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Now you can listen to our blog, “How to Change From a Sole Proprietorship to a Corporation” while on the go.
If you are a Canadian business owner, you might already know that there are multiple ways you can expand your operation beyond the private sector. Probably, your enterprise has grown a lot and it is earning enough income that you have started considering the next step; incorporation.
If yes, then this guide is specifically for you. In this, we will list down all the paperwork that is required, with a guide on how you can approve and switch over from your sole proprietorship. But let’s first start with sole proprietorship meaning.
What is a Sole Proprietorship?
A sole proprietorship is a term used when you own and operate a private business, which can be accomplished by filling out the appropriate permits. Since no other business organization is involved, you have to deal with any legal and financial situation that comes your way.
In spite of less protection against legal and debt-related incidents, it is normally cheaper and easier to claim over a business than it is to incorporate since you do not have to dedicate as much time and money toward legal or accounting costs. It is worth mentioning here that you can run your business in whatever way you want it.
Below are the documents you need to file when registering your private business:
- Business registration from valid for 5 years if approved
- Annual personal tax returns
- Payroll remittances and filling for staff members
- Sales tax forms when paying HST or GST
What is an Incorporated Company or Business?
If your business is continually growing in size and profit, then it is time to register it as a company on a federal or provincial level. This process is called incorporation. As a general rule, if your business is earning $50,000 or more annually, then it is a good fit for incorporation.
Although some business owners are reluctant owing to extra costs and documents associated with the registration process, incorporating can be highly advantageous as it turns your private enterprise into a separate legal and financial entity. This is also beneficial for providing protection from lawsuits, debt collection penalties and other liabilities that are corporation accrues.
Needless to mention that incorporation allows your company name and legacy to live on, even after you have sold your shares or are deceased.
How to Choose between Federal and Provincial Incorporation?
If you have decided to incorporate, the next thing to consider is whether to do it provincially or federally. If you are stuck in this conundrum then know that both options have their own benefits and drawbacks attached. These benefits and drawbacks can drastically change the financial health of your business. So, it is wise to get some professional advice along the way before you register.
We will explore both options with their pros and cons to give you a clear picture of what to do next.
Your company name will be protected across all provinces and territories in Canada if you register on a federal level, which is a big benefit, especially if you run into legal or financial issues.
Other benefits of federal incorporation include, but are not limited to, the following:
- With only $200-$300 in processing expenses to pay upfront, the registration process can be marginally less expensive than provincial incorporation.
- The Government of Canada’s system automatically files federal registration paperwork, saving you time and effort in the long run.
- Even if another company has the same or a similar name, your company can lawfully function in any region of the country.
- In general, whether locally or internationally, the company name will have better reputability.
However, there are some drawbacks to federal incorporation, including the following:
- Managing a federal corporation over time necessitates additional manpower and resources, especially since corporate taxes must be filed annually
- While registering is less expensive, it necessitates more paperwork and, due to added accounting fees, may end up costing more than provincial incorporation.
- To grow your business into Nova Scotia, Newfoundland and Labrador, Saskatchewan, and Ontario, you will need to complete additional registration papers.
- A federal examiner must inspect and approve your company name before it can be registered across Canada, which takes time.
Provincial incorporation is exactly what it sounds like: you register your firm in a specified province or area, and you must obtain separate approvals if you want to expand beyond your assigned sector (jurisdiction).
Although many business owners choose federal incorporation, there are a number of benefits to going the provincial route, including:
- Because corporation taxes are not required to be filed every year in all provinces or territories, the company can save money overall.
- Despite the somewhat higher provincial registration fees ($300-$400), there is far less paperwork to fill and documents to supply in order to qualify.
- Because a federal investigation is not required, registering your company’s name is a little easier if it’s limited to a certain area.
Unfortunately, there are also drawbacks to provincial incorporation, including:
- Even if you have the same name or sell similar items, a larger federal corporation may have more financial and legal authority over you because your firm is only protected inside its registered jurisdiction(s).
- In AL, NL, NT, NU, PE, QC, and YT, you must apply for a unique business number (automatically assigned in all other provinces and territories). This may necessitate extra time and money in terms of accounting.
- When it comes to increasing your company’s reputation and profitability outside of your province/territory, your options will be restricted.
The entire registration process can take one week, give or take a few days to set up or update any essential paperwork and accounts, depending on where you apply and what type of corporation you’re forming. Your bank should tell Canada’s credit bureaus as soon as possible, and each version of your business credit record will be updated properly.
The last step is to close your sole proprietorship, as well as any old financial or tax accounts (which will need to be set up again under the new company name).
The Bottom Line
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