Canada Incorporation in a Nutshell
- Incorporation creates a new legal entity in the eyes of the law.
- The main advantages of incorporation are limited personal liability and the potential tax advantages.
- A company can be incorporated either federally or provincially. This site covers a federal Canada incorporation. Please click here for more information on Ontario incorporation.
- The ‘owners’ of the corporation are its shareholders.
- A majority of directors of the corporation must be ‘resident Canadians’.
- It is the responsibility of the applicant, not the government, to ensure that the corporate name is registrable, and not confusing with the name of any similar business.
- Government approval of your incorporation does not protect your corporate name.
Methods of Carrying on Business
In starting a new business, one of the first decisions you must make is what type of business you wish to set up. There are many options available, including incorporation, partnership and sole proprietorship. Please note that the laws governing such matters depend on the jurisdiction — whether it is federal or provincial, and which province. The most common forms of business organization are:
Sole Proprietorship: This is basically a non-incorporated business with a sole owner.
Partnership: The Ontario Partnership Act defines a partnership as the relationship between persons who are carrying on business in common with a view to profit. It is NOT a legally separate entity from its partners. A partnership can be either General or Limited.
Corporation: A corporation is a separate legal entity in law from its owners. It can sue and be sued in its own name. Each jurisdiction in Canada (the ten provinces, the territories and Canada) has its own rules for incorporation.
Non-profits, Co-ops and Others: These are more specialized forms of business organizations.
Private vs. Public Corporations
A fundamental distinction can be made between what are called ‘private’ or ‘closely-held’ corporations and ‘public’ corporations. In general, a public corporation offers its shares to the public, either through the stock market or privately. In order to protect the public, the government has imposed special rules, notably about disclosure, on these corporations. These rules are complex and require much paperwork and effort.
As a result, most small businesses incorporate as ‘private’ companies that do not offer shares to the public. Three common restrictions are added to the Articles of Incorporation to ensure that securities legislation does not apply. First of all, the number of shareholders (excluding employees) is limited to 50 or fewer. Secondly, shares cannot be offered to the public. And finally, restrictions are placed on the transfer of shares.