Starting a business is exciting. It can also be a bit daunting. You might have questions about how to run your business correctly, where to file your taxes, what types of business credit cards to use, and so on. Those are prudent things to think about, but you can feel overwhelmed quickly.
One of the most common questions for new business owners is whether they should incorporate their business. But, they might not have thought about where to incorporate it – as in which jurisdiction. Entrepreneurs in Canada have a choice between incorporating provincially or federally, and there's a lot that goes into making that decision. But maybe you're wondering what it means to incorporate in the first place.
- What does it mean to incorporate?
- Incorporating federally or provincially: what's the difference?
- Deciding between the two: federal or provincial incorporation
- Can you change your jurisdiction after incorporating?
- Sidebar: What about going public?
- FAQs about incorporating federally and provincially in Canada
What does it mean to incorporate?
Under Canadian law, there are multiple ways to operate a business. The most straightforward is a sole proprietorship. In essence, whenever you offer a service or good with the aim to profit, you are deemed to be operating a business. While you do have business expenses you can write off on your tax return, there is no legal difference between you and your business. This means that any liabilities that come with operating your business are personally held by you. And, any income gained through your business counts towards your personal income.
In contrast, a corporation is a separate legal entity registered in the jurisdiction of your choice. The corporation has its own income, shares, and a board of directors to govern it. Given it is separate from the owner(s), they are no longer personally liable for lawsuits or debt collections brought against the corporation. Though there are a few situations where this is not the case such as:
- If a director signed a personal guarantee
- If GST/HST collections have not been remitted to the government
- If wages/vacation pay were not compensated to employees (up to 6 or 12 months, respectively)
Incorporating also open up opportunities for various tax breaks. Given that a corporation can issue shares, shareholders can be paid with dividends (rather than a salary), which are taxed at a much lower rate. Depending on what tax bracket you fall into, incorporating your business can result in substantial tax breaks.
Deciding to incorporate can be a solid move for businesses that are looking for increased liability protection, or lower tax rates. If you decide to incorporate, the next step is to determine if you want to operate on a provincial or federal level.
Incorporating federally or provincially: what's the difference?
Incorporating your business federally or provincially can provide ample benefits depending on how (and where) you plan to operate. Let's examine each registration type in turn.
When you incorporate provincially, you are choosing to operate in that province alone. This is a solid option for entrepreneurs that don't see themselves expanding to different provinces anytime soon. Because you are only incorporating in a single province, fees to both start and maintain your corporation are quite manageable. For example, incorporating in Alberta will cost you around $600 to register with a service platform such as Ownr. Doing it yourself costs around $400, but the lower fees come with higher risks. Annual maintenance fees for provincial corporations run anywhere from $50 or more depending on which jurisdiction you are in.
In terms of naming your business, incorporating it on a provincial level allows you to hold rights to a name in the province you register in. Should you choose to expand to a different province or territory, you will need to get approval for that same name from that province. If that name is unable to be used, you'll have to choose an entirely new name or use a number.
For smaller business owners that aren't planning on making giant steps shortly, incorporating their business on a provincial level is quite reasonable. Generally speaking, the process is easier and more cost-effective.
Incorporating federally, on the other hand, is a larger commitment. Having a federal corporation allows you to operate in all provinces and territories, instead of just one. However, there are a couple of caveats to this. First, according to the Canada Business Corporations Act, all businesses require a registered office in a province within Canada. While you can operate anywhere in the country, you still need to register your business in the province you plan to operate out of.
Second, even though you are allowed to operate nationwide, you are still obligated to extra-provincially register your business in every province you choose to operate in. Keep in mind that each province has definitions of what counts as business operations for their jurisdiction.
Because of these two stipulations, incorporating federally is more expensive than provincially. You are likely going to pay around $500 to incorporate on a federal level, plus upwards of $150 per provincial registration. In terms of annual maintenance, the federal fees are quite low ($12 to file online), but you'll also need to perform annual maintenance in each jurisdiction you are registered in. That can add up quickly.
Though the costs may be higher than provincial corporations, federal corporations come with the strongest business name protection in the country. Rather than having your name protected in a single province, your business name is protected across the country. No matter how many provinces you register your business in, your name stays the same.
As somewhat of an aside, Corporations Canada notes that incorporating federally is seen as a sign of distinction, as these corporations can be seen as distinctly Canadian businesses – not just provincial ones. That can be a big plus if you are hoping to have your business operate on a multi-national level.
Deciding between the two: federal or provincial incorporation
Deciding between these two incorporation types is no easy thing. We recommend seeking out advice from other seasoned business owners to understand the pain points they face with their business structures. Conversations like those can help you connect the dots as to where your current pain points might be, or where they could be in the future.
To help you think through the process clearly, let's recap the main differences between federal and provincial corporations.
- Your business's name is protected across Canada if you incorporate it federally. If you incorporate on a provincial level, you'll need to get your name approved in each province you operate in.
- Federal corporations are more expensive, time-consuming, and involve more paperwork to set up and maintain.
- Even if you incorporate on a federal level, you'll still need to register in each province you operate in, subject to its legislation.
- Federal corporations can carry more distinction on a national scale, as they are technically “Canadian companies”
In addition to reviewing the benefits and drawbacks of each type, you should also think about your individual business goals and if they line up with your corporate structure. Here are some key questions you need to answer before taking the final leap
Critical questions to consider
Where do you see your business going? If you're planning on operating across many different provinces or operating on a multi-national level, a federal corporation can help you meet those needs. Given the high level of name protection, a federal corp. can also ensure there is little-to-no chance of your business name being challenged. On the other hand, if your goal is to operate a small outfit in a single province, a provincial corporation is a better fit.
What upfront capital do you have to work with? The costs of incorporating federally, and registering in the appropriate jurisdiction(s), are quite high. It's crucial to check your finances to see if you can sustain a larger bill to get your business going. If not, starting with a provincially incorporated business will suit you better.
How important is the name of your business? If you're not concerned with using multiple names in the provinces you want to operate in, incorporating provincially makes more sense. If keeping a coherent brand/image wherever you operate is critical for your success, incorporating federally will help you keep the name you need to stand out.
Can you change your jurisdiction after incorporating?
Thankfully, registering a business in Canada is extremely flexible. In the event you realize incorporating provincially or federally was not the correct choice, you can change your jurisdiction. This process is a continuance. This allows you to take a federal company and move it into a jurisdiction of your choice. Keep in mind that this process can be complex and expensive – and not something to do without assistance.
Sidebar: What about going public?
Securities legislation and restrictions are quite complex in Canada, so we won't delve into public corporations deeply. However, it is interesting to note that many public businesses are federally incorporated, not provincially. A few notable exceptions might be Tourmaline Oil Corporation (TOU), a business that is registered as an Alberta corporation.
This is speculative, but a reason for such a disparity could be the prestige that comes with being a true Canadian corporation, not just a provincial one. Businesses that are publicly traded have a higher reputation to maintain with stakeholders internationally, so ensuring they recognize a national affiliation is critical.
Considering Canada does not have a federal securities regulator, each province has its own rules and regulations on how a company can begin offering its shares to the public. Knowing this, it is unlikely that incorporating federally or provincially can disallow you from entering the public market. Besides, as mentioned above, you can always change your jurisdiction if you deem it appropriate.
FAQs about incorporating federally and provincially in Canada
Incorporating federally means that you can operate within all of Canada, and have more secure business name protection. Though you still have to register in each jurisdiction you operate within, a federal corporation is considered to be an explicitly “Canadian Corporation” by the federal government.
It depends. If you choose to incorporate federally through a law firm, you could pay around $1200-$2000 in fees. Using an online provider costs around $500. You can do it yourself through Corporations Canada for approximately $200.
There are several differences. Incorporating federally allows your business name to be protected Canada-wide; not just in the province you operate in. A federal corporation can also be seen as a marker of distinction, as your business is explicitly Canadian, not just affiliated with a Canadian province. Finally, a federal corporation usually costs more to incorporate and maintain – not to mention there's more paperwork involved.