A common question asked by companies generally but especially tech startups who are looking to incorporate in Canada is whether they should incorporate federally or provincially. While the differences in cost and function of each seem relatively small at the outset, this choice can shape your business and dictate the opportunities available to you going forward.
The difference in price between federal and provincial incorporation is what most small businesses look at first. Federal incorporation is generally cheaper than provincial incorporation. In fact, in Ontario, incorporating federally can save you a few hundred dollars. Incorporating federally does however mean you must pay annual fees, but at around $20, it’s often not a factor in a business’ decision on where to incorporate.
Incorporating provincially means you will be an Ontario or other Provincial corporation. You will be limited to doing business within the province in which you incorporated in, and your company will be have to comply with provincial corporate regulations.
If your business is a restaurant or another type of local business that doesn’t expect to expand or deal with people outside of your province, incorporating provincially is possibly a better route in the long term. Certain types of businesses have to be incorporated provincially (e.g. professionals like doctors, lawyers or dentists). It is recommended to check prior to incorporating to ensure there are no restrictions on your business with respect to incorporating. The process for incorporating provincially can be somewhat complicated when compared to the federal process, as federal incorporation will often include the automatic filing of any additional forms that are needed.
To incorporate federally means that your company will be governed by the Canada Business Corporations Act (CBCA). You will be a Canadian corporation, and as such, you will be able to use the word “Canada” in your corporate name and will be able to do business across Canada.
It is recommended that if you are planning to sell your products or services outside of Canada that you incorporate federally. Online businesses may want to take this into consideration, as their target customers may be located all across the world.
With federal incorporation, your business name will be protected throughout Canada, meaning that you have the right to use that name in any province. Your business name will also be protected against registration across Canada. The Government of Canada is quite diligent about ensuring compliance with the Business Names Act, meaning that if you are able to incorporate a named corporation, it is highly unlikely that you will face any disputes surrounding your corporation’s name
As a federal corporation, you will be required to file ‘Extra Provincial’ registrations in the provinces you plan on doing business in. The Federal government has quite a streamlined system for newly incorporated businesses, and will file the forms with the provincial government for you automatically, often for a nominal cost.
Another advantage of incorporating federally is that a business number will be assigned to you automatically by the Canadian Revenue Agency, which saves you a step compared to the provincial incorporation process. The one downside of incorporating federally is that you will have to do an annual filing. This filing is to ensure that the information about the business, its directors, and its address is up to date. The annual return is a very simple form that does not take long to complete, but if this filing is not done then your business may be noted as being inactive and eventually dissolved.
In general, the up-front cost savings, expanded protection, simplicity of filing, and flexibility to grow makes federal incorporation the most common choice among start-up businesses, and especially amongst those operating in the IT sphere.
October is small business month and to celebrate, writers from Aluvion Law will be making daily posts on one of the most common forms of Small Businesses: Corporations! Corporations are particularly popular among the high-tech and IT crowd because of the tax advantages they provide to rapidly growing companies, as well as the assistance they can provide in unlocking capital. The other great benefit recognized by the ‘serial entrepreneurs’ that flock to the IT sector is that they limit the liability of the owners in the event of the business failing.