Business Incorporation Lawyers

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Incorporation: The Beginning of a Great Entrepreneurial Journey

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Whether you are an experienced businessperson or ready to start your first business, the idea of incorporating crosses the minds of all entrepreneurs. Most of the time, incorporation is an essential tool to start your entrepreneurial journey on the right foot. Depending on your situation, incorporation will help solidify your reputation as a self-employed worker, protect the interests of your small or medium-sized enterprise (SME), or even attract venture capital investment so that you can aspire to compete with industry leaders one day.

Before we begin, it is important to clarify that incorporation is an act by which a corporation is formed. In everyday life, businesspeople and professionals often refer to a « company » or « corporation. » To avoid any confusion, although these terms are acceptable, the most precise term we will use in this article is « corporation. »

The steps required to create a corporation are straightforward, as you will see in this text. In Quebec, there are two options available for incorporating your business. You can choose to proceed under the provincial or federal regime. Regardless of your decision, you will be able to do business anywhere in Canada, the United States, or even internationally.

Depending on the industry in which you aspire to operate, incorporation may be subject to specific formalities or restrictions that our team will be able to explain to you. Whether you are a real estate broker, a healthcare professional, a pharmacist, a doctor, a dentist, an accountant, an architect, or any other professional regulated by a professional order, it is important to be aware of the specific incorporation rules that apply to your situation to ensure compliance.

In some specific cases, an entrepreneur looking to incorporate a disruptive business in a related industry may have a heightened interest in seeking the advice and representation of an experienced business incorporation lawyer before implementing their project.

We believe it is essential for an entrepreneur to understand what incorporation entails, its benefits, the different options available, and the steps to take.

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1. Incorporation: A Necessity for Growth

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Why should you incorporate, and when should you do it? These are the two most frequently asked questions by clients who aspire to start a business. There are no magic formulas, and each situation must be carefully analyzed. In the past, different schools of thought have had heated debates on the subject.

In response to these questions, some professionals initially encourage their clients to start their business personally without incorporating. According to their approach, an entrepreneur should continue to work, build a client base, and start providing services or selling goods. When the business generates more revenue, and the tax burden becomes a significant issue, the entrepreneur should then incorporate a corporation and transfer the assets of their business to it, usually through a rollover to defer the related taxation.

Another school of thought, which aligns more with our business philosophy, is to retain the services of a good accountant and establish a corporation right from the preliminary stages of your business. If you subscribe to our approach, professional fees will be higher initially, but eventually, you will benefit from significant savings because you will not have to pay the high costs associated with transferring your business assets to a corporation. At Bessette Lawyers, we understand that incorporation is an essential tool for the growth and development of your business, and we genuinely believe that every entrepreneur should consider it even before starting their activities.

By incorporating your business, you make the decision to create a separate legal entity from your own person. This corporation may eventually grow and excel in its industry, with or without your contribution. Since it is a distinct legal entity, the corporation will have its own name, be able to open its own bank account, have its own credit card, its own client base, its own employees (including you), and, as a corporate taxpayer, it will generally pay less tax than individuals.

The corporation will be able to exercise (almost) all the rights enjoyed by Quebecers and Canadians, including those provided for in the Canadian Charter of Rights and Freedoms and the Charter of Human Rights and Freedoms. However, as in all things, with great power comes great responsibility. Therefore, a corporation that meets certain criteria will be required to collect sales taxes (i.e., GST/HST/QST) and will be obligated to make source deductions.

When the time comes to pass the torch, whether you are considering retiring from business or embarking on a new project, incorporation will facilitate the process of selling or passing on your business to the next generation. With proper guidance, you can benefit from significant tax advantages that will undoubtedly assist you in planning your transition.

To enable you to make an informed decision, the following section will break down the key elements you should also consider.

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2. Advantages:

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Limited Liability

Limited liability is often the most significant aspect that weighs on the mind of an entrepreneur considering incorporating their business. It is a considerable protection that allows shareholders of a corporation to be personally shielded against potential lawsuits related to the company's activities. Generally, only the assets of the corporation will be considered when determining the liability that a shareholder may be required to bear due to the activities of the corporation.

As a result, the personal risk of a shareholder will, except for exceptions, be limited to the value of the money and/or assets they have transferred to the corporation. Therefore, if a shareholder does not personally guarantee the obligations of the corporation, for example, to obtain financing or in a commercial lease clause, only the assets of the corporation will be used to pay any potential debts. However, there are certain exceptions, such as “piercing the corporate veil,” where personal liability may be imposed on shareholders under specific circumstances.

Furthermore, an entrepreneur who already enjoys substantial personal assets, such as investments, a house, a condominium, income-generating property, or other valuable assets, would have a significant interest in protecting their assets from potential creditors of the corporation.

For more experienced businesspeople who already operate their businesses through a corporation, this protection can also be enhanced to safeguard the assets of their operating corporation by establishing a management company. Indeed, it is sometimes beneficial to transfer certain assets from the operating corporation to the management company through a rollover. For example, an entrepreneur may want to transfer a real estate portfolio or residential and commercial rental properties that they personally own or through their operating corporation.

By ensuring that you follow the advice of a tax specialist or financial planner, it may also be opportune to consider transferring surplus cash from your operating corporation to the management company through intercorporate dividends.

Simplicity and Flexibility in Business Income/Expense Management and Tax Benefits

From a tax and financial perspective, incorporation could significantly simplify the management of your income and expenses. Without going into details, a corporation can offer you the following advantages:

• The ability to control the distribution of profits from your corporation by choosing to receive a salary or dividends, providing more flexibility in your type of compensation and the timing of your personal taxation.
• Although the corporate tax rate is lower than that of individuals, the integration mechanism will equalize this situation. Taxation upon the payment of a dividend to the shareholder will ensure that the shareholder pays a similar amount of tax as an individual operating their sole proprietorship and being taxed on profits. However, if you decide to leave profits in your corporation, the lower tax rate for corporations will allow it to have more after-tax money to cover expenses or reinvest in its development.
• If you plan to receive profits from multiple sources of income, such as maintaining a full-time job while operating a business through a corporation, it will be easier to isolate and control your personal income.
• Subject to tax rules limiting income splitting, setting up a management company may be a strategy to consider for further asset protection and optimizing your tax structure. We recommend consulting a specialist to learn more about this.

Increased Ease of Financing Your Business

In addition to enhancing your credibility in potential capital searches, incorporating a corporation will give you access to a diversified range of financing options. For example, your corporation can benefit from the following financing methods:

• Your corporation can issue shares with or without voting rights as needed to obtain equity, i.e., funds that do not have to be repaid by the corporation.
• It can solicit investments using crowdfunding methods, for example, by offering advantages to investors or using the pre-order model. This financing method can not only be useful for financing your startup activities but can also help you gauge the interest of your future customers in the product you are developing or the services you intend to provide. A successful campaign will give you a compelling argument when seeking larger financing from traditional investors.
• If you intend to engage in scientific activities, develop experimental products, or conduct research, your corporation may potentially be eligible for substantial tax deductions and tax credits that will facilitate the financing of your activities and reduce the costs associated with the development of your business.

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3. Practical Considerations

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Startup and Management Costs

Sometimes, certain entrepreneurs may be reluctant to operate their business through a corporation due to the expenses required for its establishment and management. It is true that it may seem counterintuitive for an entrepreneur to have to spend money on hiring a business incorporation lawyer and an accountant before their business starts generating revenue. Depending on the chosen regime, the entrepreneur will also have to pay for the incorporation and registration fees with the Quebec Business Registrar and/or Corporations Canada. Once the corporation is in place, there are also annual fees related to the corporation's accounting, as well as the requirement to submit annual update statements to the appropriate government authorities and pay the associated fees.

Limited Liability - Theory vs. Reality

On paper, the limited liability gained through the incorporation of a corporation may seem impenetrable. However, there are several situations in which a shareholder who is also a director of a corporation could be held personally responsible for the corporation's shortcomings. When certain conditions are met, a director may, for example, be required to personally cover unpaid employee salaries for the corporation. To minimize risks and further limit the potential liability of directors, a prudent solution is to consider subscribing to liability insurance policies.

In everyday life, another example in which a shareholder can be personally held responsible for a corporation's obligations is when they function as a guarantor. Depending on the type of financing for the corporation and the assets it owns, bank loans may sometimes be conditional on shareholders personally guaranteeing them. Following the same reasoning, it is common for personal guarantee clauses to be included in contracts with suppliers or commercial leases. Before putting your personal assets at risk, we believe it is always wiser to consult experienced professionals who can guide you in protecting your assets and asserting your rights.

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4. Quebec Charter and Canada Charter

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Now that you have made your decision and feel ready to launch and incorporate your own corporation, the next step is to decide under which law you want to operate. You will need to choose whether to create a corporation under the Canada Business Corporations Act (CBCA) or under the Quebec Business Corporations Act (QBCA). While both options have many similarities, and in both cases, your corporation can do business anywhere in the world, there are differences that should be considered.

Therefore, we present four key factors that we believe are essential to guide you in your analysis:

Place of Business

• The head office of a corporation incorporated under the provincial regime must be in Quebec, while the head office of a corporation incorporated under the federal regime can be located anywhere in Canada.
• If you plan to establish or move your head office to another Canadian province, federal incorporation could help you avoid future fees.

Name Protection

• Corporations incorporated under the provincial regime enjoy name protection within the territory of Quebec, while the names of federal corporations benefit from some protection in all provinces and territories of Canada.
• The costs to select the corporation's name are higher at the federal level since a NUANS search is required.
• In any case, the chosen name must comply with the requirements of the Charte de la langue française. However, you to comply with language requirements of the Quebec French Charter, can also provide an English version of your French name.

Composition of the Board of Directors

• At least 25% of the board members of a corporation incorporated under federal law must be Canadian residents, while there are no residency requirements for directors of a corporation incorporated under provincial law.
• If you plan to partner with foreign residents and want them to sit on the board of directors of the corporation, you may benefit from incorporating your business under provincial law.

Costs

• It is more expensive for a corporation to incorporate under the federal regime than under the provincial regime. Annual fees are also higher.
• If you do not need the specific features of federal incorporation listed above, you will benefit from choosing provincial incorporation over federal due to lower costs.

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5. Incorporation for Professionals

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Since 2001, various professional orders in Quebec have been authorized to allow their members to conduct their professional activities through a corporation or a limited liability partnership (S.E.N.C.R.L.), subject to certain conditions.

Incorporation for these professionals, however, involves an additional step in the standard incorporation process, which requires sending a notice or declaration to the relevant professional order or association. On this occasion, the professional wishing to incorporate must submit various documents and comply with the terms set out in the order or association's regulations.

Since the requirements vary from one regulation to another, a professional would be well advised to retain the services of a business incorporation lawyer to avoid unpleasant surprises or unwanted situations.

As examples, doctors, accountants, lawyers, notaries, dentists, pharmacists, psychologists, real estate brokers, architects, and information technology (IT) specialists can now conduct their activities through a corporation.

Depending on your profession, we invite you to consult the following websites to learn more about your obligations and rights:

• College of Physicians
• Chartered Professional Accountants of Quebec (CPA)
• Barreau du Québec
• Chambre des notaires du Québec
• Order of Dentists of Quebec
• Order of Pharmacists of Quebec
• Order of Psychologists of Quebec
• Quebec Real Estate Brokerage Self-Regulatory Organization
• Order of Architects of Quebec
• Quebec Association of Independent IT Professionals (AQIII)

Of course, this text is for informational purposes only and provides general information that cannot replace legal advice. That is why it is essential to consult a business incorporation lawyer. If your situation requires it, the Bessette Lawyers team will be happy to help you incorporate your business or provide advice based on our personalized approach tailored to your vision, your business model, and the considerations of your business partners. We invite you to contact one of our lawyers for more information on this subject.