Registering your online business can seem like an intimidating process. That’s why many online entrepreneurs wonder if and why they should incorporate in the first place.
However, even though it might appear scary at first, the benefits of incorporating are worth it! Whether you’re selling on Shopify or Amazon or providing online services to clients, incorporating can help take your business to the next level.
This article will discuss some key advantages of registering your online business. We’ll also provide detailed steps on how to incorporate your online business in Canada. And finally, you’ll learn some useful tips and considerations that can make your life as a business owner much easier.
Do you need to incorporate to start selling online
The short answer is no. It is not required to register a business entity to start selling your products or services online. It’s possible to sell online without incorporating your business first. However, there are some important advantages that you might want to consider before making this decision for yourself.
Benefits of incorporating an online business
Registering your online business comes with some compelling advantages like limited liability and protection for your personal assets, potential tax savings, easier access to capital via investors or loans, protection from frivolous lawsuits, more credibility in the market, etc.
Reduced risk due to limited liability
Limited liability is one of the most important benefits to consider when you are thinking about incorporating your online business. The limited liability effect means that if something happens once your company begins generating revenue, only your business and its assets will be held responsible for any damages caused.
This reduces your personal risk and protects your personal assets from potential litigation. By separating your business from personal assets and finances, you effectively limit your liability, so none of your personal assets like your home, car, jewelry, and other valuable possessions are exposed to business risk.
Lower taxes and more deductibles for corporations
Incorporating a business also helps reduce your tax liability. If you register your business in Canada, you’ll be able to take advantage of favourable small business and corporate taxes which are typically lower compared to personal income taxes. You may benefit from the small business deduction (SBD) which lowers the effective federal tax rate to 9% on the first CAD 500,000 of net income.
Finally, incorporated businesses can leverage tax deferral opportunities. Essentially, since the corporate tax rate is much lower than the personal tax rate, this difference in tax rates allows you to take advantage of tax deferral. If you do not take all the earnings out of the company as salary you can achieve tax efficiencies by keeping the money in the company.
If you take out less than the entire amount of corporate earnings, and you only take as much as you need for your living expenses, you can pay less on personal taxes now and defer the rest until later, when you are in a lower tax bracket.
Tax planning can help further reduce your tax bills
Tax planning allows incorporated businesses in Canada to minimize their tax bills through careful analysis and planning of a financial situation in order to increase tax efficiency. Tax planning typically involves strategies like reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.
This includes activities like paying out dividends instead of salary, splitting income, using corporate structures, different classes of shares, holding companies, family trusts and so on. Other tax planning strategies include using tools such as Lifetime Capital Gains Exemption (LCGE), Estate Freeze, Key Person Insurance, Investments using a holding company, etc.
Tax planning is a very complex subject and beyond the scope of this article. We recommend you consult an experienced CPA or a tax lawyer before implementing any of these tax strategies.
Easier access to capital and higher credibility
Incorporated businesses have easier access to capital, as they can attract business investors and financial institutions who will offer loans based on the assets of the company rather than an individual’s personal assets like their house or car.
Registered businesses also may be eligible for various government grants and loans. Canada often provides financing to small businesses, young entrepreneurs, women-owned businesses, and innovative companies.
Finally, only incorporated businesses have the option to raise capital by issuing shares or even going public on a stock market to acquire additional capital necessary for growth.
How to incorporate an online business in Canada
Incorporating an online business in Canada consists of a few steps and important considerations. First, you need to choose the right business structure. Next, you need to decide on where in Canada you will register this new entity and how it should conduct its affairs. Then you need to register your business name, incorporate a company, get a unique BN number, and finally open a company bank account.
Let’s go over each of these steps in more detail.
Choose your business structure
Deciding on your business structure is one of the first steps to registering a business. You need to decide what type of business entity is the most appropriate for you. Online business owners can choose between registering a sole proprietorship, a partnership, and a corporation. Each has its own operational, accounting, tax, and legal requirements.
- Sole proprietorship – This is a single-person company with no legal or financial distinction between the business and its owner. It’s most suitable if you’re a merchant and starting an online business by yourself with no partners or employees. In this case, there’s no legal separation between personal and business assets, so the owner is completely liable with all his/her possessions.
- Partnership – This type of business consists of two or more partners that register a joint business and share the liability together with all their personal assets. This is probably the worst structure because each partner is responsible for all the liabilities of the partnership jointly and severally which means if the other partners do not have the ability to pay, the partner who has sufficient assets bears all the responsibility.
- Corporation – This type of business is owned by shareholders and typically managed by directors. The owners are not personally liable for the debts, liabilities or expenses of the company which makes it an attractive business structure for online businesses. This may also be a good option for investor-funded businesses that plan to issue stocks and go public in the future.
For most online businesses, a corporation would be the optimal choice. It offers plenty of flexibility and comes with reduced risk compared to a partnership or sole proprietorship since you can keep your business and personal finances/liability separate making it ideal for online businesses and start-ups.
Decide whether to register at the federal or provincial level
When incorporating a business in Canada you have the option to register at the federal level or the provincial level.
One of the main differences is that federal incorporation provides increased business name protection and allows you to conduct business across Canada. This may be a big advantage for online businesses and e-commerce sellers if they want to sell products and services in all provinces, through multiple locations.
Provincial incorporation only protects your business name at the provincial level. This may become an issue later if you decide to set up an establishment outside your province. Your business name may already be taken in the other province, which might negatively reflect on your branding and reputation.
For most online business owners, it’s best to register their business at the federal level, especially if they want to expand their operations all across Canada.
Register your business name
Once you’ve decided on your business structure and company name, it’s time to register for an account with the federal government’s Corporations Canada department (or provincial government).
The following are some things you should prepare for the registration:
- Your full legal name and address
- A valid mailing and business address
- Information about your business (business type, company name, list of owners and directors, etc.)
You can incorporate a Federal Corporation online through BRO (Business Registration Online) which can make this process much easier. However, this requires you to have a valid SIN (Social Insurance Number) and you must have an income tax return filed with the Canada Revenue Agency (CRA). Some provinces like Ontario, British Columbia and Nova Scotia also allow you to incorporate online.
However, you must remember that the Government does not provide any legal advice or much guidance about the type of shares and their rights and obligation. Also, you do not get a Minute Book with all the Resolutions and Corporation Documents for which you have to approach a lawyer or a paralegal to prepare your documents.
We recommend incorporating through a corporate lawyer which can be a little pricey but it is a worthwhile investment in the future of your business. Alternatively, you can incorporate yourself using some online tool such as Owner or Law Depot.
Get your BN number
When you complete the business registration process, you’ll receive a unique nine-digit BN (Business Number) with an RC0001 extension issued by the Canada Revenue Agency (CRA). This number allows you to set up GST/ HST and Payroll accounts with RT0001 and RP0001 extensions respectively. BN identifies your business to federal and provincial governments.
Open a company bank account
Once you’ve registered your online business you can open a company bank account. A company bank account allows you to formally separate your business and personal finances, as well as receive and issue payments, get funded, apply for loans, and conduct other financial activities.
To open a company bank account, you’ll need to provide the following:
- Certificate and Articles of Incorporation
- Your Business Number (BN)
- Business address
- Contact information
- Your SIN (Social Insurance Number)
- Your driver’s licence or other proof of identity such as a passport
Many banks nowadays also offer the option to open a company account online. This may make it much easier, especially for online entrepreneurs who are already comfortable conducting business and making transactions online.
In addition to the limited liability, incorporating a business allows you to access certain tax breaks and can help streamline your company’s financials by allowing for things like payroll management. A big benefit of incorporation is that it also gives entrepreneurs increased credibility in their market, which will lead to greater success over time.
However, incorporating an online business comes with some caveats, mostly in the form of specific requirements when it comes to bookkeeping, accounting and taxes.
That’s why it’s best to hire a virtual accounting firm that can guide you through the entire process as well as ensure regulatory compliance, assist with tax planning, and provide general accounting services. Bronte Bay is an online CPA firm with years of experience dealing with all aspects of accounting, tax, and finances for online businesses.
Contact us or schedule a free 30-minute consultation to learn how our experts can help incorporate your online business.
Disclaimer: The writer or Bronte Bay is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this article is provided “as is”, with no guarantee of completeness, accuracy, timeliness, or the results obtained from the use of this information. Readers are advised to seek legal advice from a reputed corporate lawyer before incorporation.