Incorporation Services...



Why should I Incorporate?

The four most significant reasons to incorporate are the following:

Limited Liability;
Ability to raise capital;
Perpetual Existence; and
Tax advantages.
(See the information below for greater detail).

What are the differences between a Sole Proprietorship, a Partnership and a Corporation?

SOLE PROPRIETORSHIP:
A sole proprietorship is the simplest arrangement for carrying on business. The individual is the sole owner of the business. The sole proprietorship business and the sole proprietor are one and the same. All benefits from the business accrue to the sole proprietor and all obligations of the business are the responsibility of the sole proprietor. The main disadvantage of sole proprietorship is that the individual is fully exposed to personal liability with respect to any and all claims relating to the business.

PARTNERSHIPS:
A partnership comes into existence when two or more individuals or corporations carry on business together with a view to profit. It is much like a sole proprietorship in that partners directly carry on business themselves. All benefits of the partnership business accrue directly to the partners and all partners are personally liable for the obligations of the business. Most provinces have legislation providing for limited liability partnerships called limited partnerships if certain prescribed rules are met. The partnership itself is not a taxable entity. The income or losses of the partnership are divided among the partners, and each partner's share of that income or loss is included in that partner's income from all sources for tax purposes.

CORPORATIONS
Unlike sole proprietorships and partnerships, a corporation is a legal entity separate in law from its shareholders who are its owners. The corporation itself may own property, carry on business, possess rights and incur liabilities. Shareholders own shares and enjoy the rights that go with such ownership. They do not own the business or the assets of the corporation. The rights and liabilities of the corporation are not the rights and obligations of the shareholders. Because a corporation is a separate legal entity it can sue and be sued in its own name and can have perpetual existence notwithstanding the death of its shareholders. For income tax purposes, the corporation is taxed separately from its owners, the shareholders. Income or loss from the business of the corporation is determined and taxed at the corporate level. A corporation's net income is subject to tax each year. Shareholders only pay tax when the corporation's after tax income is distributed to shareholders by way of dividend or other form of distribution.

Are there tax advantages to incorporation?

REDUCED RATE OF TAX

Canadian-controlled private corporations ("CCPC") can benefit from a reduced rate of tax on their active business income ("ABI") and certain profits derived from manufacturing and processing activities.

In most cases, ABI is income other than income earned from property (i.e., income other than rents, royalties, interest, dividends or capital gains). A reduced rate of tax can apply to as much as $300,000 of the corporation’s ABI. On the first $200,000 of ABI, the federal rate reduction can be as high as 16 percent. The recent federal budget proposes to offer a further rate reduction of up to seven percent on ABI in excess of $200,000 but less than $300,000 starting with taxation years ending after January 1, 2001. The various provincial governments also offer rate incentives to incorporated small businesses operating within their jurisdiction. The reduced rate of tax will enable a corporation to retain more of its profits that can be used to reinvest in the corporations business operations. The use of a corporation also provides owner/managers additional opportunities to plan their remuneration. In addition to income tax reductions, other incentives may apply to incorporated businesses such as improved investment tax credits for investment in fixed assets or for R&D carried on in Canada.

ENHANCED CAPITAL GAINS EXEMPTION:

A shareholder that disposes of shares of a corporation is subject to tax on any resulting capital gain. A significant tax benefit is available to some shareholders of qualifying incorporated small businesses. The capital gain on the disposition of qualifying shares may be eligible for an offsetting capital gains deduction to a life time maximum of $500,000. Essentially, to be eligible, shares must be those of a CCPC that uses a prescribed amount of the fair market value of its assets in an active business carried on in Canada. A 24-month holding period requirement may have to be satisfied before the shares become eligible for this incentive deduction.

INCOME SPLITTING

The share structure of a corporation provides a very flexible mechanism for income splitting with family members who would otherwise have little income of their own. Due to the recently imposed "kiddie tax" this form of income splitting is best done with spouses and children 18 years of age or older. Salaries may also be paid to family members active in the business but only to the extent that they are reasonable in relation to the services performed on behalf of the company.

ESTATE PLANNING

Incorporation also provides an effective mechanism for estate planning and transferring future growth to employees or family members. A common technique, called an estate freeze, allows a retiring shareholder to freeze the value of his or her shares, thus limiting capital gains taxes on death. Upon freezing the shareholder’s interest in the company, future growth in the value of the company’s shares can be transferred to other shareholders, usually family members.

Are there any restrictions on incorporation?

There may be either specific approvals or restrictions affecting incorporation depending upon the nature of the business to be carried out by the corporation. For example, real estate brokers, insurance agents, pharmacists, engineers, accountants, lawyers, architects and other professionals are subject to either prior approvals or restrictions on their incorporation. You should check with your governing body prior to incorporating.

Should I Incorporate Federally or Provincially? (see Corporate Jurisdiction)

Incorporating, whether under the federal statute or under a provincial statute, is a matter of right exercised by the filing of Articles of Incorporation. Technically, unlike provincially incorporated corporations, federally incorporated corporations have a right to carry on business in each province. In practice there is little difference between the treatment of federal and provincial corporations. There may however be reasons specific to the type or nature of the business to be carried out by the corporation to prefer federal or provincial incorporation over to the other. One should consult a lawyer and/or accountant in that regard.

What are Articles of Incorporation?

This is a document that creates the corporation once filed and accepted by the appropriate government office. Unlike sole proprietorships and partnerships that come into existence upon commencement of business, a corporation comes into existence by filing Articles of Incorporation and paying the necessary fee to the appropriate government department.

What are by-laws?

They are the rules and regulations created by the directors to regulate the business or affairs of a corporation. The first by-law, By-Law No. 1 is a general by-law dealing with meetings, notice, quorum, officers, proxies, the manner of executing documents and other matters of a continuing nature.

Must a Corporation have a Board of Directors?

Yes, however the number of directors is a matter for the shareholders to decide subject to the number of directors permitted by the Articles of Incorporation. Generally the Articles of Incorporation provide for a minimum and maximum number of directors. Only one incorporator is required to execute the Articles of Incorporation. The original incorporator is a director of the corporation from the date of filing of the certificate of incorporation until the first shareholders meeting. At the first shareholders meeting the shareholders can elect the number of directors permitted by the Articles of Incorporation. Generally larger more complicated businesses have a greater number of directors. (Please note unless requested otherwise Cityfax will provide for a minimum of one (1) director and a maximum of ten (10) directors)

What do Directors do?

Subject to the provisions of a unanimous shareholders agreement, directors manage or supervise the management of the business and affairs of the corporation.

Can anyone be a director of a Corporation?

No. The following persons cannot be directors:

A person who is less than eighteen years of age.

A person who is of unsound mind

and has been so found by a court in Canada or elsewhere.

A person who is not an individual

(Note: this is because most jurisdictions define "person" to include an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and a natural person in his or her capacity as trustee, executor, administrator, or other legal representative).

A person who has the status of bankrupt.

With the exception of New Brunswick,
and in some jurisdictions where there are only two (2) directors, Canadian jurisdictions require that a majority of directors must be resident Canadians.

No. There is no statutory provision that requires directors to be shareholders of the Corporation, although the Articles of Incorporation may contain such a restriction.

What do Officers do?

They are persons appointed by the directors to carry out duties using powers delegated by the directors to manage the business and affairs of the Corporation. It is not uncommon for the directors to appoint a President, Secretary and Treasurer. One person can hold more than one office. One person often holds the offices of all three President, Treasurer and Secretary in smaller less-complicated businesses.

Can Directors be Officers?

Yes. Directors can and often are also officers of the corporation.

What are Shares?

A share entitles its holder to a proportionate share of the assets of the corporation, whether by dividend or upon the ultimate distribution of its assets upon winding up. It also may confer other rights to its holder such as the right to vote and attend meetings. (Unless requested, the corporation's shares will carry the right to vote and receive dividends). Shareholders obtain shares in the corporation by providing the corporation with money, property or services that are transferred to and become the property of the corporation. The number of shares issued to each shareholder generally reflects the value of the consideration paid to the corporation for such shares, in the form of money, property or services. There are no minimum capitalization rules in Canada. Often shares are initially issued for nominal consideration. A corporation must maintain registers setting out the names, addresses and number of shares of each shareholder.

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