Talking To Lawyers (Small Business) Series: Incorporation
Updated: Jan 7
According to British Columbia’s Ministry of Jobs, Trade & Technology there were a total of 501,300 businesses in British Columbia in 2017; of these a full 493,100 businesses (98 per cent) were considered small businesses with fewer than 50 employees (and 302,700 of these businesses (60 per cent) were self-employed individuals with no employees). According to B.C.’s Ministry of Jobs, Trade & Technology, small business in B.C. accounts for 35 per cent of overall gross domestic product (GDP).
Clearly, small business owners and the self-employed represent a significant portion of business conducted in British Columbia.
Usually long before an entrepreneur contacts a lawyer, if they ever do, they have considered the what (as in what business they wish to pursue) and the question of why they want to start a new business. One of the first questions often asked when finally seeking advice is how should the business be structured – more likely, should I incorporate my business or not?
For this series we will set aside consideration of specialized subsets of the structures below like not-for-profits, societies, cooperatives, community contribution companies, unlimited liability companies (ULCs) and business required to be formed under particular statutes.
Generally, there are four potential business structures to choose (or not choose, in some circumstances) from:
Below, we will consider incorporation and the corporate structure form.
The “Corporation” or “Company”
Most businesses of any size are carried on in the form of a corporation (the phrase “corporation” and “company” can usually be used interchangeably in most instances, although they may have unique meaning under specific legislation, for example, the phrase “corporation” is often used in reference to a federal or other provincial corporate entity and “company” to a British Columbia corporate entity). The corporation is a unique and popular form of undertaking a business, for many reasons, but the primary reason with many small business entrepreneurs is that – unlike the sole proprietorship and general partnership – fulfilling the formal requirements of the applicable corporate statute creates a separate and distinct legal entity (artificial person, so to speak) which can do almost anything a natural person of full legal capacity can do and whose liabilities are its own and generally not those of its directors, officers and shareholders.
It must be understood that a corporation is created – like the limited partnership and the limited liability partnership – by either specific federal or provincial statute (a "statutory corporation", very rare in recent years) or by fulfilling the formal requirements of a federal statute or provincial legislation applicable in the jurisdiction where incorporation is to take place. In that regard a corporation is a regulated entity. A corporation exists only because of that particular statute or legislation pursuant to which is was form and, therefore, to enjoy the benefits of that existence (and maintain its existence going forward) a corporation must continue to comply with the requirements contained in that particular statute or legislation.
For example, the Business Corporations Act (British Columbia) requires every company to display its full corporate name in legible characters in a conspicuous position at all places where it carries on business and on a variety of written documents, including business letters and contracts. Failure to do so may result in significant penalties, including personal liability on the part of directors and officers. Similarly, both the Business Corporations Act (British Columbia) and the Canada Business Corporations Act require a corporate entity to maintain corporate records; maintain a corporate records office; to file annual reports and pay annual fees; and, unless otherwise waived in compliance with applicable statute, to produce or publish annual audited financial statements and hold annual general meetings of its shareholders. Failure to do so may result in the corporation being dissolved, legal action by shareholders and potential personal liability on the part of directors and officers. Related to the above, if tax planning is a major part of the decision to incorporate, the Canada Revenue Agency or “CRA” often takes a simple perspective on tax payers using a company structure – if you want the benefits afforded by incorporating, you need to attend to formalities and respect the separate nature of a corporation (ie. no casual dipping into the corporate bank account for personal expenses).
Simply put, forming a corporation does not end there. Take a moment to appreciate that doing it yourself or using a filing service that hands you a corporate entity may not in and of itself achieve the very things you are seeking to obtain. It is recommended that all incorporated businesses have experienced legal and accounting advisers retained.
Advantages and Disadvantages
It is perhaps best to mention some potential disadvantages before moving on to potential advantages as consideration as to whether to incorporate or not requires an understanding, and balancing, of both. Remember that the vast majority of formal businesses in Canada operate as corporations. So with that in mind, a few potential disadvantages:
Ease, Maintenance & Compliance. It makes sense to package these matters together, and then relate them to the item below. To form a sole proprietorship or general partnership really requires you to do nothing other than commence an activity in which the law then presumes one or the other with all of the potential problems that may bring (see earlier installments of this series). To form a corporation requires some formal acts, filings, fees and compliance with statute. To maintain a corporation requires some formal acts, filings, fees and compliance with statute. Before most entrepreneurs start to build and invest in a business, they are willing to make that investment to obtain the benefits outlined below. Some individuals are not willing to do so because the proposed business or undertaking is too casual, too small or too preliminary (and therefore incorporation is not pursued at the beginning or at least is delayed). Be aware, however, that a casual or “side” business can result in unanticipated liabilities that can create unintended tax consequences or personal liabilities that put your personal assets at risk. Delay in incorporation can result in potentially more complex and, therefore, more expensive incorporation and organization procedures later on.
Expense. Often the question arises as to how much incorporation costs before any conversations of the why or how of incorporation. Incorporation – whether you do it yourself, retain an online service, seek the assistance of a local business law firm or engage a full-service national or multi-national law service provider with cost money. Incorporation filing fees alone, payable to either the British Columbia or Federal corporate administrators, are in the range or $200 to $350 (corporate name formalities, if applicable, add to that) and annual maintenance is another $20 to $45. That is the starting point as fees to attend to the applicable formalities of incorporation, together with any related advice, are additional as are fees related to the post-incorporation organization and maintenance. Those additional fees and the service and knowledge (if any) they are meant to facilitate can vary substantially, both based on the service provider and the complexity of the particular incorporation. Some individuals see this expense as either the central issue of their decision to incorporate or not; or often seek the lowest fee to obtain the most basic of outcomes. Be aware, however, that doing it cheap is often not necessarily doing it right or doing it all and overlooking this can result in unanticipated liabilities more complex and, therefore, more expensive legal procedures later on.
Tax Treatment. Tax considerations with incorporation can be both a disadvantage or advantage, depending on the circumstances. A potential disadvantage, for example, is that a corporate structure may offer less than optimal tax treatment for business losses - particularly if the business never earns a profit against which losses can be taken. If possible, talk to an accountant and get the benefit of up-to-date advice as to the potential tax implications of any structures you may be considering.
As for potential advantages:
Separate Legal Entity. As noted above, corporations formed under the federal statutes or the various provincial legislation have the ability to do almost anything a natural person of full legal capacity can do including owning land; holding permits and licences; entering into contractual obligations; and the ability to own and dispose of any assets. All separate and apart from its directors, officers, employees and shareholders.
Immortality. As a person created by statute, a corporation has potentially an unending existence (as long as annual obligations are maintained and the shareholders or a court does not decide otherwise) and continues to exist even if all its shareholders may change or even if it, for a time, has no shareholders. A partnership, for example, is automatically dissolved in a number of situations (such as if a partnership consists of only two partners and one of them dies).
Limited Liability. As stated above, the shareholders, directors and officers of a corporation are not usually liable for the obligations of that corporation simply by virtue of be such. Federal and provincial corporate statute provides that those that form the corporation and who become its shareholders are only liable for the debts of the corporation up to the amount they have agreed to pay for their shares in the corporation – that is to say, shareholders are generally only at risk up to the amount they paid for their respective shares. Limited liability does provide some protection, particularly from general trade creditors and legal proceedings that may result from wrongful acts of, for example, employees. However, limited liability may provide less protection than is often advertised. Certain legislation both federally and provincially extends liability for tax, environmental and some employee payroll obligations beyond the corporation itself and, as a matter of practice, lenders and commercial landlords can routinely ask for personal guarantees from the principal shareholders for the corporation’s obligations.
Raising Capital. Typically, incorporation may make raising capital for the business somewhat easier since investors are often more familiar with the corporate structure, more confident in the legal implications of incorporation and more receptive to the numerous alternatives and capital structures available to a corporation. A shareholder’s interest in a company (usually by way of ownership of shares) can easily be made transferable, whereas transferring partnership interests can be difficult and is typically subject to specific requirements in a partnership’s partnership agreement. Shareholders can participate in the management of the company to the extent they have control over the election of directors. The ability to transfer your interest somewhat easily can, therefore, accommodate investors who may be seeking the ability to exit a particular investment at some point. Shareholders have several other rights and remedies, such as legislated protection for minority shareholders. Be aware, regardless of the structure, the distribution and trading of securities (which includes but is not limited to shares, debentures, promissory notes) is governed separately by applicable securities legislation.
Tax Treatment. An advantage, for example, in circumstances where certain corporations receive preferential income tax treatment like the small business deduction. Also, a corporate structure often provides more flexibility in deferring taxes and in allowing the division of business income. If possible, talk to an accountant and get the benefit of up-to-date advice as to the potential tax implications of any structures you may be considering.
Endeavor Law provides federal and British Columbia incorporation; annual maintenance services; registered and records office services; and extra-provincial registration services and can assist new entrepreneurs and small business owners consider, implement and maintain the business structure that is right for their particular circumstances. Endeavor Law will always seek to provide competitive pricing (with respect to corporate services, see here) for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.
 SMALL BUSINESS PROFILE 2018 published by the B.C. Ministry of Jobs, Trade & Technology (see here).