19 JulyWhen and how to make the leap towards incorporation ?
For several weeks now, we have presented multiple ways to do business in Quebec and Canada. Through our protagonists, Simon and Léa, you have been able to learn more about the realities of running a sole proprietorship, a corporation, a general partnership, a limited partnership or even a not-for-profit corporation.
The various types of businesses may no longer be a secret to you, but you may still wonder if the moment has come to incorporate your business. The following will better equip you to make that decision.
Most people who want to start a business first choose the sole proprietorship form because it requires very few administrative formalities to form. In fact, it was a sole proprietorship that Simon and Léa owned before incorporating Troque tes fringues. But what exactly is a sole proprietorship?
A sole proprietorship is a business without a legal structure. Firstly, this means that a sole proprietorship doesn’t have a legal personality, can’t take legal action in its own name, exercise rights or even be subject to obligations.
Secondly, the sole proprietorship doesn’t have a distinct patrimony. If Simon and Léa had decided not to incorporate Troque tes fringues, expenditures made on behalf of their business would have, from a tax perspective, been assimilated into Simon and Lea’s personal expenses. Ipso facto, revenues generated by Troque tes fringues would have been assimilated to Simon and Lea’s revenues as well and would have been taxed at the tax rate applicable to individuals.
After registering their business in Quebec’s enterprise register, the only formality sole proprietorship owners have to accomplish is to provide an annual updating declaration which will notify the register about the changes that took place within the company during the year. As you can well imagine, running a sole proprietorship isn’t complicated.
Thus, we can easily understand why a lot of entrepreneurs prefer this business form. So how do we know when it is advantageous to “close” a sole proprietorship in order to create a corporation?
From a fiscal point of view
Previously, we highlighted that since a sole proprietorship doesn’t possess a legal personality or a distinct patrimony, it was subject to the progressive tax rates applicable to individuals. Conversely, a corporation is a legal person and benefits from a legal personality and a distinct patrimony.
Thus, a company can exercise rights and be subject to obligations. As a corollary, a corporation can incur expenses and generate revenues on its behalf. Fiscally speaking, corporations are taxed only on profits they have made and are subject to a more advantageous tax rates than individuals, 19 % for the first 500 000 CAD of profit and 26,9 % beyond that amount. If your start-up wishes to save on taxes, incorporating your business might be a good option.
From a financial point of view
As we have pointed out, investors are more prone to provide funding to a corporation rather than a sole proprietorship. Why? It’s actually quite simple: most investors will finance a corporation in return for shares. These investors will own shares that potentially carry voting rights and preferential rights to dividends. Running a corporation might be advantageous for entrepreneurs looking for funding since they can raise money without having to get a loan and pay the interests associated to it.
Considering what precedes, when a company needs a lot of funding, it might be more advantageous to create a corporation.
From a contractual and civil liability point of view
The main difference between a sole proprietorship and a corporation pertains to their different legal status. As you probably know by now, unlike a sole proprietorship, a corporation is a legal entity. For an entrepreneur, this has the advantage of limiting his personal liability, both for obligations contracted by the company and his own acts within the company.
Generally speaking, the entrepreneur operating a corporation, as a director for example, will not be held responsible for the company’s debts, unless he personally cautioned it or guaranteed it in one way or another.
Moreover, the entrepreneur acting as a director of his company won’t be liable for any damage caused in the performance of his duty, unless the prejudice is due to a wrongful decision taken by him.
Therefore, the more your business grows, the more it is subject to important obligations and is subject to a great risk regarding the activities it engages in, the more incorporation should be preferred. Subject to certain limitations, incorporation will allow you to make sure your personal patrimony cannot be used to cover a the debts of your company.
There it is: You have read the previous paragraphs and you want to create a corporation. Great ! First, you will have to produce a cancellation declaration to Quebec’s enterprise register, if your business is registered there. Secondly, you shall also inform Revenu Québec.
If you had a GST and QTS number, you also should ask Revenu Québec to cancel your inscription in the GST and QTS’s files as well as other taxes’ files where you are inscribed. Then, you will have to produce your company’s last information return for Revenu Québec which will cover the financial exercise ending when your company stops doing business.
Note that other particularities may apply, if your company operated in the tobacco industry, the fuel industry or had a license from the International Fuel Tax Agreement. To comply with Canada Revenue Agency’s requirements, you will have to close your GTS and HST account, remit the contributions to Canada’s pension plan, Employment insurance and income tax deductions withheld for the former employees in your tax center within one week. Then, you will have to produce a record of employment and T4 and T4A slips for each one of your ex-employees.
Moreover, you will have to cancel the business number granted to you by Canada Revenue Agency as well as all the business accounts related. Note that others particularities apply if your business owned a registered pension Plan or a deferred profit sharing plan.
Finally, in order to create your corporation, you will have to incorporate your business either under provincial law or under federal law. How? Easy.
Join us by email, at firstname.lastname@example.org, or by phone, at 514-378-6703, and we will be delighted to incorporate your business, provide you articles of incorporation and a minute book written by one of our lawyer partners.
Me Gilles de Saint-Exupéry, LL.M