What is Incorporation?
Incorporation is the legal process of forming a business corporation. A corporation is a type of business structure, a legal entity that sets it apart from its founders. In that way, business founders are not responsible for corporate debts and obligations and creditors cannot sue them for liabilities incurred by the corporation.
Why should you incorporate your business?
If you want to protect your personal assets and liabilities, to have lower tax rates, to have greater access to capital and attract new investors, you should incorporate your business.
What are the benefits of the corporation?
As a general rule, when incorporating a business, you and other business owners get Limited Liability protection. In most cases, you are not responsible for the debts and liabilities of the corporation. For that reason, creditors cannot take your personal assets, such as a house or a car, to pay the debts of the corporation. These convenient terms of corporation attract many investors, especially because shares can be easily sold or transferred to someone else.
However, have in mind that your liability to the creditors as a shareholder is equal to the amount of your investment. In other words, money you invested in the company is liability. Major shareholders and directors still have statutory obligations and possible liability.
Lending institutions can see larger corporations as less risky investments and they are more eager to give bigger capital and at more favourable rate. Those institutions also give favourable terms because corporation has unlimited life which gives stability image and the assurance of long existence. On the other hand, financial institutions may ask from business an equity position.
In Canada, shareholders and officers don’t necessarily have to be Canadian residents. If you want to form a business corporation in Ontario, the registered office should be in Ontario. However, if you plan to spread the business across provinces, you need to form a federal incorporation.
What steps you need to take before incorporating?
Before incorporating, you need to take several steps. First you need to propose the name of the corporation, the location of the registered office and its purpose. You should also state the names and residential addresses of the shareholders, as well as the number of shares each shareholder will have. Then you need to select the directors and the officers of the corporation. In most jurisdictions in Canada, there has to be at least one or even more directors of the corporation and officers can hold more than one office. Lastly, you need to decide when your fiscal year-end will be.
Don’t forget to describe how the corporation will run and what are the responsibilities of each member- a shareholder, a director and an officer. You have to predefine and state in a written form when the shareholder meetings will take place along with other details of running a corporation.
What incorporation documents you need to prepare?
To incorporate a business, you must file Articles of Incorporation document and other supporting documents. Within sixty days of the date of incorporation, the corporation must file an Initial Return/Notice of Change. Articles of Incorporation, which generally consists of 10 separate articles and each article requires different information:
Other supporting documents that need to be delivered together with Articles of Incorporation are:
NUANS name search– this document need those who are incorporating under a name instead of a number name. NUANS is software, a database that checks if the corporate name you proposed has already existed.
Bilingual name– if your corporate name has both English and French version, you should check names for both languages.
Covering letter– introduce your application in the cover letter and enclose it with the contact details of the person, incorporator who will be communicating with the authorities with regards to incorporation application and its documents.