As a small to medium-scale business owner, you may be thinking of taking a step further from running a sole proprietorship or partnership to a fully incorporated company.
There are many reasons businesses incorporate, some of which include:
- Tax deferral and opportunities for tax breaks
- Limited liability legal implications
- Business organization and brand recognition
- Funding / Grant Opportunities
These reasons to incorporate are discussed in detail below. Regardless of what influences your decision to incorporate your business, you need to understand the business incorporation process.
Business Incorporation Process
The steps to incorporating a business may vary across Canada but involve similar processes.
To incorporate your business in British Columbia, you need to reserve a distinct company name with a corporate designation through the corporate registry. To register a business name through the registry, you must pay a fee of $30 as of 2023. You can decide to use a company name or the incorporation number. Currently, the reservation period for a distinct name after approval is 56 days. Always check with your registry as this number is subject to change.
After reserving and registering a new company name, you will need to establish your company’s articles. The company’s articles include the rules for your company, shareholders, directors, and benefits statement, if applicable. When completed, the Registrar will issue your company’s Notice of Articles.
To complete your business incorporation through the registry, you also need to sign an incorporation agreement and pay the $350 incorporation fee ($1,000 for Unlimited Liability Company) as of 2023. After you complete payments to the registry, your incorporation application process will commence.
You will receive the following documents when you complete your company incorporation:
- Certificate of Incorporation
- A certified copy of the Incorporation Application
- A certified copy of the Notice of Articles
- The company’s incorporation number and business number
Record Filing Requirements
As an incorporated company, you are required to file annual reports every year within two months from the anniversary date of your business incorporation. The annual report fee is $43.39 as of 2023.
Your annual filings must report a change of business address, changes in shareholder composition, or directors. You do not need to submit your financial statements or annual general meeting minutes with your annual report. Instead, you should keep these records at your Corporate Registry office.
The most common type of incorporated business is the limited liability business. A limited liability incorporated business is a separate legal entity from its shareholders, and legal obligations are usually binding on the company.
For unlimited liability corporations, on the other hand, shareholders are liable if a business goes bankrupt.
Transferring ownership of an incorporated company by selling company shares is often straightforward. Incorporated businesses have greater chances of continuity.
As a sole proprietorship or partnership business, the Canada Revenue Agency (CRA) taxes your business income using your marginal tax rate. To an extent, you cannot control how much of this income gets taxed.
With an incorporated business, you can determine how much of your business income falls under your personal income for tax purposes. You can pay yourself a salary or receive dividends as a shareholder in the company.
After deducting allowable expenses, your net business income will get taxed at the applicable corporate tax rate.
Total corporate tax rates can be generally lower after accounting for tax benefits, such as capital cost allowance, tax abatements, and applicable business deductions.
Incorporating your business can also give you access to tax breaks such as the Small Business Deduction (SBD) and the Federal Abatement.
The basic Part I tax on qualifying taxable business income is 38%, a federal tax abatement of 10% reduces this rate to 28%. After a general 13% tax deduction, federal corporation taxes come up to 15%.
Note that only income earned in Canada is eligible for the federal tax abatement.
You can take advantage of the SBD if your business qualifies as a Canadian-controlled private corporation (CCPC).
The Small Business Deduction is calculated as 19% of the lower of your taxable income, active business income from Canada, and the specified business limit ($500,000 for a corporation not associated with another corporation).
The SBD can reduce your corporation taxes on eligible income to 9%, down from a 38% basic Part I tax rate (28% after the federal tax abatement). BC incorporated businesses are also subject to a 2% lower tax rate for a business limit of $500,000 and 12% higher provincial tax rate.
To get the full advantage of incorporating your business, you should liaise with a tax professional to help you incorporate your company, provide required filing reports, and file corporate taxes.
Funding / Grant Opportunities
Incorporating your business can open doors to various business credits, grants and funding opportunities. For example, if your business incurs eligible research and development costs, you can claim Scientific Research and Experimental Development (SR&ED) tax incentives.
The Canada Digital Adoption Program (CDAP) federal grant also provides funding of up to $2,400 to grow your business online and $15,000 to boost your business technology.
Incorporating you business requires considering key factors such as the incorporating process, the tax advantages, legal implications and access to funding.
You can also use a full-service incorporation company, such as DW & Associates, Chartered Professional Accountants, to assist your business through a complete incorporation process.
We provide incorporation advisory and company registration services as we work with your business to file corporate taxes. Contact the team for a consultation.