Should You Incorporate Federally or Provincially?

Thinking of starting your own business in Canada? Congratulations!

Entrepreneurship can open many doors and opportunities and give you the chance to break through wage ceilings that are typical of the average salaried job. You’ll also have the creative freedom to turn your passion or knowledge into a full-fledged business and source of income.

But starting and running a business requires more than just marketing your goods or services and serving your customers. There are some legal and tax issues that need to be ironed out in order to operate your business in Canada.

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One decision that you will want to consider is the way in which to register your business. More specifically, do you want your business to be a sole proprietorship, partnership, or incorporation? Each one comes with its own set of perks and drawbacks that need to be considered.

For the sake of this article, we’ll be discussing registering incorporated businesses. There are a number of benefits of incorporating your business, including the following:

• Personal liability protection
• Easy transfer of ownership
• Ability to function as a separate legal entity
• Ability to enter into contracts
• Ability to raise capital
• Ongoing existence until terminated
• Lower income tax bracket
• Increased growth potential

But more specifically, should you incorporate your business provincially or federally?

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Federal Vs. Provincial Incorporation

If you’ve decided to incorporate your business, the next decision you need to make is whether to incorporate on a federal or provincial level. Let’s discuss the difference between the two.

Ease of Incorporation

The process for incorporating a business provincially can be a bit complicated compared to the federal incorporation process. That’s because federal incorporation typically includes automatic filing of any additional forms required.

Protection

Being federally incorporated offers business owners more rights and better protection of the business name. This can come in really handy if you find out that another business is operating under the same registered name as your business.

If this happens, you can take specific action to rectify the situation and seek protection if it’s discovered that there’s another business in another province outside of where you are using the same name.

As such, federal incorporation gives you the right to use your business name across all of Canada. Such is not the case if your business is provincially incorporated.

If you’re only registered in one province – such as the one you reside and operate in – you’re only given protection in that one single province. If another business is using your name in a different province, you will not be able to register in that location.

In this situation, you could face significant issues if you ever plan to expand your business and take it nationally or even internationally at some point.

Possibility of Expansion

If you don’t plan to expand your business outside of provincial boundaries, then registering your business as provincial incorporation might be fine. In fact, certain types of businesses must be incorporated provincially, such as professionals like doctors and lawyers.

That said, if there are no such restrictions on the type of business you run, you may be better off looking into federal incorporation to save some money when you incorporate and take advantage of additional protections that you wouldn’t be able to get if you were provincially incorporated.

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Compliance

Federal incorporation means your company will be a Canadian corporation and will be able to do business across Canada. In this case, it will be governed by the Canada Business Corporations Act (CBCA).

Provincial incorporation, on the other hand, means your company will have to be in compliance with provincial corporate regulations.

Initial Cost

Federal incorporations are cheaper to register at the onset than provincial incorporation registrations. That said, federal incorporation companies must file annually, which come with added costs, as we’ll discuss further down.

Currently, the cost to incorporate federally is $299 (+HST). Provincial incorporations in Ontario, for example, are $399 (+HST).

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Annual Filings

In provinces like Ontario, an Annual Return isn’t required, and a Notice of Change is only needed if there have been changes to your company’s Board of Directors, Corporate Officers, or physical location.

Federal corporations, on the other hand, must file every year, regardless of whether or not there have been any changes. These annual filings come with a cost, and while federal registrations are typically cheaper at first, over the long run, the costs can add up.

Are There Any Disadvantages to Federal Incorporation?

Federal incorporations come with a number of advantages that business owners won’t get with provincial incorporations, as already noted. But there are two distinct disadvantages:

Overall cost – Since federal incorporations must file annually (which comes with additional costs), the overall expenses might be more compared to provincial incorporation registrations.

Time needed to adhere to regulations – Federal incorporations require that extra provincial licenses are registered for. That means business owners must also register in each province or territory where business is being conducted.

The Bottom Line

As an entrepreneur, you have options when it comes to how to set up your business’ identity. While you may choose to become a sole proprietorship or partnership, incorporating comes with a set of perks that you won’t find with these other options.

When it comes to incorporating your business, determine whether provincial or federal incorporation is best for you.

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