Whether you are an entrepreneur starting a new venture or an established business looking to expand, selecting the appropriate business structure for your company is an important decision. Corporations are an attractive option for many companies because they can be incorporated either provincially or federally, and their status as a separate legal entity provides shareholders with limited protection against legal liability. This blog will provide n overview of considerations for business owners interested in incorporating in Alberta or Canada.
A corporation is one of several business structure options and may not necessarily be the most appropriate structure for every business. Selecting the appropriate structure for a particular business depends on a variety of factors, including the nature and location of the business, tax considerations, and potential for legal liability. It is best to consult with a knowledgeable business lawyer to determine which business structure is most suitable for your venture.
What is a Business Corporation?
A corporation is a legal entity, separate and distinct from its owners and shareholders, with the same rights and obligations as a natural person. A corporation can enter into contracts, own assets, borrow money, and sue or be sued in its own name. As a separate legal entity, a corporation has certain legal rights and protections that sole proprietors and unincorporated businesses do not have.
As with any major decision, incorporation can have both advantages and disadvantages that must be considered before proceeding.
Advantages of Incorporating a Business
There are a number of advantages to incorporating a business.
Limited liability protection
Incorporating a business limits the personal liability of the shareholders for the debts and obligations of the corporation. Should the business fail or be sued, the personal assets of the shareholders are protected. There are, however, certain instances where the directors of a corporation may be held personally liable, such as unpaid employee wages, GST/HST that was collected but not remitted, and when debtors require personal guarantees for early-stage corporate loans.
Tax benefits
Incorporation also confers certain tax benefits. Perhaps the most significant advantage is thecorporate tax rate. The corporate tax rate in Canada is significantly lower than the personal tax rate. This allows the corporation to retain more of its earnings, which can be used to reinvest in the business or to distribute to shareholders in the form of dividends. Corporations can also take advantage of various deductions and credits that are not available to unincorporated businesses and can benefit from reduced import/export duties and customs fees. Additionally, corporations are permitted to deduct certain business expenses, like travel and marketing costs, against their income.
Continuity of the business
The continuity of the business is another advantage of incorporating a business. A corporation can continue to exist even if its shareholders die or leave the business. This can provide greater stability for the business and its employees. If a sole proprietor or partners die or become incapacitated, the business often dies with them. However, if a business is incorporated, it can continue despite the death or incapacity of the owners. The owners of a corporation are the shareholders, and their interests are represented by shares. If a shareholder dies, his or her shares can be sold or transferred to someone else without affecting the existence of the corporation.
Ability to raise capital and secure financing
Another advantage to incorporating a business is the ability to raise capital through the sale of equity. An incorporated business can issue shares of stock to investors in exchange for funding. This allows the corporation to raise money to finance its growth without having to take on debt.
Additionally, by incorporating, businesses can access a number of government programs and incentives. Corporations also have access to government grants that provide financing for businesses. These programs can help businesses with start-up costs, expansion costs, and other costs associated with running a business.
Disadvantages of Incorporating a Business
There are a few potential disadvantages to incorporating a business.
One of the main disadvantages of incorporating a business is the cost. The fees associated with incorporation can be expensive, and it can also be costly to maintain a corporate structure. This may be prohibitive for some small businesses.
Another downside of incorporating is the increased paperwork and compliance requirements. Corporations must file annual reports and keep accurate records of their financial affairs. This can be time-consuming and arduous.
Finally, corporations can be held liable for the actions of their employees and directors. This means that if something goes wrong, the corporation itself could be sued, and this could lead to financial difficulties.
Steps to Incorporation
Choosing a Name
A corporation name must have a distinctive component, a descriptive component, and a legal element ending. A name search should be conducted before incorporating to ensure the proposed name is not already in use. An Alberta NUANS search must be done, which also reserves the proposed name for 90 days.
If a business owner cannot, or chooses not to, pick a business name, they may opt to use a numbered company. Numbered companies are often used for corporations which hold assets instead of performing daily business operations. As opposed to having a distinctive name, a numbered company is assigned a number by the Alberta Corporate Registry, the formulation of which begins with an assigned number, followed by “Alberta” and a legal element, typically “Ltd.”
Where to Incorporate
Whether a business is incorporated at a provincial or federal level depends on where the business is conducted. The legislation governing the incorporation process will also differ.
Incorporations in Alberta are incorporated under the Alberta Business Corporations Act. Provincial corporations generally require less annual paperwork and administration; however, the corporate name is only registered for use in Alberta.
Federal incorporations operate pursuant to the Canada Business Corporations Act. Federal corporations require ongoing paperwork and filings, including federal and provincial annual tax returns, and may incur additional fees for such requirements. However, a federally incorporated name is registered for use throughout Canada.
Additional Considerations Before Incorporation
When working towards incorporation in Alberta, a business owner will also be required to set up a registered address for the corporation and appoint an agent for service. The agent does not need to be a lawyer; however, this individual will be authorized to accept documents and notices, either in person or by mail, on behalf of the corporation.
At the outset, initial directors must be elected or appointed. Directors must be over the age of majority, and there are various requirements regarding where directors may live.
A business owner will also be required to create Articles of Incorporation, which will establish the corporation’s legal structure with specifications as to the classes of shares to be issued by the corporation and their corresponding rights and obligations. Corporate bylaws are also required to govern and organize the corporation’s internal management. Finally, Directors’ and Shareholders’ Corporate Resolutions will assist with properly organizing and setting up the corporate structure.
Contact the Business and Corporate Lawyers at DBH Law in Calgary for Assistance with Incorporating Your Business
Incorporation can help elevate a business to the next level. However, incorporation can be expensive, time-consuming, and complicated. Therefore it is important to consult with an experienced corporate lawyer to ensure that the steps to incorporation are done correctly and quickly. The lawyers at DBH Law in Calgary have extensive experience assisting clients with the incorporation of businesses, as well as with the preparation of shareholder agreements in case of a shareholder dispute. If you have questions about incorporation, contact us online or call us at 403-252-9937.