• Incorporation – What, Why, Where and How

    Over the next while I’ll be posting on some of the more common questions I get from clients. Please feel free to leave a comment if you have something to add. Today, it’s the basics of incorporation.

    What is incorporation and why do I need to incorporate my business?

    Incorporation is the process that legally creates a corporation – a form of organization that is probably the most common form for technology businesses. There are many reasons for this, but the three most important are probably the tax advantages one gets from incorporation; the corporation’s independent, perpetual existence; and the corporation’s limited liability. The latter two mean that a corporation is a separate legal person, distinct from its owners, and that in general the owners do not have anything at risk other than their investment in the corporation. For obvious reasons, these characteristics facilitate operating, financing and selling businesses.

    Not every business needs to incorporate – sole proprietorship and partnership, for example, are popular vehicles in many contexts.  But the typical life-cycle of a technology business involves activities and relationships with third parties that make incorporation the best choice in most cases.

    Where do I incorporate?

    Incorporation is done in Canada under one of our many provincial and federal incorporation statutes. These statutes used to be quite different in important respects, but in recent years they’ve mostly been conformed and they’re now very similar (though there are still some differences that can matter for specific needs).  In Ontario, the Business Corporations Act is probably the most common statute used, but many businesses based in Ontario are incorporated under the federal Act, called the Canada Business Corporations Act (“CBCA”). Generally, because of cost and duplication of effort considerations, most businesses in Canada incorporate under their home province’s statute or under the CBCA.  Here is a recent paper from Wilson Vukelich, co-authored by my friend Jordan Dolgin, explaining some of these considerations.

    How do I incorporate?

    Incorporation is a pretty simple process. There is a government fee to pay and forms to complete, but that’s about it. Here’s a slightly dated but still useful outline.  And here’s Industry Canada’s guide to incorporating under the CBCA, and a couple of guides for Ontario. There are a few services now that will do your incorporation online. Or you can consult a lawyer, who can do it for you.

    What about the company’s name?

    I usually advise clients to defer picking a name until the dust has settled on choosing the brand. Most of the clients I work with will change their vision of the brand several times before they settle on their final choice. As a result, I usually suggest quickly locking down relevant domains on any possible choice, but staying with the default numbered name (eg., 1234567 Ontario Inc.) until the choice is settled and the brand is ready to be used in public. Once you’re ready to pick a name there is a search process that must be undertaken to ensure that the name can be used as the corporate name.

    Picking the name is obviously a longer discussion, but before it’s settled it’s a good idea to do an exhaustive search, including in trade-mark registries, for similar names. And if the business is carrying on business or identifying itself to the public under a name other than its corporate name (eg. a brand name different than the corporate name), that name should be registered under the Business Names Act.  Finally, trade-mark registration, while costly to the typical startup, offers some advantages, and should be considered at some point.