How to Change From a Sole Proprietorship to an Incorporation
As a Canadian business owner, there are plenty of ways that you can expand your operation beyond the private sector. In fact, as your enterprise grows and starts earning more income, you might want to consider taking the next step; incorporation.
However, before that can happen, you’ll need to file the right paperwork that, when approved, allows you to switch over from your sole proprietorship. Not sure how this is done? Keep reading to find out.
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What is a Sole Proprietorship?
A sole proprietorship is when you own and operate a private business, which can be accomplished by filling out the appropriate permits. Since no other business organizations are involved, you will then have to deal with any legal and financial situations that arise.
Despite having less protection against legal or debt-related incidents, it’s usually cheaper and easier to claim sole proprietorship over a business than it is to incorporate it since you won’t have to dedicate as much time and money toward legal or accounting costs. Not to mention, you can run your business in whatever way you see fit.
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In addition, you will only have to file the following documents in order to register a private business:
- A business registration form (valid for 5 years upon approval)
- Your annual personal tax returns (T1 slips)
- Your payroll remittances and filings for any staff members
- Your sales tax forms (when paying HST and/or GST)
What is an Incorporated Company?
If your business is continually growing in size and profitability, then it may be time to register it as a company on a federal or provincial level, otherwise known as incorporation. Most financial experts recommend this process for businesses that earn $50,000 or more yearly.
While some business owners are hesitant about the extra costs and documents associated with the registration process, incorporating can be highly advantageous because it turns your private enterprise into a separate legal and financial entity. This provides you and any other shareholders added with protection from lawsuits, debt collection penalties, and other liabilities that the corporation accrues. Not to mention, it allows your company name and legacy to live on, even after you (or any of its original directors) have sold your shares or deceased.
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Choosing Between Federal or Provincial Incorporation
If you’ve decided to incorporate, the next choice you’ll have to make is whether to do it provincially or federally. Both options have benefits and drawbacks that can drastically change the financial health of your business, so be sure to get some professional advice before you register.
If you register on a federal level, your company name will be protected across every province and territory in Canada, which is a huge asset, particularly when it comes to any legal or financial problems that occur.
Other advantages to federal incorporation include but aren’t limited to:
- The registration process can be slightly cheaper than provincial incorporation, with only $200-$300 of processing fees to pay initially.
- Federal registration forms get filed automatically through the Government of Canada’s system, saving you a bit of time and effort overall.
- Your company can legally operate in any part of the country, even if another business has the same or a similar name.
- The company name will have more reputability in general, whether locally or internationally.
However, there are some disadvantages to federal incorporation, such as:
- It takes more labour and funding to manage a federal corporation throughout the years, especially since its corporate taxes must be filed annually (For more information, click here to see how to file a business tax return.)
- While registering is cheaper, it requires more paperwork and may end up being pricier than provincial incorporation due to additional accounting costs.
- You will have to fill out extra-registration forms to expand your business into Nova Scotia, Newfoundland and Labrador, Saskatchewan, and Ontario.
- To register Canada-wide, a federal examiner must inspect and approve your company name, which also takes time.
Just as it sounds, provincial incorporation is when you register your company within a specific province or territory, and you must gain separate permissions if you wish to develop outside your designated sector (jurisdiction).
Although many business owners choose the federal route, provincial incorporation also has plenty of advantages, such as:
- The company can save some money overall because it is not mandatory to file corporate taxes each year in all provinces or territories.
- Despite provincial registration fees being slightly higher ($300-$400), there is much less paperwork to file and documentation to provide in order to qualify.
- Registering your company’s name is a bit easier if it’s limited to a particular area, as a federal examination will not be necessary.
Unfortunately, provincial incorporation is not without its disadvantages, such as:
- Your company will only be protected within it’s registered jurisdiction(s), so a larger federal corporation may have more financial and legal power over you, even if you have the same name or sell similar products.
- You must register for an individual business number in AL, NL NT, NU, PE, QC, and YT (automatically assigned in all other provinces and territories). This may require more effort and accounting costs.
- The possibilities will be limited when it comes to expanding your company’s reputation and profitability outside of your province/territory.
Still not sure, click here to learn more about if you should incorporate federally or provincially.
What Do You Need to Incorporate Your Business?
When you incorporate, it may be wise to hire a professional accountant to oversee the financial side of the registration process, as well as a lawyer to counsel you on any legal requirements. In that case, save at least $1,000 – $2,000 for these costs alone.
You may also have to provide these documents during and in the years that follow the registration process (requirements vary based on province/territory):
- Articles of incorporation (Federal, Provincial, or Territorial registration forms)
- Yearly information returns (details of the company directors and share structure)
- Various corporate records (you must keep these on file for at least six years)
- Annual corporate tax returns and financial statements
- Payroll remittances and filings for corporate employees
- GST and/or HST filings (if your company earns more than $30,000 yearly)
- At least one NUANS (English jurisdictions) or CIDREQ (Quebec) name search report to confirm that your company name is not already taken.
Although you can do all this online through the Government of Canada website, there are also many physical outlets and business web portals in every jurisdiction where you can register for provincial or federal incorporation.
Make Sure You Update the Following When You Incorporate
Remember, incorporating your business, whether provincially or federally, isn’t always simple and requires a lot of time, money, and patience. That said, it’s definitely one of the most effective ways to grow your enterprise and rake in more profit as a result.
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That’s why it’s essential to get the right professional advice before you start filling out your registration forms. Be sure that you understand every aspect of incorporating and are aware of the necessary updates you must make, such as:
- Company Name – If your NUANS report shows no discrepancies with other corporations, you can start by adding one of these legal endings to your company name and having it registered properly:
- Financial Information – As soon as the corporation is registered as a separate entity, you will need to set up a corporate account with your bank, which appears under a different business category. Afterward, you must have some new cheques printed up that clearly display the company name.
- Tax Information – You’ll also have to register or update several documents with the Canada Revenue Agency, including your business number, corporate tax account, HST, GST, and payroll. All this will need regular management, especially if the company is slowly expanding through other jurisdictions.
- Business Image – Once you’ve taken care of the formalities and your corporation stands tall, it’s time to update your company’s look with a new logo and other forms of advertising, such as business cards and signage.
What Happens to Your Sole Proprietorship After You’ve Incorporated?
Depending on where you apply and what type of corporation you’re creating, the whole registration process can last about one week, give or take a few days to set up or update any necessary documents and accounts. Soon after, your bank should relay this information to Canada’s credit bureaus (Equifax, TransUnion, Dun & Bradstreet), who will modify each version of your business credit report accordingly.
The final step is to cancel your Sole Proprietorship, along with any old financial or tax-related accounts (which will need to be set up again under the new company name). Once all this is done, congratulations, your corporation is on its way to greatness!
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