The Costs & Benefits Of Incorporation vs. Business Registration
There are several major distinctions between incorporating and registering a business or trade name. Clients have often asked the differences between the two and the following details those differences, including the costs and benefits associated with each.
Incorporating a business in Ontario is more expensive than if you were to incorporate federally. This is due to the fact that there are third-party service fees associated with incorporating online in Ontario. On the other hand, incorporating federally provides a more streamlined process and does not require the use of third-party service providers when filing online. The government filing fees to incorporate online in Ontario are $300 while incorporating online federally is $200.
The initial costs associated with registering a business in Ontario are much less than the costs of incorporation. To register a business or trade name under Ontario’s Business Names Act, a fee of $60 is required. However, this registration must be renewed every 5 years. Once a business or trade name is registered, a Master Business License will be issued providing the registration and expiration date, as well as the Business Identification Number (BIN).
A corporation is considered a separate legal entity apart from its shareholders or owners. Businesses that are incorporated are afforded limited liability, so long as corporate formalities are followed. This means that the directors and officers running the business are shielded from personal liability. In addition, shareholders’ liability is limited to the amount of their initial investment in the company.
On the other hand, businesses that register a business or trade name are not shielded from personal liability. This means that if the business incurs any debts, losses, liabilities or other obligations, those debts, losses, liabilities and obligations will attach to the owners of the business personally. Thus, the unincorporated business is not treated as a separate legal entity apart from its shareholders or owners.
To incorporate, a NUANS report is required to reserve the name of the business and is valid for 90 days. If the 90 days expires, then a new report will be required. Each jurisdiction requires its own report. For instance, if you wish to incorporate in Ontario, an Ontario NUANS report is required. If you wish to incorporate federally, a federal NUANS report is required. However, to change the name of a registered business that has a Master Business License, a new license will be required altogether.
Businesses receive name protection in the province or territory in which they are incorporated, as well as any other provinces or territories in which they are registered to do business. For instance, if you incorporate Jane Doe Inc. in Ontario, and you operate in several other provinces or territories, then you must register Jane Doe Inc. in those other provinces or territories in which you operate. A business will receive name protection in Ontario, as well as any other provinces or territories in which it is registered, so long as there are no objections to the use of that name in those other provinces or territories. If a business decides to incorporate federally, then it will receive global name protection across Canada and overseas.
However, businesses using their individual or corporate name as an operating name, are not required to register that name. This is only required when one decides to operate under a business or trade name that is different from the legal name of the individual or corporation. If this is the case, then one must register that name in the province or territory in which they intend to operate in. For instance, Jane Doe (individually) and Jane Doe Inc. (corporately) do not require registration. Yet, if Jane Doe or Jane Doe Inc. decide to operate under the trade name “Rocky Mountain Chocolates,” then it would be required to register that name in the province or territory in which they do business or operate in.
Business Structure & Changes
Federal and Ontario corporations require that at least 25% of their directors are Canadian citizens or permanent residents. To make changes to the name of a corporation, or its directors, officers or corporate structure, articles of amendment must be filed.
On the other hand, a registered business has flexibility and may operate without any requirements that the directors or owners be Canadian citizens or permanent residents. Additionally, registered businesses have limited ability to make changes to their business structure, including their business and personal address, as well as their business activity.
Taxation & Investment Opportunities
A corporation can issue income or dividends to its shareholders. However, if shareholders receive dividends, the one drawback is double taxation imposed on the shareholders both at the corporate and personal level. Also, corporations have lower tax rates available to them depending on the income and profits earned each year. Other advantages afforded to corporations include tax deferrals, small business deductions and income splitting. To determine the best course of action tailored to your business, it is recommended that you seek the advice of an accountant or tax lawyer.
Additionally, corporations can seek investments and financing from various lenders and businesses. This provides for greater diversification of the business portfolio, as well as expansion and capital for the corporation.
Depending on your income, individuals that register a business or trade name are typically taxed at higher tax brackets than corporations. However, each situation is unique. It might be in your best interests to incorporate and receive the tax advantages that are applicable based on your current situation.
Corporations exist from the moment they are incorporated through until dissolution. They exist continuously until they are voluntarily dissolved, upon the authority of its directors or shareholders, or involuntarily by court order. However, most provinces and territories require corporate filings, and failure to maintain these requirements results in the corporation being cancelled.
Rather, business name registrations are effective for 5 years. After 5 years, businesses must renew their business or trade name before the expiration date and pay the respective fees to continue operating under its name.
Dissolution of a Corporation & Cancellation of a Master Business License
Dissolving a corporation in Ontario requires consent from the Minister of Finance before filing the articles of dissolution. Rather, dissolving a federal corporation may be completed more expeditiously, especially if the corporation has not conducted any business or issued any shares.
To cancel a Master Business License or registration, the registration details are required. This includes the Business Identification Number (BIN), the names of the business owners, the business address and its activity. If a business ceases to operate, one must cancel its business name registration.
Therefore, understanding the nuances between incorporating and registering a business or trade name can have several implications on your business. Each situation is unique and not "one size fits all.” For more information, please contact Ranieri Law to find the best business solution for you.
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