Business Start-up general questions
One of the first decisions every entrepreneur must make is to determine the legal structure for his business. There are 3 common forms of business ownership: sole proprietorships, partnerships, and corporations. Each structure has its advantages and disadvantages. The choice of legal structure is an important decision because it will have an impact on the taxation of your business, the liability you will face, the paperwork needed to operate the business, and your ability to raise capital. Let’s take a quick look at each structure.
Sole Proprietorship
This is the most common form of legal structure because it is the simplest and cheapest structure to start your business. A sole proprietorship is a business owned by one individual. You can operate a sole proprietorship under your personal name or any other name you have chosen, subject to the legal requirements in your jurisdiction.
Advantages
- Easier start-up: A sole proprietorship is easy and inexpensive to set up and operate since there is minimal paperwork required to start the business.
- Fewer regulatory requirements: Contrary to a partnership or a corporation, the operation of a sole proprietorship is not highly regulated, so its management requires very little formalities. In most provinces, if you operate your sole proprietorship under your personal name, you don’t even need to register your business at the corporate registry.
- Deductions and expenses: Just like a partnership or a corporation, a sole proprietorship enables you to deduct business expenses from your revenue and obtain certain tax deductions.
- Direct control: The business does not have a separate existence from its owner, so the owner has unlimited control over the company.
Disadvantages
- Liability: Since the business does not have a separate existence from its owner, the sole proprietor is fully responsible for all the debts and obligations of the business.
- Lack of continuity: The business is inherently tied to its owner. In the absence of the owner, the business does not exist.
- Financing: A sole proprietorship does not provide a lot of options to raise capital.
- Name protection: Except for the limited protection created if you register your business name, a sole proprietorship does not benefit from extensive name protection. The best alternative would be to obtain a trademark for your business name.
Partnership
A partnership is an agreement between two or more people who combine resources in a business to make a profit. In Quebec, partnerships are either general partnerships, limited partnerships of undeclared partnerships.
Advantages
- Easier start-up: A partnership is also comparatively easy and inexpensive to set up and operate since there is minimal paperwork required to start the business.
- Limited regulation: There is limited regulation on partnerships, so its management requires little formalities.
- Shared skills and resources: The partners can share their skills and resources for the success of the partnership.
Disadvantages
- Unlimited liability: The partners are liable for the debts and the obligations of the partnership. In the case of a general partnership, not only are the partners jointly liable for the obligations of the partnership, but they are also solidarily liable if the obligations have been contracted for the service or operation of an enterprise of the partnership.
- Possibility of conflict: Conflicts between partners could seriously affect the operation of the partnership.
- Lack of continuity: The life of the business is tied to the partners because the partnership is not a separate legal entity. In the absence of the partners, the business does not exist.
Corporation
A corporation is a legal entity that is created to conduct business. As such, it possesses the same rights and responsibilities of a natural person and it is completely separate from its founders, shareholders, directors, and officers.
Advantages
- Limited liability: Subject to certain exceptions provided by law, the shareholders, directors, and other representatives of the corporation are not responsible for the debts and the obligations of the corporation.
Unlimited life: The lifespan of the corporation is not limited to the existence of its owners. The ownership of a corporation can be passed from generation to generation. - Flexibility: Operating through a corporation allows flexibility as to how to move the earnings of the business. There are a lot of options. You can choose to pay out your directors and shareholders through salary, dividends, or even loans. You can also choose to keep the profits in the corporation. You also have the possibility to split the income of the corporation between members of your family.
- Corporate structure: Having a corporation allows you to direct the earnings of the business towards other business ventures. For example, by creating a holding corporation that holds the shares of your operating corporation, you can move profits from your operating corporation to your holding corporation (inter-corporate dividends are generally done on a tax-free basis) and then redirect such profits in the same manner to any other operating corporation.
- Raising capital: A corporation allows you to raise capital by issuing shares to family members, friends, or other investors. You are also more likely to obtain a loan or an investment due to the limited liability. A corporation gives you access to more alternative sources of capital.
- Tax benefits: A corporation benefits from lower income tax rates. You can defer tax payment by keeping your earnings in the corporation. Shareholders can also benefit from the capital gains tax exemption at the sale of the shares of the corporation.
Disadvantages
- Start-up costs: You will incur fees for the incorporation of your business, such as government fees for the registration of your business and legal fees for the drafting of the legal documents for your corporation.
- Possible double taxation: The income will be taxed at the corporate level (when earned by the corporation), then at the personal level, when received by the shareholders or directors (salary, dividends, etc.). However, there are ways to reduce and possibly avoid such double taxation.
- Heavy regulation: The operation and the management of a corporation are highly regulated compared to the other two structures. There are also more formalities such as keeping a minute book for all the important documents of the corporation.
When you are incorporated, you can choose any tax year-end as long as the number of weeks does not exceed 53. Sole proprietorships and partnerships must apply to the CRA for approval to change their fiscal year-end to any date other than December 31st. A professional corporation that is a member of a partnership and carries on business in Canada must have December 31 as its tax year-end. It is important to choose your year-end wisely. Your year-end does not have to coincide with the busiest time of the year. On the contrary, if there is a time in the year when your business slows down and your inventory is low, it might be best for you to set your year-end during that time so that you get the time to complete the filing requirements and perhaps count your inventory. The fluctuation of your business operations can help you determine which date is best for your year-end.
As a general rule, you should register for GST and QST if you intend on earning more than $30,000 in a given calendar quarter or if you earned such an amount in the 4 preceding calendar quarters.
Calendar year quarters are as follows:
- January through March;
- April through June;
- July through September;
- October through December.
This is another important question for your business. Understanding the difference between an independent contractor and an employee can have an impact on the overall management of your business. An employment relationship comes with a lot of responsibilities for any employer. Under most employment standards acts, an employee has the right to an array of benefits including vacation pay, statutory holidays, overtime pay, notice, or severance pay in lieu of notice, upon termination and employment benefits. Such is not the case for an independent contractor unless negotiated by agreement. Consequently, many businesses prefer hiring independent contractors.
How do you determine if a worker is an employee or an independent contractor? A simple agreement stating that the worker is an independent contractor is not sufficient. Also, an employee who creates a corporation to offer his services through such a corporation is not sufficient either. There are several elements to be considered when determining if there is an employment relationship.
Subordination
This is the most important criteria to determine if a worker is an employee or an independent contractor. The courts will analyze the following criteria:
- Obligatory presence at work;
- Does the worker have to respect a specific schedule?
- Does the business control when the worker can go on vacation?
- Does the worker have to remit work reports to the business?
- Does the business control the worker’s work with respect to its quantity, its quality, and the method used to do the work?
- Can the business take disciplinary action against the worker?
- Does the worker need permission to work for someone else?
- Does the business deduct income tax for the worker?
- Does the worker benefit from an employee benefits plan?
If the majority of the questions above have a positive answer, there is likely an employment relationship between the worker and the business.
Ownership of Tools
This is another criterion to assess the relationship between the worker and the business. In an employment relationship, the employer provides the tools which are necessary to perform the work. On other hand, when the worker supplies his tools and covers any costs for the maintenance or the repair of such tools, he is more likely to be considered as an independent contractor.
Profits and Losses
When the business assumes the costs associated with the work, such as the expenses for the worker’s services and the operating costs of the worker, it is likely to be an employment relationship. Such is also the case when the business reaps the profits from the worker’s services. In other words, when the employer incurs the losses and earns the profits from services performed by the worker, there could be an employment relationship. On the other hand, when the worker incurs the risk of loss and earns the profits for his work, he is likely to be an independent contractor.
We have highlighted some of the criteria to be taken into consideration before hiring a worker. We encourage you to take these factors into account before making your decision. In any case, it is extremely important to properly define the relationship between both parties in a written agreement.
Contact us if you if need an employment agreement or an independent contractor agreement for your business.
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Incorporation - General questions
A corporation is a legal entity created under federal (Canadian Business Corporations Act) or provincial law (in Quebec, the Quebec Business Corporations Act). Its shares are held by shareholders, who elect a board of directors to manage the activities of the corporation. A corporation enjoys most of the rights and responsibilities that an individual person possesses: it can sue or be sued, own assets, loan or borrow money, hire employees, enter into agreements and pay taxes. As such, it has a separate patrimony from its owners, which ensures limited liability for its representatives. Corporations also benefit from tax advantages which can be beneficial for your business.
Limited Liability
Since the corporation is a legal entity of its own, its representatives are not responsible for the debts and obligations of the corporation. In the event of a lawsuit or bankruptcy, your personal assets will be off the hook.
Continuity
The lifespan of the corporation is not limited to the existence of its owners. Therefore, the ownership of your corporation can be passed from generation to generation. You can also choose to sell the assets or the shares of your corporation, which, in the latter case, may enable you to benefit from a capital gains tax exemption.
Flexibility
A corporation allows flexibility as to how to move the earnings from the business. There are a lot of options. You can choose to pay out your directors and shareholders through salary, dividends, or even loans. You can also choose to keep the earnings in the corporation. You also have the possibility to split the income of the corporation between members of your family.
Raising Capital
A corporation allows you to raise capital by issuing shares to family members, friends, and other investors. You are also more likely to obtain a loan or an investment due to the limited liability. A corporation gives you access to more alternative sources of capital.
Tax Benefits
A corporation benefits from lower income tax rates and other tax benefits, which provides a lot of options for your tax and succession planning. There are other benefits such as the tax exemption on capital gains for shareholders at the sale of the shares of the corporation.
Once you decide to incorporate your business, you have the option to incorporate under federal law or provincial law. We will outline below the main factors to consider before making your choice of jurisdiction.
Business Activities
The nature of your business activities will likely determine whether you should incorporate a federal or a provincial corporation. If you plan on operating on a local level, a provincial corporation might be the best for you. For example, if all your customers will be in Quebec and you don’t plan on expanding across the country, then a provincial corporation might be best for you. On the other hand, if you will conduct business activities across the country, for example, sell products and services across Canada, then you should incorporate your business under federal law. It is important to assess your business activities when determining whether to incorporate provincially or federally.
A federal corporation also allows you to do business across the country, as there is no restriction regarding the location of the head office or the records of the corporation.
Name Protection
A federal corporation provides greater name protection than a provincial corporation. If your business incorporates at the provincial level, you only get the right to operate your business with that name in that jurisdiction, with no name protection outside such jurisdiction. Moreover, the rules for name approval are more lenient compared to federal incorporation.
A federal corporation provides greater name protection, in part because of its stricter name approval process. If you want a designated name for your federal corporation, you must obtain a NUANS report, which is a search report of the Canadian database of business names (including names of provincial businesses). This report is used to assess if your name is distinct from such registered names. You have the benefit of ensuring that there is no other federal corporation using your name. Once your name has been approved for incorporation, you also have the benefit of having your name protected from future use.
A federal corporation enables you to do business across Canada under the same business name, even if another provincial entity is using a similar name in such jurisdiction.
Recognition
A federal corporation enjoys a higher global recognition because it conveys a global reach. If you intend on growing and expanding a brand across the country or at the international level, a federal corporation may be best for you.
Costs and Paperwork
When you look at the elements detailed above, you might ask yourself if there is an advantage to having a provincial corporation. The main disadvantages for a federal corporation are the start-up costs and the additional paperwork.
Federal corporations must first file their articles of incorporation at Corporations Canada ($200), along with the NUANS report, if applicable, then register in the province of their choice. In Quebec, the registration costs are $367. That is in addition to any name search fees if the corporation has a name. A provincial corporation only has to register provincially ($367 in Quebec). The name search and reservation in Quebec cost 24$.
A federal corporation will also require additional paperwork. Every corporation must file an annual declaration in the jurisdiction where it is registered. A federal corporation must file an annual declaration at Corporations Canada, then at the provincial registry where it is registered. A provincial corporation will only have one annual declaration to file.
To find out more about a corporation’s annual obligations, click here.
The incorporation of your business, meaning obtaining the Articles of Incorporation confirming the existence of your corporation, normally takes 24 hours. It may take between 24 and 48 hours for a federal corporation to appear at the federal corporate registry. Then, it will take us around 3 or 4 days to prepare your corporate minute book. In the meantime, you can operate your business using your Articles of Incorporation.
Federal Corporation
- Federal incorporation: $578 at Corporations Canada;
- Provincial registration: $378 (Quebec); and
- Name search and reservation fees (if applicable).
Provincial Corporation
- Provincial registration: $378 (Quebec); and
- Name search fees (if applicable).
Corporation - Structure
The directors of a corporation are members of its board of directors. The board of directors is responsible for managing the activities of the corporation and for making decisions regarding those activities. The directors of the corporation are elected by the shareholders. A director is not required to be a shareholder unless provided otherwise in the articles of the corporation. Only an individual can be a director.
The officers of the corporation are named by the board of directors and they are responsible for overseeing the daily operations of the corporation. They are also given legal authority to act on the corporation’s behalf in most of its business-related activities. Only an individual can be an officer.
The shareholders are the individuals, corporations, or other entities who own the shares of the corporation’s stock. They are considered to be the owners of the corporation, although it is managed by the board of directors. The shares give the shareholders the right to vote regarding certain decisions regarding the corporation (including the election of directors), to receive dividends declared by the corporation, and to receive a share of the remaining property of the corporation upon liquidation. The shareholders participate in the profits and losses of the corporation.
Shares are units of equity ownership interest in the corporation. The number of shares held by a shareholder determines the proportion of equity ownership help by such shareholder in the corporation. There are several categories of shares that may be issued, but usually, the shares of a Quebec corporation provide for the following rights:
- The right to vote regarding certain decisions regarding the corporation (including the election of directors)
- The right to receive dividends declared by the corporation, and
- The right to receive a share of the remaining property of the corporation on liquidation.
The articles of incorporation are the documents provided by the corporate registry which establishes the existence of the corporation. It contains basic information about the corporation as well as its share capital (the description of the shares which can be issued by the corporation) and other relevant information.
Corporate by-laws are the rules adopted by the board of directors and ratified by the shareholders regarding the internal management of the corporation, including the relationships between the corporation and its shareholders, directors, officers, and others.
A resolution is a document that details the actions and decisions of the corporation’s board of directors or its shareholders. The corporation speaks through resolutions of its board of directors. As such, any decision regarding the corporation’s business needs to be put in the form of a resolution. The corporation’s resolutions are stored in the corporation’s minute book.
Examples of corporate decisions that require a resolution:
Basic Resolutions
- Change of director;
- Change of officer;
- Changer of address;
- Change of shareholder
Complex Resolutions
- Amendments to your stock option plan;
- Amendment of the articles of incorporation;
- Share transactions/ transfers ; and
- Other structural changes to the corporation.
The corporate minute book is a set of documents that constitute the official and primary record of the activities of the corporation, beginning at incorporation. It contains all the relevant records relating to directors, officers, and shareholders of the corporation. It is also used to store all important corporate documents, such as documents concerning the formation and the management of the corporation. As such, it stores all material corporate transactions that affect and involve the corporation.
The minute book usually contains the following documents:
- The Articles of Incorporation ;
- The by-laws;
- Minutes of the directors’ and shareholders’ meetings
- Directors’ and shareholders’ resolutions;
- Share certificates issued to the shareholders of the corporation;
- Shareholder, officer, and director registers and ledgers;
- Share transfers and any other documents relevant to transactions of the corporation.
Firstly, all corporations registered under the Quebec Business Corporations Act or the Canada Business Corporations Act are required to keep an up to date and organized corporate minute book.
Then, it is very important to keep excellent paper records of the management of the corporation for many practical reasons. Over the life of the corporation, the corporation’s representatives will be asked to provide the corporate records of the corporation on numerous occasions, namely in connection with:
- Any financing of the corporation: the corporate minute book shall be subject to examination by lenders and investors;
- Legal opinions: the corporation’s counsel shall rely on the documents in the corporate minute book to provide a legal opinion to any potential lenders or investors;
- Sale of the assets or the shares of the corporation: the corporate minute book will be the first set of documents examined by the purchaser;
- CRA tax audit: in the event of a tax audit, the auditor will ask to see the minute book.
Any major decisions regarding the corporation shall require the examination of the corporate minute book and/or proof of evidence of approval from the board of directors of the corporation.
For all the above reasons, maintaining an up-to-date and well-organized minute book brings the following obvious advantages:
- It leaves the impression that your business is organized and is more likely to meet the lenders’ or investors’ requirements;
- It enables you to avoid the painful and expensive process of reinventing the wheel by recreating and ratifying all past actions.
Name of the corporation
A named corporation is a corporation with a registered name other than a designated number that appears in its articles. Your corporation must have an acceptable name that conforms to various statutory requirements. The most important rule is that your name cannot be identical to or lead to confusion with another entity already using another similar or identical name.
You can have an official legal name and register other trade names under which you do business.
A corporate name is usually made of the following components:
- Distinctive element: this element distinguishes your name from other entities. Ex: ABC;
- Descriptive element: this element describes your activities or the type of business you are conducting. Ex: Plumbing;
- Legal ending: this element describes the legal nature of your entity. Ex: Inc.
According to the example above, the name of the business would be ABC Plumbing Inc. Please find below other examples:
Distinctive – Scott (family name), Hellio (distinctive)
Descriptive – Supplies, Renovations
Legal Ending – Inc., Inc.
A corporation can also be assigned a number as its corporate name. For Quebec corporations, the numbering looks like 1234-5678 Quebec Inc., whereas for a federal corporation it would be 123456 Canada Inc. A numbered corporation helps to speed up the incorporation process because you don’t need to have the name approved. In Quebec, you can have an assigned number, then register other trade names under which you do business (trade name). Although you must be identified by your legal name for formal and legal matters, you may use your trade name in other business settings, such as on business cards, letterheads, etc.
It depends on several factors, such as the nature of your business, your start-up funds, and the urgency to incorporate your business. If your business includes a brand that you want to promote and market, having a named corporation is the best option because the legal name of your corporation will carry the brand and provide more credibility to your business. Please note that you can also register a trademark for your brand, which would provide heightened name protection, regardless of the legal name of your corporation. There are costs related to name search and name reservation. If your name fulfills all the legal requirements, your name should be accepted.
On the other hand, having a numbered corporation avoids the delays and expenses related to name search and name reservation. It is a good option if the name of your business is not that important for your operations, or if you need to incorporate it as fast as possible.
To register a federal corporation with a designated name, a corporate name search report is required by Corporations Canada. NUANS is a Canadian database that contains the list of all business names along with trademarks that are already in use. The NUANS report provides you a list of all business names and trademarks which are similar to the name you wish to use. This helps you (and Corporations Canada when you submit the name) determine if your name is distinctive from other business names.
A NUANS search is for one name only and it is valid for 90 days. To avoid costs associated with doing repetitive NUANS searches, it is highly recommended to do a preliminary search. This enables you to search up to 3 business names in the NUANS database and eliminate proposed names with exact matches before you pay for a full NUANS report.
Please note that obtaining a NUANS report does not mean that your name is pre-approved or approved by Corporations Canada. The only way to ensure that that your proposed name is available when you incorporate is to obtain a name pre-approval (free) from Corporations Canada. For this pre-approval, you will need to provide a NUANS report.
To register a Quebec corporation with a designated name, or change the name of an existing Quebec corporation, you can request at the Registre des entreprises du Québec (“REQ”) for the reservation of your proposed name. Name reservation is optional, but it prevents the REQ from registering such name for another business. The reservation is valid for 90 days.
Please note that reserving a name does not prevent another business from registering the same name as a trade name (other name used in Quebec). Also, although the name reservation is a prevalidation process, the REQ can subsequently reject the name based on the information in the incorporation application. Therefore, it is important to specify the nature and origin of the proposed name in the name reservation application and give a summary description of the business’s activities.
To change the legal name of your corporation, you need to amend its articles of incorporation. You can then either request a designated number or choose a different name. There is a government fee for the amendment of your articles. You will then be issued articles of amendment detailing the name change.
The name change also has to be recorded internally. As such, at least 2/3 of the shareholders of the corporation need to approve the name change by special resolution signed by such shareholders. By that resolution, the shareholders authorize a director or an officer of the corporation to sign the articles of amendment.
Contact us if you wish to change your corporation’s name.
Yearly obligations of a corporation
Every corporation has to prepare yearly financial statements and file a corporate tax return at both the provincial and federal levels within six months of their year-end date. Corporations must also make sure that they pay their corporate taxes 3 months after their financial year-end. Failure to fulfill these obligations will result in the imposition of interest and penalties on the corporation.
Corporations who meet certain requirements need to register for GST/QST and thus collect sales taxes on behalf of Revenue Quebec and the Canada Revenue Agency for the sale of their products and services. Corporations can choose to remit such taxes quarterly or yearly. Click here for more information. It is important to remit your sales taxes on time to avoid heavy penalties from the government.
At each year-end, a corporation is required to update its minute book concerning the following:
- The approval and ratification of the financial statements;
- The re-election of the directors and officers of the corporation and other structural changes to the corporation;
- The update of the shareholders’, directors’ and officers’ registries.
This may not be on your to-do list, but it is very important to maintain an up-to-date and organized business. Click here for more information.
On the other hand, having a numbered corporation avoids the delays and expenses related to name search and name reservation. It is a good option if the name of your business is not that important for your operations, or if you need to incorporate it as fast as possible.
Every corporation must file their annual at the corporate registry where it is registered. A provincial corporation only has one filing return to do, at the Registraire des entreprises du Québec (the “REQ”). A federal corporation, on the other hand, has to file 2 annual returns, first at Corporations Canada with a $12 fee, then at the REQ.
A provincial corporation that fails to file its annual declaration within 6 months of its anniversary date is subject to a penalty. Should it fail to file such a declaration for 2 consecutive years, the REQ may dissolve the business. A business dissolution means that the corporation will no longer exist. To revive the business, the corporation will pay a $200 fee along with other penalty fees. It will also have to file its overdue annual declaration and a request for revival.
If a federal corporation fails to file its annual declaration within 2 consecutive years, Corporations Canada can dissolve the corporation. After such dissolution, the federal corporation will have to go through a similar process to revive the business (payment of penalty fees, filing overdue declarations, and a request for revival with filing fees).
A NUANS search is for one name only and it is valid for 90 days. To avoid costs associated with doing repetitive NUANS searches, it is highly recommended to do a preliminary search. This enables you to search up to 3 business names in the NUANS database and eliminate proposed names with exact matches before you pay for a full NUANS report.
Please note that obtaining a NUANS report does not mean that your name is pre-approved or approved by Corporations Canada. The only way to ensure that that your proposed name is available when you incorporate is to obtain a name pre-approval (free) from Corporations Canada. For this pre-approval, you will need to provide a NUANS report.