As a sole proprietor, you may be looking back at last year’s results andahead to the time you have to pay your taxes, and wondering whether you might not be better off incorporating to control the income tax expense on earned income. In Canada, a company may be incorporated provincially or federally. Federal incorporation has some advantages:
Whether you are thinking of incorporating provincially or federally, the following are a few areas to consider:
Naming the Company
The corporation can have a name company or a number. If you incorporate using a number, you may also use a name (i.e., 1234567 Ontario Ltd. could also register itself as “Able’s Horse Stable”.) This name becomes “attached” to the registered number.
When conducting business using the trade name, you must still identify the company by its registered name. For instance, sales invoices could show “Able’s Horse Stable” but should indicate that the actual incorporation name is 1234567 Ontario Ltd.
The name chosen cannot be either identical or deceptively similar to existing registrants in the province. The name or number must be identified as a corporation by using the French or English forms of “limited” or “incorporated”.
The head office of a provincially incorporated company must be located in the province of incorporation. The head office is usually at the same location as the operations but, if there is more than one operating location, a choice can be made.
Ownership and control are determined by the number of shares held.
Shares must be issued in order for the company to be owned. The owners must decide among themselves the minimum number of shares that will be owned by each shareholder. The shares provide the owners with voting rights. Whether the corporation issues 10,000 or only 50 common shares with voting rights, the degree of ownership and control are determined by the proportion held by each individual. The value of each share is decided at the time of issue. If share value was set at $10 per share, then the holder of, say, 5,000 shares would have to remit $50,000 to the corporation to purchase ownership.
Private corporations may not have more than 50 shareholders. The residential addresses of all shareholder(s) must be provided for notification purposes.
All corporations must appoint at least one Canadian resident as a director. If four or more directors are appointed, 25% must be Canadian residents. The residential address of the directors must be provided along with the residency status.
In owner-managed businesses, it is not unusual for the shareholder(s), director(s) and officer(s) to be one and the same. It is not a requirement for officers to own shares or be directors of the corporation. However, in that officers manage the operations of the company, they are held to a high standard of stewardship and thus the appointments should not be taken lightly. The residential addresses of the officers must be provided.
You will have to determine a fiscal year-end date for the corporation. Depending upon the date of incorporation and the business cycle, you may choose a year end other than the calendar year end. It is advisable to speak to your CPA about the best month end for your type of business and to maximize tax-deferral possibilities.
Auditor or Accountant?
Provincial acts of incorporation may require audits of financial statements. This requirement can be waived for non-publicly traded companies as long as all of the shareholders agree to waive the audit provision. Consent to waive an audit is required each year. Most business owners, their banks and creditors do not require audited financial statements; waiving audit provisions in favour of reports provided by a CPA is an acceptable alternative.
Even though the appointment of an auditor may not be required, it is wise to consider appointing a CPA as part of the incorporation process to assist in setting up the required books and records, tax accounts, business number, WSIB, employee payroll remittance accounts, HST or PST accounts and all the other regulatory registrations that may be specific to your business.
Seek Professional Advice
Incorporation requirements vary from province to province. The guidelines above are provided as general consideration as to what is normally required. Entrepreneurs considering incorporation should seek professional assistance in their jurisdiction to ensure the appropriate steps and documentation meet the requirements under their provincial incorporation act.
Because lighting, heating and cooling represent 19%-25% of the cost of operating a commercial business, control of energy costs is essential to improving profit margins. A reduction of even 10% in these costs can produce a significant improvement. But, because Canada is located in a part of the world where temperatures can range from 40C below zero to 35C above, it is inevitably expensive to keep internal temperatures at levels needed to maintain comfortable working conditions through the changing seasons.
Setting the price point for your product or service is not simply the process of determining the cost of production then adding a mark-up. It is more a matter of understanding the price the consumer will accept as the value of your product or service and keeping the costs of production to a level that will give you a profit at that price.
The significant rise in the cost of equipment, vehicles, real estate, and inventory has prompted many businesses to increase business debt. Low interest rates, combined with the ability to obtain larger loans with extended payment terms, have allowed businesses to operate in a “business as usual” mode with less consideration for the actual cost of borrowing.
To give some idea of the effect of even low interest rates on an owner-managed business, the following key elements of most businesses have been put forward as an example of the effect of interest costs on a business. The effect of domestic borrowing has been added to show the full impact of current interest rates on the owner-manager. Since lending rates vary widely depending on a variety of factors such as risk, item to be funded and the term, and are usually negotiated, the interest rates used below have been chosen at random from Internet sources; calculations are approximate and for illustrative purposes only . All loans have been made effective June 1, 2017.