Incorporating a business is often a sign of success for entrepreneurs, self- employed workers, real estate investors and healthcare professionals. However, this important step has many legal and tax implications. Here are some answers to the five most frequently asked questions about incorporation.

Incorporating offers several advantages:

• Lower tax rate — The corporate tax rate is much lower than the personal tax rate. This is one of the main reasons why individuals who are in business choose to incorporate.
• Limited personal liability — A corporation is a separate legal entity that owns assets and is responsible for its actions. In the event of bankruptcy, for example, the corporation’s assets will be seized, but not your personal assets.
• Income left in the corporation — Unused income can be left in the company. It can be used at a later time to purchase equipment or to invest, for example. You can also set up a management corporation to help this income grow.
• Income splitting — This makes it possible to include your children and spouse in the shareholding. However, changes to the tax rules in recent years have made this option less attractive.
• Dividend payouts — Depending on the situation, it may be possible to pay yourself an income in the form of a dividend rather than a salary, which has tax advantages.
• Tax exemption on sale — SMEs have a unique advantage whereby they can sell shares in their company without having to pay tax on the profits of the sale (to a certain extent). This is known as the lifetime capital gains exemption. In 2021, the lifetime limit was $892,218.
• Estate planning — An incorporated company survives the death of its founder, unlike a sole proprietorship. This makes planning for ownership transfers much easier, notably by stipulating provisions in a will.

Before you begin the incorporation process, you need to be aware of the filing requirements, as some may prove burdensome:

• Incorporation fees — These are registration fees charged by the Registraire des entreprises or Corporations Canada.
• Production of financial statements — Accounting fees are higher for a corporation than for an individual or sole proprietorship. Each year, you’ll need to have an accountant produce your financial statements and file your corporate tax return.
• Administrative requirements — Your company must keep a minute book containing all decisions made by the Board of Directors.

If you’re self-employed, incorporation becomes an attractive option when your income exceeds what you need to support yourself and your family. In other words, if at the end of the year after paying all your family expenses you have money left over, incorporation may be right for you. Don’t forget to factor in the recurring accounting costs of an incorporated business, as mentioned above.

You may also want to incorporate your business from the outset to protect yourself against the risk of debt and personal bankruptcy.

If you’re not sure about taking the incorporation step, you may wish to consult a professional in the field, such as an accountant, tax specialist, financial planner or notary.

You can incorporate your business either federally or provincially. A federally incorporated company can set up its head office anywhere in Canada, and no other businesses in the country can use its name. Provincial corporations must establish their head office in Quebec, and the company name is protected only within the province.

Companies planning to do business with other provinces or countries may find it advantageous to incorporate federally, but there’s no obligation. The process is a bit more complex and costly, in part because you will have to file two annual tax returns, one for each level of government.

You can choose a very simple company name, such as a series of numbers followed by “Quebec Inc”, if your business is incorporated in Quebec, or “Canada Inc” if your business is incorporated federally. But that’s not very attractive to customers! When picking a company name, you first need to conduct a search to ensure it isn’t being used by anyone else. In Quebec, you must also comply with the provisions of the Charter of the French Language concerning business names.

Still have questions about incorporation? We have the answers! Contact us today. As legal specialists, notaries are well positioned to explain the implications of incorporation and guide you through the steps. Our team will be happy to help you make the decisions that will suit you best.

The information provided in this article is for general information purposes only and does not represent legal opinion or advice. Consult your notary to obtain information adapted to your situation.