of incorporation of a company is the document that sets out the the basic setup of the corporation. For example, it will say how many types (classes) of shares there are and the rights associated with each class of shares. It may also say whether the business the company can carry on is restricted. It may restrict the sale of shares, etc.. A properly drafted set of articles requires the help of a knowledgeable lawyer.

    Bylaws are the rules of procedure that a company needs to follow when conducting internal business, such as calling and holding meetings of directors and shareholders.

    Notice:The information on this website is general in nature only. It relates to Saskatchewan, Canada and may not be applicable in your jurisdiction. It does not constitute legal advice to you and no solicitor client relationship will be established. A conflict check would also be required before our firm can act for someone. You should seek specific legal advice regarding your circumstances from a lawyer entitled to practise law in your jurisdiction.
    * Richard Carlson Legal Prof. Corp. | Friday, Jun 21 2024 17:30 pm UTC1 (-6 hrs for Sask)