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How to Federally Incorporate in Canada: A Complete Guide From Choosing a Name to Paying Your GST

Starting your own business can be an exciting and motivating experience. At the same time in can be overwhelming given the numerous options for business owners, the fistfuls of legalese, and the need for a clear focus and plan. This guide is not meant to inform you of whether federal incorporation is right for you, but rather is meant to show you how to set-up your corporation affordably and efficiently.

This guide best applies to:

• Small business owners just starting out or looking to go to the next level
• People residing in Ontario because Ontario’s Ministry of Consumer and Business Services works closely with Industry Canada’s online incorporation process (i.e., you don’t have to mail off forms to two different places). Because we are dealing with federal incorporation, those residing outside of Ontario will still benefit from this guide.
• Privately owned businesses and businesses that will have a limited number of non-publicly traded shares (i.e., private corporations).

With that said, I would be ethically remiss if I didn’t point out a few things before we get started.

1. This guide is not meant as a replacement for professional legal consultation, but with common sense and careful consideration of the resources I will present, do-it-yourself or lawyer-less incorporation can be an easy, painless, and appropriate. A world without lawyers…? Imagine that.
2. Incorporation may not be what you want or need. There are other options when starting a business including a sole proprietorship (i.e., Mom and Pop’s corner store) or a partnership (i.e., popular with lawyers and accountants). Still, federal incorporation is unlikely to limit your business as it grows and carries with it many specific benefits.
3. Write a business plan before starting your business or if you have a business without a clearly defined path. A business plan will help ensure that your decisions or well-informed, that your plan does not lack focus, and that your goals are grounded in reality. You are more likely to succeed if you have thought about your business structure, competition, needs, etc. For a good “guide to writing a business plan”: http://sbinfocanada.about.com/cs/businessplans/a/bizplanoutline.htm
4. The Government of Canada’s Canada Business site has an excellent Business Start-Up Assistant
5. More useful information including another Business Start-Up Info-Guide provided by Canada-Ontario Business Service Centre:
6. Before you start understand these terms
7. Corporation Canada’s Website

Should I incorporate?
A good place to find out about different types of legal business structures can be found at the Canada-Ontario Business Service Center

Legally speaking, there a four main types of business structure; sole proprietorships, partnerships, corporations, and co-operatives. We can ignore partnerships and co-operatives for the purpose of this guide, but by all means feel free to investigate them if you feel either would best suit your needs. For most business owners though, the most relevant options will likely be a sole proprietorship or corporation. In fact, the majority of small business owners are probably sole proprietorships.

Incorporation versus Sole Proprietorship

One of the biggest decisions facing those wishing to begin their business is choosing between a Sole Proprietorship and Incorporation. Here’s a summary comparing the advantages and disadvantages of each: (Source)

Sole Proprietorship

Advantages:

Sole proprietorships are easy to start up and are the simplest form of business structure. They also have relatively low start-up costs. If you carry on business under your own name, say as a consultant, then you are not even required to register a business name. More than likely, you’ll want your business to have a unique name so you’ll need to register it with the province in which you’ll be conducting business, but other than that there are very few additional costs and hoops to jump through to begin selling your wares or services. The only real cost involves things specific to your business. If you’re going to make muffins, then you need to invest in kitchen supplies. If you’re going to offer advice, then you need to invest in office supplies. These costs can be kept quite low which is why only minimal working capital is required for a sole proprietorship. Sure you can splurge on the Muffin Master 3000, but the judicious business owner will visit the used restaurant supply warehouse and pick up a Muffin Master 1000 second-hand.

You also experience the greatest freedom from regulation and as the sole owner, you are in direct control of all aspects of your business. You are dictator and your vote is the only vote when decisions are being made. As sole owner, you also reap the benefits in terms of businesses profits and tax advantages. There are no shareholders to answer to or pay dividends to so your profits can be handily reinvested into your own pocket.

Disadvantages

The bad thing about a sole proprietorship is the liability to which you as an individual are exposed. Thus, you are personally responsible for your business’s debts and liabilities. Your business is “you” so your business’s debts are “yours”; filing for bankruptcy means personal bankruptcy so you’d better make sure your idea is well thought out (i.e., write a business plan). In addition to this exposure to risk, your name is also not as comprehensively protected as with federal incorporation. There is nothing stopping someone in Alberta from starting “Much Ado About Muffin” even though you run an Ontario business by the same name. Trade marking your name can mitigate this threat, but so to can federal incorporation.

There is also a lack of continuity in your business organization when you’re not around (i.e., sickness, vacation, alien abduction, or …gulp… death). Roughly speaking, “no owner” equals “no business”. Lastly, sole proprietorships have much more difficulty raising capital and it can be hard to expand if you cannot secure additional capital. So if your muffin business takes off and you want to borrow money to buy five Muffin Master 2000’s you might run into a roadblock when banks won’t lend you the $100,000. There’s always family, but if your family has $100,000 lying around to buy Muffin Master’s, then you’re probably already incorporated.

Corporation

Advantages

In order to highlight the advantages of incorporation you must understand a few things. When you create a corporation you are creating a separate entity. Think of it like giving birth although without the stretch marks or pickle and ice cream cravings. When you give birth, you are producing a new individual under law with rights and privileges, as well as partaking in a miracle of nature. You give this individual a name and you create rules like “be home by 9” and “eat your vegetables”. They grow up to become and adult and if they take out ten credit cards and run them all up, you are generally not responsible (perhaps morally, but not legally or fiscally) in the least. Creating a corporation is similar in that you create the corporation as a separate legal entity which acts as a proxy of sorts for your business activities. You give your corporation a name, you create rules (a charter) that govern the corporation, and the corporation assumes responsibility for your debts and liabilities.

Moreover, a corporation experiences continuous existence and ownership is transferable. Thus, like a child, when the parents die the child lives on as does a corporation and individuals can “adopt” a corporation as they can a child. This continuous existence as well as close government regulation makes it easier to raise capital because financial institutions like less risky investments; corporations will be able to raise much more capital than a sole proprietorship allowing them to expand quickly and capitalize on a good idea or a technological innovation. Moreover, you are director of your corporation, which allows you to appoint CEO’s, COO’s, CTO’s, etc., to handle all manner of the day to day operations of the corporation while you and the board of directors make the key decisions and set the main course for the business. It’s this specialized management that gives the corporation a lot more flexibility. Lastly, much like sole proprietorships, corporations also offer the possibility of tax advantages.

Note: Just because you have limited liability does not mean you are invincible. The modifier “limited” implies that there are limits to what you can get way with. So before you go off thinking about becoming another Enron, keep in mind that you will not be able to raise capital unless you have an established plan and purpose and you can still be held legally responsible for such things as gross oversights and accounting mishaps.

Disadvantages

Corporations are closely regulated at the federal and provincial level. Although the amount of regulation may seem overburdening it has the benefit of making corporations attractive vessels for investment. In general, corporations are also the most expensive form to organize. In the case of a small privately held corporation, the expense is actually very reasonable especially when legal services are not extensively needed. Extensive record keeping is also necessary, but this is something that is necessary for any business. The corporation-specific record keeping involves keeping a minute book with detailed notes from your shareholder meetings. Again, because you’re aiming for a privately held corporation with only a few directors, this task is made much more straightforward.

As director of a privately held corporation the following disadvantages don’t apply either, but if you decide on selling shares in your company, then definitely consult another guide. There are no charter restrictions because as director, you create the corporations charter. Without shareholders, double taxation of dividends is not a concern and the possibility of conflict between shareholders and executives is removed. Although the absence of share holders seems to simplify matters, there are benefits to having them as can be evidenced by all the publicly traded companies; the greatest benefit possibly being the financing of debt ($$$).

Why incorporate federally?

• It is cheaper than incorporating provincially. In Ontario, you pay $353.50 to submit your articles of incorporation. The federal government lets you submit your articles of incorporation online for $200. That’s a big savings especially to a small business starting out.
• It is easy. Industry Canada has a great site that enables you to submit your articles of incorporation online as well as conduct corporate name searches.

The step-by-step guide begins here:

Our starting budget will be $300 which is very reasonable and includes the government fee for incorporation.

You may find it useful to consult Corporation Canada’s Guide to Federal Incorporation if you need further information: http://strategis.ic.gc.ca/epic/internet/incd-dgc.nsf/en/h_cs02079e.html

Step 1: Register with Corporations Canada Online Filing Cenre

Go to the Strategis Registration page and register yourself as a new user. Make sure all your information is accurate.

Step 2: Choose Your Corporate Name

It is important to choose a corporate name before your submit your articles of incorporation. When choosing a name you have to keep in mind what names already exist so your corporate name does not infringe on the names of other businesses. Corporations Canada has information on choosing a name including an overview as well as their name granting guidelines You can also consult the Canada Business Start-Up Assistant

Some simple guidelines ar as follows:

• Names should not contain any inappropriate terms. So, expletives, racial slurs, and lewd language are obviously out. What business are you trying to run anyways?
• Names should not contain certain reserved terms such as Parliament Hill or be confuded with Federal Government activities (i.e., no Canadian Forces Inc.)
• Names should be distinctive and thus, not cause confusion with other names
• Names should be descriptive and thus, explain what your business does

For some input on the creative aspect of choosing a name you can read:
How to Name Your Business
8 Mistakes To Avoid When Naming Your Business
Choosing a Business Name

You can also visit Corporations Canada corporate name search. Feel free to type in some keywords and see what others have thought of.

Keeping all this in mind I suggest the following activity:
On a sheet of paper, draw a line down the center of the page. On the left side put “Distinctive” as a heading, on the right side put “Descriptive” as a heading. Write down as many of each term as you can.

Distinctive terms should be unique and help ensure that your business name won’t be confused with other names. Things like “Much Ado About Muffin” or “Muffin Makers Extraordinaire” or even “MM & E” are all distinctive.

Descriptive terms should actually describe what your business does. Things such as Baking, Bakery, Baked Goods are all descriptive terms that describe your product and consequently your area of operation.

The cherry on the sundae is the final part of your business name and involves the suffix of Inc., Co., Ltd, etc. You have to choose one of these and it has to be included in your name to identify your business as a corporation.

You might want to consider what your name will be like as an acronym because catchy acronyms make handy distinctive terms or a convenient shortened form for your corporate name.

Once you have a sheet with two columns of terms, start matching them up and see what sounds and looks good. Does the name conjure up a powerful image? Does it roll off the tongue? It can be useful to ask your friends, family, and future customers or clients. Just keep in mind that making decisions by committee can sometimes be disastrous and your corporate name may come down to your personal taste and feel. If you’re just starting out, don’t worry about your name being so catchy that it spreads like wildfire. Names like Nike or Google are recognizable because they are established and have millions of dollars of advertising backing them so it’s basically the advertising horse coming before the name cart. Take a look at a Fortune 500 list of companies and skip the ones of which you have previously heard. You’ll find that the unknown ones, although belonging to huge corporations, are not all that impressive or persuasive, so relax. I recently saw about 30 companies all using a variation of the theme “three men and a baby”.

Note: You business name can pen you in. It could be potentially awkward or difficult selling bagels and donuts to people if your name was “Much Ado About Muffin”.

Step 3: Reserving Your Name with a NUANS Report

In order to properly choose a name, you must use NUANS (https://www.nuans.com/nuansinfo_en/home-accueil_en.htm) (newly updated automatic naming service, phew!). The system let’s you conduct an online search for your name to see if it conflicts with any other names. The search produces a report called a NUANS report that lists similar corporate names, business names, and trademarked names. You have to be distinct from all of these. Each NUANS report costs $20.

Rather than going directly to the NUANS site, you can log into the Corporation Canada’s online filing centre Once logged in, select the NUANS Real-Time System under Choosing a Name. You will be securely connected to the NUANS system. Select your language and on the next page select NUANS Real Time. The key to doing your own NUANS report is to use the extensive help files that can be found throughout the process. If you follow the onscreen instructions and read these help files, you should be fine. Also, you can conduct a limited number of searches so when given the opportunity, feel free to search for variations of the distinctive and descriptive parts of your corporate name so that you have an even better idea of whether your name conflicts. The more detailed your report, the better equipped Corporations Canada will be when deciding to approve your name and the better informed you will be when deciding if your name needs tweaking.

Once you have finished your report you will be given the opportunity of saving the report to your computer. Download it and print it as well. Now, head back to Corporation Canada’s Online Filing Centre

If no other names seem too similar to yours we can proceed to the next step. Believe me, there’s a grey area, with names like A1 Consulting and B1 Consulting coexisting amicably.

Note: A nice feature of your NUANS report is that the corporate name from the report is reserved for a period of 90 days. This gives you time to think or explore other possibilities.

Step 4: Submitting a Corporate Name Proposal

From the Choosing a Name section of the Corporations Canada web site:

1. Your proposed name must be determined by the Director to meet the requirements of the CBCA name regulations and policies. When you submit your proposed name along with your application for incorporation you may ask for a pre-approval of your proposed name. This is a good idea because if you choose to submit your non-approved name along with your complete application, please be aware that if Corporations Canada rejects your proposed name, the entire application will be refused. A pre-approved name can prevent this situation from happening. There is no fee for this service. Send your application through the Corporations Canada Online Filing Centre.
2. During the incorporation process, you will be asked to attach your NUANS® report. You may also choose to submit a “Corporate Name Information Form” which provides Corporations Canada with additional information about the name of your corporation. This information will often make it easier for the Director to approve your proposed corporate name.

Thus, you can submit your corporate name for approval before submitting your articles of incorporation. This ensures that your application is not rejected on the basis of an unacceptable name. Moreover, filling out the additional information form allows a more informed decision regarding your name.

Head back to the Corporations Canada Online Filing Centre. Click the button “Go to On-Line Filing” (you should still be logged in, but if not then login again) and scroll down to heading “Other Forms”. Select Corporate Name Proposal. Follow the steps as they are presented. You will be required to upload your NUANS report which you should have downloaded earlier and if you choose to fill out the “Corporate Name Information Form” you will be required to describe whether your name may conflict with other names and if so, why this will not be an issue.

Once your Corporate Name Proposal is submiited you can relax for a while until you recieve the decision via email.

Step 5: Completing Your Articles of Incorporation

Corporations Canada Guide to Federal Incorporation

Sample Articles of Incorporation

Next week we will complete this guide on Federal Incorporation.