In Canada, the creation of a separate legal entity through the correct legal channels is known as incorporation. Able to enter into contracts, own assets, take on liabilities, and pay independent taxes, corporations are distinct from their owners.

While some founders may be excited to incorporate their growing partnership or sole proprietorship, doing so at the wrong time can expose them to risks that may otherwise have been avoidable or create costs that were unnecessary. The right time to do it depends on a number of key factors, each of which a corporate lawyer in Edmonton can help you better understand.

Should you incorporate, and if so, why?

There are a few points to consider:

  • Revenue generation and legal obligations
    For Canadian businesses earning revenue or taking on financial or legal obligations, incorporation can help limit personal liability. If you’re hiring employees, signing contracts, or selling items, your legal exposure increases, and you may want to further protect your personal assets from the risks associated with the business.
  • Plans to raise capital
    For a startup planning to seek funding from investors, incorporation will typically be required. Most investors put their money into company shares, not individuals, and without incorporation, funding options could be limited.
  • Significant profits
    For businesses with growing profits, there may be certain tax planning advantages that incorporation can provide. If your profits are exceeding the needs of your personal income, you may wish to discuss the benefits of Canadian-controlled private corporations, or CCPCs, with a business lawyer.

A step-by-step guide to incorporation

1. Validate your idea – begin by market-testing your product or service before you take on any legal complexity.

2. Assess the legal risk – if your liability risk increases, such as when you enter contracts or expose yourself to legal or financial risks, incorporating may offer some of the protection you need.

3. Evaluate your financial growth – if your income is consistently growing and you’re reinvesting those earnings, you may be able to better manage your taxes by incorporating.

4. Decide whether to invest or scale – if you need to facilitate growth, operating as a corporation can give you the structure and credibility you need.

The risks of incorporating too early

There are annual requirements such as legal compliance, tax filing, and accounting obligations that corporations must meet. Even if a corporation is inactive, it must still file tax returns. Incorporating only makes sense if the benefits outweigh the ongoing responsibilities, such as tax filing and compliance.

What can happen if you don’t incorporate soon enough?

Continuing to operate as a sole proprietor leaves you personally responsible for business liabilities and debts, which can have a direct impact on your personal assets. You may also miss out on certain tax planning opportunities if you delay incorporation.

Incorporating in Canada

With guidance from experienced business lawyers in Edmonton, you can follow these steps to incorporate your business:

More than a legal formality, incorporation is a decision that can impact your business on a long-term basis. Making ill-advised decisions early on in the process can hamper your efforts to raise funds or exit the business at a later date. Correctly structuring your corporation from the outset is best managed with expert help from a business lawyer.