One of the most important steps of creating and building a business is to incorporate. Although many believe that first you need to build the business and only after it has seen some success, should you actually incorporate it. I would suggest that you prioritize incorporation early on in the business creation process.

Incorporation creates and entity which is distinct from the business’ creators and members. This is very important from a liability perspective as you greatly the reduce the consequences of a business failure spilling over into your personal life and leading to the potential seizure and liquidation of your assets to satisfy the claims of your business’ creditors.

In addition, as a corporation can have a business banking account (and I strongly, strongly suggest you to open one), this greatly simplifies dealing with revenues and expenses associated with your business, as these are now separated from your own personal revenues and expenses. With this clear separation, it becomes easier to expense costs associated with your business from your own personal expenses. That being said, a corporation does have to file corporate taxes every year which is a bit of a hassle and generally leads to an additional cost for the accountant who prepares the returns.

Now the question arises as to what type of incorporation should be prioritized. In Canada, you have two choices as to the type of incorporation: a federal incorporation or a provincial incorporation. Although this choice appears to have been reduced down to only two options, in fact each province has its own type of provincial incorporation, so there are in fact 11 different options (a federal incorporation and an incorporation under the applicable law for each of the ten Canadian provinces).

Let me state the most important aspect off the bat, for just about all businesses, from an operational standpoint, it makes no difference whatsoever whether you have a provincial or federal corporation. Both types of corporations can cover just about any type of business and the fact that a corporation is provincial does not in any way limit the scope or territory where the business can operate. That being said, a provincial corporation needs to have its head office in the province of its incorporation.

There are some slight distinctions between federal and provincial corporations and those change according to the province chosen. Here’s a comparison of some of the more important differences between a Quebec provincial corporation and a federal corporation:

Of these, the most important distinction is the residency requirements for directors for federal corporations. If your business will have many foreign directors, a provincial incorporation may be much more attractive. On the next point, provincial incorporations are cheaper than federal incorporations. For a federal incorporation, you need to pay for the federal corporation filing fee and the provincial registration fee. In addition, a NUANS name search needs to be completed for federal incorporations and doesn’t need to be completed for certain provincial corporations. That being said, even a provincial corporation which doesn’t require a NUANS search requires that you attest that the name is valid and not being used by a similar business in your same market.

So if you want to keep your costs to a minimum, a provincial incorporation is the way to go. That being said, I always recommend federal incorporations to clients. Federal incorporations have the caché of being a Canada corp instead of a provincial corp which gives a better impression when you are trying to attract foreign or out-of-province investors.

From a name protection perspective, federal corporations appear in NUANS searches which makes it harder for another business to have the same name as yours. In addition, federal corporation names pop in trademark searches which makes it more difficult for someone to register a trademark of your business’ name. In Quebec, federal corporations have the advantage of being able to have English names and to circumvent certain of the language laws which apply in the province as they fall under federal jurisdiction. Nonetheless, if you want to operate a business in Quebec with an English-sounding name, seriously consider registering a trademark for that name which should allow you to operate under that name.

Finally, independent of whether you choose a federal or a provincial corporation, you should really have a corporation which has a name as compared to simply a number (i.e.: 3456789 Canada Inc.). Numbered companies are not as impressive sounding as companies which have a name. It also becomes much more confusing to distinguish your companies if you have several of them which all have different numbers. Most importantly, your customers may struggle to remember the number of your company which means that every time they want to make a payment, they need to double-check your company’s name to write it correctly on a cheque or to send certain other types of money transfers.

Thinking about alternative business structures, another post will discuss your non-incorporation options including sole-proprietorships, general partnerships, and limited partnerships. That being said, I would caution against partnerships unless you have very good reasons to have one; they lack many of the advantages of incorporations without providing much in return.

If you want to discuss the topic further or want to proceed with an incorporation, just write me a line or give me a call and I’ll help you through the process to let you focus on more important parts of your business.