Did you miss ATB Financial’s Jan. 25 webinar about structuring your company? We’ve got you covered.
The session delved into sole proprietorships and corporations, outlining how each structure has different legal implications.
Read on for a recap of key points and answers to frequently asked questions from the event.
When your business makes more than $30,000 in revenue, GST comes into play. If you make $1 more than that, there are five cents you should be collecting from your client and remitting to the Canada Revenue Agency, explained accountant Erich Ly. Register for a business number—it’s like a social insurance number but for your GST. This number will also be used to track corporate tax and payroll deductions.
“Just make sure you do your bookkeeping, and remember that five per cent of the revenue that you have in your bank is not yours,” Ly said, noting you can learn about GST through the RC4022 guide.
Sole proprietorships are known for their simplicity—because it’s just you—but this structure means unlimited liability to you and all your assets (whether business-related or not).
If you’ve never run a business before, you need to determine how much taxable income came from your company. This could spell trouble if you’ve lost expense receipts or don’t know how much you invoiced.
There are different filing deadlines for different structures. For sole proprietors, the CRA requires that you pay taxes by April 30 but file them by June 15. What can you deduct as a business expense? Check the CRA's T4002 guide and consult an accountant.
You can file a trade name so there is public recognition for how you’re operating, but the legal entity is still yourself. Trade name registration is useful because it records how long you’ve had it, explained lawyer Colin Luke, but “it doesn't give you absolute protection.” A corporate name “gives you some protection because nobody else can use that exact name.”
Unlike sole proprietorship, incorporating a company turns the business itself into a distinct legal entity separate from owners (meaning ownership is divided into shares).
“What distinguishes corporations from sole proprietorships is they have a legal element at the end—like Corporation, Ltd., Incorporation, Company, Limited spelled out—that designates and lets the world know that we actually have a legal entity separate and apart from a sole proprietor,” Luke said.
After you’ve named your company and filed articles of incorporation, notice of address and notice to directors with Alberta Corporate Registries, your business is incorporated. The next phase is organizing the company (issuing share certificates, implementing organizational resolutions like appointing directors and taking in subscription proceeds). Then, that information goes in your minute book, which contains constating documents about your history, every meeting decision, key players, share certificates, articles and bylaws.
Incorporating federally gives you name protection, meaning no provincial jurisdiction can use that name. If your business’ name is vital and you’ll operate in multiple jurisdictions, choose federal incorporation.
“The wrinkle with the federal one though is you then have to extra-provincially register that federal one in the province [in] which you are going to be operating. That's like a double cost,” Luke said.
If cost is concerning, go the provincial incorporation route.
“If you knew you were just going to operate in Alberta, you could just incorporate an Alberta corporation and you don't have to do that extra-provincial registration,” Luke said. “If you do an Alberta corporation, that doesn't preclude you from extra-provincially registering that Alberta corporation in other provinces as well.”
When should you change from a sole proprietorship to a corporation?
A revenue increase could be a marker. You get to a certain threshold where the “expense of operating a separate corporation is justified by the tax treatment that you are achieving,” Luke said.
Another reason is limited liability protection. The corporation is “the one that's contractually obligated to all of its customers. It's the one operating the business, that if something goes wrong, it gets sued,” Luke said. “The shareholders don’t get sued personally.”
An additional reason to incorporate is because you’re bringing in investors and want to clearly divide ownership.
Another factor is your credibility within the industry. Suppliers and potential clients might overlook you if you're a sole proprietor.
Whether you need to speak to a lawyer, an accountant or the CRA, ask questions far in advance.
“It's always way easier than to figure things out when we sort of feel like we need a time machine,” Ly said.
For more helpful advice on starting your business and to connect with experts, check out ATB's educational webinars.