When you decide to start a business, one of your first choices is how to structure it. Many people begin as sole proprietors. That means you and the business are legally the same (no limited liability protection). You earn the income, pay the taxes, and personally take on the risks.
A corporation is different. It’s a separate legal person that exists on its own. It can own property, borrow money, open accounts, and enter into contracts. You may act as a director (the decision maker for a corporation), but the corporation is the legal entity operating the business.
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A main advantage of using a corporation is limited liability protection. Because the company is legally separate from its owners (owners of a corporation are called shareholders), your personal assets are usually protected if the business runs into debt or legal trouble. That separation offers security and peace of mind. It is important to note however, most lenders will required the shareholders of a new corporation to give a personal guarantee for any bank loans that a corporation may take, this is common).
Corporations can also bring tax flexibility. Income can be paid as dividends or salary, depending on what makes sense. You can keep profits in the company for reinvestment or future planning. Clients and lenders also tend to see incorporated businesses as established and dependable.
That said, a sole proprietorship remains a simple and inexpensive way to begin. There’s little paperwork and few ongoing requirements. For small, low-risk operations, that can be enough at first, perhaps in the business ‘testing’ phase. But if you plan to grow, bring in partners, or sell later, a corporation is often the better fit.
Common Terms and Misunderstandings
You’ll hear several acronyms when people talk about companies. “Ltd.,” “Inc.,” (and the longer forms; Limited, Incorporated, or their French equivalents) describe incorporated businesses in Canada. They mean the same thing and appear at the end of a company’s name. When you register the corporation, you must choose one of these endings.
A common misunderstanding involves the term “LLC.” That’s an American structure called a limited liability company. Canada doesn’t have this exact model. Here, you achieve the same protection by forming a regular corporation under either provincial or federal law.
Other options include partnerships, which share profits and responsibilities between two or more people. Limited and limited liability partnerships offer some protection but still differ from corporations.
Federal vs. Provincial Incorporation
In Canada, you can incorporate federally or provincially. A federal incorporation is governed by Corporations Canada, while a provincial incorporation is governed by the provincial registry.
A federal corporation offers nationwide name protection. That means no other company in Canada can use an identical or confusingly similar name. It also allows you to operate in every province, though you still need to register in each one where you carry on business.
The trade-off is cost and paperwork. A federal company must file its incorporation federally and then register extra-provincially in the province where it operates. That means two sets of filings, two registration numbers, and two annual filings to maintain.
A provincial incorporation is usually simpler and less expensive. You get one registration, one renewal process, and a name that’s protected within that province. For most small and medium-sized businesses that operate locally or regionally, this is enough. You can achieve the same functionality as a federal corporation, just without national name protection.
The right choice depends on where you plan to do business and how far you expect your brand to grow.
Extra-Provincial Registration: Expanding your business across provinces
When your corporation starts doing business outside its home province, it must often register as an extra-provincial corporation. This ensures your business is properly recognized and compliant wherever it operates in Canada. *(Note – Nova Scotia Companies are not currently required to register in New Brunswick; and vice versa (if they are provincially incorporated companies), due to an exemption that the NS and NB provincial governments have agreed to).
Registration is generally required when your company establishes a real presence in another province, such as:
- Opening an office, storefront, or warehouse
- Hiring employees or contractors who work there
- Owning or leasing property or equipment
- Signing contracts or providing services locally
- Actively marketing or soliciting business in that province
Even federally incorporated companies must register before carrying on business in another province. Failing to do so can lead to penalties or limit your ability to enforce contracts.
Named or Numbered Company
You’ll also need to decide whether your company will be named or numbered. A named corporation has a custom business name that you choose, such as City Widgets Inc., for example. This option enabled you to brand your corporate presence.
A numbered corporation is assigned a number automatically by the registry, such as 1234567 Nova Scotia Limited. It functions exactly the same as a named company but saves time because there’s no name search or reservation required. Many people choose a numbered company when the name itself isn’t important; for example, holding companies or entities used for real estate or investments.
Either option gives you the same legal rights and protections. The difference is purely practical and cosmetic.
Common Corporate Terms
Ltd. – Limited. A standard ending for Canadian corporations.
Inc. – Incorporated. Equivalent to Ltd.
LLC. – Limited Liability Company. Common in the United States, not used in Canada.
Federal Corporation. – Registered with Corporations Canada and recognized nationwide.
Provincial Corporation. – Registered within one province. Easier and less costly for most local businesses.
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