17 Mar Choosing Between Federal and Provincial Incorporation
Entrepreneurs must make many decisions when looking into establishing their business, and one of these is the decision to incorporate either federally or provincially. Before you make this decision, there are a few things you should consider.
This article seeks to explain what it means to incorporate your business, and the differences between incorporating federally and provincially. As will be made clear, choosing one or the other matters a great deal and relies on your specific vision for your company.
What does it mean to incorporate a business?
Incorporating your business means legally and personally separating yourself from your business. This means that an incorporated business is governed by corporate legislation of the region that it is incorporated, which can bring many benefits.
By establishing you and your business as separate entities, you may no longer be personally liable for the operations of the business, such as debts or legal obligations. For example, if a lawsuit is brought against a company, the action would be taken on the business rather than the owners themselves. This serves to protect the owners from possible financial risk or loss of personal assets like real estate or other properties.
Additionally, incorporating your business can be wise financially if your business income places you in a higher tax bracket. Once you reach a tax threshold, you can choose to incorporate, which can save you money that can be spent elsewhere, such as investing back into your business.
The Canada Business Corporations Act (CBCA) is the governance framework for the incorporation of business in Canada, from the smallest enterprises to the largest corporations. Business may be incorporated federally under the CBCA, or provincially through the equivalent provincial corporate statutes. Once you decide to incorporate your business, you must choose whether you are going to incorporate provincially or federally – so what are their main differences?
A company that is incorporated provincially is responsible for operating under provincial corporate legislation. Although this legislation is similar in most provinces, there are variations between them that you should become familiar with when considering this option. For instance, while Alberta corporate legislation requires that 25% of a business’ directors be resident Canadians, there are no residency requirements for directors in B.C.
You should also consider incorporating provincially if you only plan on doing business within the province of which you are going to incorporate. For most smaller business owners and those operating in a specific area, this is not a problem. For larger businesses or those that expect expansion in the future, this may cause issues down the road.
Provincial incorporation also serves to protect your business name, but only in the province. This means that another company can legally incorporate under the same name in another province. This is a limitation of provincial incorporation, and you would have to incorporate federally to protect your business name across the country.
The federal incorporation of business is governed by the CBCA and generally offers wider protections. Most notably, it allows you to conduct business in all provinces and territories of Canada, which is preferable for larger corporations. Additionally, as mentioned previously, federal incorporation grants federal business name protection, which is often highly sought after by businesses.
However, incorporating your business federally typically involves a higher initial cost of incorporation and more annual documentation. Additionally, it still requires you to incorporate in the province of which your business resides, meaning the process is generally more costly and time consuming. Still, many business owners decide that the benefits outweigh these costs.
There are a few topics you should consider when making the decision to incorporate provincially or federally. Namely:
- Whether your business stands to benefit from being governed by provincial or federal corporate statutes;
- If you plan on conducting business within a province or across Canada;
- Whether your would like your business name to be protected; and
- If the advantages of federal incorporation outweigh the added costs.
This article provides a brief description of provincial and federal incorporation and introduces some aspects to consider when making the decision to choose one or the other for your business.
If you are a business owner seeking to incorporate your business and in need of practical guidance, contact a corporate lawyer at Guardian Legal Consultants today. We provide advice to business owners to ensure that their legal needs are met, allowing them to focus on what they should – running a successful business.