One question posed to me by small business owners is how to incorporate a proprietorship.
Before answering this, the business owner must first ask if it is advantageous to do so. Past columns have addressed this in detail so I will summarize two key considerations.
Is there a need to protect oneself from liability? This can be in terms of business debt, errors or omissions, environmental damages, injury to workers or clients, among others. Since a corporation is its own entity separate from the “owner”, the corporation will be responsible for these liabilities as long as the owner, known as the shareholder, hasn’t signed personal guarantees.
The other consideration involves the business profits. Because there is a lower tax rate for small corporations compared to personal tax rates, there is a tax advantage for profits earned by a corporation vis-a-vis proprietorship, unless of course, the shareholder has to draw all the funds out of the corporation to pay for life’s expenses since this draw on the profits is seen as “wages” by CRA and are taxed at personal tax rates thus nullifying the benefit of the lower corporate tax rate.
Not intending to gloss over these two questions, but now to the point of this column – the steps to incorporation.
The first step is more a word of awareness. Self-incorporation is an option but do not hesitate to get professional advice from a lawyer and accountant first. Messing up this paperwork can be a nightmare and costly to correct, not to mention opportunities foregone in terms of corporate structure. Yes, there’s lots of on-line help, including the BC Registry Services website, but several hundred dollars spent for one-on-one consultation before incorporation may be wisely invested funds.
The second step is to create a company name. This may appear simple for an on-going business but the current name may not be available so submit three choices and hope for the best. Another option is to agree to a numbered company and then choose an “operating as” name. This may allow the current business name to continue to be used.
Step three, enter into an incorporation agreement with all the incorporators. Given available templates, this is straightforward if there is only one incorporator. However, complexity may increase as the number of incorporators increases.
Number four, establish the corporation’s articles. These govern the conduct of the company, shareholders, directors and officers. Templates are available but again, complexity may increase as the number of people and roles increase.
Lastly, file the incorporation application with its fee, and keep all documentation. This isn’t just a good thing to do, the Business Corporations Act requires the corporation to have the Incorporation Agreement, Articles of Incorporation and all registration documents in its possession.
This includes the Business Number automatically issued by Canada Revenue Agency. This 9 digit number is the corporation’s equivalent to a person’s social insurance number.
Moving forward then, every year the filing of an Annual Report (a standard form routinely mailed to the corporate office) is required within 60 days of the incorporation date to confirm corporate information. Note that this 60 day period is from the incorporation date, not the corporate fiscal year-end date.
By the way, missing the filing of the Annual Report two consecutive years will result in the deregistering of the corporation – not a pleasant experience. Take 10 minutes to fill out the form and file it with BC Registry Services each year.
From a tax perspective, the former proprietor who only had to remit a T1 personal tax return in the past, now also has to remit a T2 corporate tax return within 90 days of the corporation’s fiscal year-end. Add a second T2 if a holding company is part of the corporate structure and a T3 for a Family Trust.
And I would be remiss if I didn’t refer you back to step one.