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.
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.
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.
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.
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.
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.
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.
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.
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 $347. That is in addition to any name search fees if the corporation has a name. A provincial corporation only has to register provincially ($347 in Quebec). The name search and reservation in Quebec cost 22$.
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.
