When you start a business, you have two options. First, you can operate as a sole proprietorship and simply report your earnings on your personal income tax return. The second choice is to form a corporation, which gives you more flexibility but also adds a layer of cost.
Read on to learn more about how to incorporate a business in Ontario and whether this structure is best for you.
What does it mean to incorporate?
A corporation is a separate legal entity that has the power to operate a business, sue or be sued, and purchase or lease commercial property.
When you incorporate your business, it gets limited liability protection. This means that the company’s assets can be seized to pay debts or damages from a lawsuit, but your house or personal savings cannot.
However, the directors of the corporation do face liability to pay employees. In Ontario, this obligation is up to six months of wages and 12 months of vacation pay.
Corporations continue even after you die. They can only be closed when the directors vote to dissolve the corporation and make the appropriate filings with the provincial government.
How to incorporate in Ontario step by step
- Company name: The first decision you need to make is whether you want to have a company name (such as Bob’s Building Services Inc.) or a numbered company (such as 123456 Ontario Inc.)
Having a named company will cost a bit more. You will need to hire a registered name search firm to conduct a NUANS search. This checks all of the corporations in Canada to ensure that there is not already one with your name (or a similar name).
- Create the articles of incorporation: Normally, you hire a lawyer to help you with this. This sets out the number of shares in the corporation. It also specifies whether you have a single class of shares or have both voting and non-voting shares. The articles state the minimum and maximum number of directors of the company.
- Registration: When you register your company, you provide a certified office address and list of board of directors. You can list your home address if you don’t have a corporate office.
- Where to incorporate a business in Ontario: You submit the documentation to the province and pay the incorporation fee. Assuming that everything is in order, it should only take a few hours to complete the incorporation.
Benefits of incorporating in Ontario
One of the key advantages of incorporation in Canada is limited liability. If the corporation is sued or cannot pay its debts, its assets can be seized. However, the personal property of the owners and directors cannot be touched.
There can be financial benefits as well. With a sole proprietorship, you must report all of your earnings on your personal income tax return. Corporations are different. You can hold money within your corporation, only paying a modest corporate income tax on any net income.
In addition, you can own the corporation with your spouse and even other family members. They can receive dividends if the company decides to declare one. This allows you to split your income, which can reduce your personal income tax owing.
How much does it cost to incorporate in Ontario?
In the section above, we talked about the benefits of incorporating. However, the costs are definitely one of the disadvantages.
It costs $360 to register a corporation in Ontario. There is no charge if you decide to establish a numbered company; if you go with a named company, there is a name search fee of $30.
In addition, you will need a lawyer to draft the articles of incorporation. Typically, this can cost $1,500 although you may be able to get a lower rate if you shop around.
Every year you will need an accountant to file your corporate income tax return and a lawyer to prepare your corporate resolutions.
When should I incorporate?
Well, there are two options:
- Incorporate your business from the outset: When setting up your company, you can incorporate rather than run it as a sole proprietorship. This can be valuable if your business is in a sector where there is a risk of lawsuits.
- Start as a sole proprietorship: If your business is small and in a relatively low-risk industry, you can save money by operating as a sole proprietorship. This allows you to see whether the business will be successful. Once your business grows, you can incorporate to take advantage of the limited liability and income tax options.
Articles of incorporation in Ontario
The articles of incorporation set out the structure of your corporation, including the number of shares and the minimum/maximum number of directors. It’s a good idea to provide some flexibility here. For example, suppose you and your spouse are the directors of the corporation. It’s best to make the maximum number of directors greater than two – because down the road you may wish to take on a partner by selling some shares and making your partner a director.
Not for profit incorporation
Non-profit organizations, including charities and co-operatives, can incorporate in Ontario. This is a good idea because it protects the directors from a lot of potential liability (although they are still on the hook for employee wages). The provincial government sets out specific rules for non-profits. You can view them here on the Ontario website.
In summary: Incorporating in Ontario
Opening a corporation in Ontario is a fairly straightforward process. With some expert assistance from a lawyer, you can establish your corporation in just a few days.
The big question: Is it better to establish your business as a sole proprietorship or a corporation. Incorporating provides you with liability protection and can carry tax advantages; however, there are costs associated with incorporating, including legal and accounting fees.
