How To Set Up A Business
By MyLegalAnswers | December 1, 2001
First of all, a corporation is "a distinct legal entity", whereas sole proprietorships and partnerships are not. This means that a corporation can sue or be sued and can enter into contracts in its own name, while a sole proprietorship or partnership is more limited as to what it can do through that form of business arrangement. If you wanted to sue a corporation called "X Inc.", you would, in fact, sue that company. In contrast, if you wanted to sue the sole proprietorship "John Doe's Gardening Services", you would sue John Doe personally.
Second, because it is a separate legal entity, in most cases, a corporation has limited liability. This means that the liability of those who own the company is generally limited to the amounts invested in the company. Sole proprietorships and partnerships, on the other hand, are responsible personally for the debts/obligations of the business.
Third, a corporation can only be formed by following the procedures set out in the governing provincial or federal legislation. On the other hand, a business can be run as a sole proprietorship without following any fixed, legislated guidelines. Alternately, a partnership can be formed merely on agreement of at least two people. This can be much less involved if do not want to be concerned with share structures and keeping the proper corporate records.
As you can see, forming a corporation to carry on your business has both advantages and disadvantages. Whether you ought to incorporate your business will depend on your own particular situation. However, some of the general reasons why carrying on business through a corporation is viewed as advantageous are:
- Corporations offer, in most cases, limited personal liability as described above.
- The life of a corporation is unlimited. This means that if someone dies or retires, the corporation still exists. This is in contrast to sole proprietorships and partnerships which end when an individual dies or retires, unless the remaining two or more partners have specified otherwise in a partnership agreement.
- Corporations are able to raise new money (financing) by selling equity (i.e., issuing shares) in itself. This method of financing is not available to sole proprietorships or partnerships.
- There may be tax advantages to incorporating (e.g., tax deferral strategies). This is a matter that should be discussed with an accountant or a tax lawyer with expertise in this area.
Where to Incorporate
Once the decision to incorporate has been made, then you have another choice to make which is whether to incorporate under the federal government, or under your province.
A point of view often expressed is that if a corporation intends to do business in only one province, it should incorporate provincially. Conversely, if it plans to carry on business in more than one province, it should incorporate federally. Unfortunately, the decision of "where to incorporate" is not quite that simple.
There are a number of factors that are often considered when deciding where to incorporate:
- If you incorporate provincially, you may be required to obtain a licence to carry on business in the other provinces, and it is not always certain that a province will grant such a license to a corporation from another province. Alternately, if you decide to incorporate federally, you have a right to carry on business in all provinces. Please note that even with a federal company, you will still be required to comply with registration/licencing requirements of each province in which the federal corporation decides to carry on business, but the province cannot refuse to grant the licence to carry on business in that province.
- Certain provinces insist that their applicable corporate laws be strictly followed, while other provinces are more relaxed in this regard.
- While the next factor is of lesser importance, especially with the move to more harmonized legislation, the difference in various jurisdictions' legislative requirements can influence where you might want to incorporate.
In addition to these factors, you should also consider which incorporation process is easier, the fees to be paid, the tax effects, and the specific legal requirements, as they apply to your particular situation. Each of these factors differs from province to province and therefore legal help is usually a good first step.