Someone who is starting a business project or who has been self-employed for some time inevitably ends up asking himself this question: should I incorporate my business? The other well-known option is to operate your business in your own name, and therefore to register what is called a sole proprietorship.

Both have their advantages and disadvantages. For tax purposes, the choice will depend mainly on the company’s income. Although tax benefits are the most often heard to promote incorporation, there are many others that are undeniable.

1. INCORPORATION OR SOLE PROPRIETORSHIP?

There are two types of benefits to incorporation: those that are tax-based and therefore affect business taxation, and those that are commercial in nature. Thus, it is possible that a start-up company may not generate enough income to make it fiscally advantageous to incorporate, but it may have other reasons to do so. Here are some of them:

• A corporation (synonymous with the incorporated company) is an entity separate from its members, which means that they are generally not liable for the actions of the company, which has its own assets and debts. This is not the case for a sole proprietorship.
• The corporation is governed by internal laws and regulations that provide for what happens in certain situations, such as the death of the person who controls the corporation. His heirs will be able to continue trading or sell the shares, and this choice does not exist in the case of a sole proprietorship, which ends with the death of its director.
• It is often easier to obtain a source of funding when you are incorporated. Financial institutions do not consider shareholders’ debts for the provision of financing since the corporation is a separate entity.
• In general, whether in the eyes of investors or potential clients, an incorporated company projects a more serious image than a person who personally operates his or her business.

The main tax benefit of being incorporated is the advantageous tax rate. Indeed, it is between 17% and 22% for the first $500,000 of taxable income from an active business. Even for taxable income exceeding $500,000, the tax rate is just over 26%. As mentioned, these rates apply for an active business, which excludes, for example, income from rent. These are taxed at about 50%.

For many people, the corporate tax rate is therefore more advantageous than the progressive rate reserved for individuals. The most interesting situation is when the company generates more money than is necessary to support the shareholders. It is then advisable to leave the excess money in the corporation so that it can be taxed at the low rate and eventually reinvested.

Another major advantage of the incorporated company is the possibility of asset protection. As mentioned above, the incorporated company has its own assets and liabilities. For a person who engages in activities that are at risk of liability, and therefore increase the risk of prosecution, it is important to isolate his or her personal assets from the company’s assets. In this way, if the company is sued, the manager’s property cannot be seized. Similarly, if a person is engaged in several different activities, it will be appropriate to isolate each activity in a separate incorporated business in order to isolate all assets.

The decision to incorporate or not therefore depends on several tax factors, but also on other business principles. The disadvantages of incorporation are few. The provincial incorporation fee is just over $330, plus accounting fees to produce financial statements and an annual tax return.

Once the decision has been made, it is time to proceed with the creation of the company. As the sole proprietorship is very simple to register, the rest of this article will only cover the steps involved in setting up an incorporated business.

2. CREATION AND REGISTRATION IN THE REGISTRAIRE DES ENTREPRISES DU QUÉBEC

Several legal formalities must be completed for a company to be properly incorporated. Although it is possible for a person to complete these formalities themselves, it is strongly recommended to consult a lawyer or notary to do so. This will probably avoid mistakes or omissions that can lead to unfortunate consequences in the future.

The main issue is to be considered a private issuer. To be able to obtain financing more freely from potential investors, several provisions of National Instrument 45-106 Prospectus Exemptions must be met. If this is not done, the company will be considered a public company and the financing process will be complicated and costly.

The reality is that when a person fills out the forms to register his or her business in the business register, the Registrar can only refuse if the name chosen does not meet the criteria. If the name is too similar to a name that already exists, or if it does not comply with the Charter of the French Language, for example, the Registrar will refuse to incorporate the company.

It will not refuse if the legal documentation necessary to be considered a private issuer is missing, which can have serious consequences for someone who does not know the formalities to be completed.

3. ORGANIZATION OF CORPORATE BOOKS AND RECORDS

An incorporated company is required to keep corporate records, often grouped together in what is called the minute book. This book contains, among other things, the certificate of incorporation of the company, the list of shareholders and directors, share certificates and resolutions adopted by the members.

To avoid the risk of sanctions, the company must keep all these records up to date. It’s not that complicated, as long as the book was organized in the right way from the beginning. Lawyers and notaries often offer the service of organizing the start of the minute book and it is advisable to do business with a professional in this field. It is also recommended to organize the minute book as soon as the company is created.

4. THE SHAREHOLDER AGREEMENT

Once the steps have been completed to register the company and the minute book organized, it is important to consider managing the relationships between the people who benefit from the company’s profits, i.e. the shareholders.

Unlike the other steps listed in this article, the shareholder agreement is not mandatory. On the other hand, corporate laws that allow companies to be created are incomplete in terms of shareholder relations, which makes it almost necessary to have a shareholders’ agreement as soon as there is more than one person who derives a profit from the company.

What happens if a shareholder wants to sell his shares in the company? Can he sell them to an outside person, or must he offer them first to a person who already owns shares? And what happens in the event of the death of a shareholder? Are his shares transferred to his heirs? When is an investor entitled to reclaim his or her initial investment?

These are all issues that are not addressed in corporate laws. If not addressed in an agreement, a multitude of situations could lead to a conflict between shareholders, which is obviously not desirable. That is exactly what the shareholder agreement is all about: anticipating situations that may arise in a business relationship and determining the solutions that will be applied if they do occur.

This summarizes the main steps in creating an incorporated company. For any questions regarding the choice of incorporation or sole proprietorship, or for professional help in setting up a business, do not hesitate to contact us!