How does incorporation work in Quebec?

In the course of any entrepreneur’s career, there come decisive moments when it is necessary to determine the most appropriate legal personality for his or her company. Frédérique Lissoir, a practicing lawyer in commercial law, IP and founder of Propulsio 360, shares with us some tips to better understand the different business forms that exist and how they work. 

What is business incorporation?

“It is the process of forming a corporation, a legal entity separate from its founders or owners. It has an independent legal personality, an entity separate from the individuals that make it up. Once incorporated, the corporation owns the assets of the business such as customers, products, property and income. It is also responsible for the various expenses and obligations of the business: salaries, rent, income taxes, and consumption sales taxes.”

What are the main differences between sole proprietorship/self-employment and incorporated business?

“There is no difference between the sole proprietorship and the individual or “self-employed”, they are one and the same. Indeed, as a representative of the company, the individual shares its assets, declares the income of the company in his personal taxes and is personally responsible for the obligations of the company (customers, suppliers, subcontractors, creditors, etc.). The incorporated business (corporation), on the other hand, is an entity distinct from the individual. As such, it carries out all its activities in its own name.

For example, as a sole proprietorship, I can use my first and last name for my business. However, if I decide to do business under another name, while being a sole proprietorship, I am obliged to register at the Registraire des entreprises by paying a fee of $42. This process is imperative for other businesses to be able to find another business online. Also, it should be noted that if an individual has a very common name in Quebec, it is essential to register.”

To whom is incorporation more appropriate? What factors should be considered?

The good news and bad news is that there is no magic list! What I always recommend to entrepreneurs is to observe some specific criteria.

The income tax threshold

The first criterion concerns the income threshold. In this regard, one must ask whether it is more advantageous for an individual to be taxed as a person or as an incorporation. In Quebec, beyond a certain income threshold, the government imposes the payment of more than 52% of taxes on your income. By the way, I have a law professor who used to say that there are two things in life that are certain: death and taxes. All of this is to say that you can’t avoid these two things but, you can make them more effective.

Business risks

In terms of the second criterion, you need to ask yourself about the risks inherent in your company’s operations. Is it appropriate to have a separate legal personality? Specifically, you need to ask whether the individual exposes himself or herself to the risk of being sued.

Is your product or service dangerous? Some products can be flammable and taking out an insurance policy allows entrepreneurs to separate personal and professional liability. The food industry also comes to mind.

The inventory

Third, study the inventory of one’s business. In most cases, craftspeople have a lot of inventory and many responsibilities that come with it. Therefore, I advise evaluating whether the individual wants to assume this responsibility or delegate it to a separate legal entity.

Employees

Finally, hiring employees also comes with responsibilities. If there is a problem with the NOSH, you can be personally sued as a self-employed person.

In short, consider whether it is more advantageous to assume these various responsibilities or to transfer them to an incorporated company.”

Is incorporation the preferred business form for artisans? Why?

“I would say that incorporating a corporation is a personal choice. Certainly, if one considers the factors listed above and answers yes to any of these questions, it may make sense to incorporate. However, I often recommend considering one’s total income.

Incorporating can make sense in terms of expenses and tax treatment of the total income. As an example, if the person also has another job (full-time, part-time) or earns related income, incorporation can optimize the tax treatment and use only the amounts needed.”

What are the drawbacks to incorporation?

Incorporation is more expensive in the sense that the business must pay the more expensive incorporation fees. An entrepreneur may also pay lawyers’ fees, fees to the Registrar of Companies.

On the other hand, the obligations of a corporation are more cumbersome administratively and more costly from an accounting (preparation of financial statements, separate tax returns, etc.) and legal (maintaining a corporate book, etc.) perspective.”

What are the steps to incorporate a business?

“First, you must determine the legal status of the business: federal or provincial. Then, to incorporate your business, you must choose the name of the company. The Legal Publicity Act requires that you register your business using a French name. There are several techniques to get around this requirement. For example, by registering Propulsio which means propulser in Latin, I added the words “business consultants” so that it would be accepted by the Registraire des entreprises. You also have the option of creating a company with a numerical designation.

At the end of these two steps, it is necessary to create the constitutive documents and define the status of the company. These are the founding documents that precede the organization of the company. For example, the documents concerning the categories of shares, the date of creation of the company and the registered office of the company.

On the other hand, it is necessary to deal with the internal organization of the company. During this phase, the company creates a company book allowing the updating of the register for the directors, shareholders as well as the number of issued and paid shares. This is also the stage during which the directors are elected. In short, the entire history of the company is created at this time.

Finally, the shares must be issued to have a properly organized incorporated corporation.”

Should you incorporate provincially or federally? What are the differences?

“In 2014, as a result of the overhaul of the Quebec Act, the provincial Act and the federal Act have become very similar, if not almost similar. However, there are certain aspects where there are more restrictions at the federal level. For example, at the federal level, the election of a board of directors consisting of 25% of directors who are Canadian residents is mandatory. Such a restriction does not exist in Quebec.

Furthermore, a person who incorporates a business at the federal level must have its head office in Canada, whereas a person who incorporates a business at the provincial level must have its head office in Quebec. Finally, I would like to point out that most people who incorporate their business in Quebec do so because the federal government charges $200 more than the provincial government.”

Does a corporation absolutely have to have a board of directors?

“The answer to this question is yes, at the federal level, a corporation absolutely must have a board of directors. However, at the provincial level, the board of directors is not always mandatory because a sole shareholder may choose not to elect a board of directors by having, by written declaration, withdrawn all the powers normally reserved to the board of directors by the Act, in order to appropriate them in advance.”

What other forms of business entity might be appropriate for artisans? Under what conditions?
 
General partnership

“A general partnership allows you to test a partnership while operating as a self-employed person. This option is very inexpensive. I often advise entrepreneurs to start with this option and then incorporate later.

NPO

An NPO works like a corporation except that there are all sorts of much stricter rules. Many times, forming an NPO is attractive because an NPO does not pay taxes. However, this implies that the internal management and accounting is excessively strict.

Furthermore, an NPO requires much more organization and a mandatory board of directors. It is a corporate structure where the founder can get kicked out, whether he or she is a board member or even the CEO.

COOP

This is a very common business model among craftspeople because it allows them to pool resources and act as a group. By buying raw materials in bulk, contractors can get a discounted rate. I would say it’s like the Costco of the craft world.

Also, the CO-OP is a very solidarity-based model. In this sense, the additional revenues of the cooperative are redistributed among the members. Also, its operation is similar to that of an NPO since there is a board of directors and the founder is exposed to the risk of being expelled.”

What advice would you give to an artisan thinking about incorporating their business?

“I would say surround yourself with professionals, speak with an accountant, a lawyer or both. The accountant will be able to determine if this is a good option for the craftsperson. The lawyer will be able to assess if it’s worth doing at this point in time.”

What are the pitfalls to avoid?

“If you’ve been self-employed for several years and you start making a lot of money and have a lot of inventory, assets, etc., at the time of incorporation, you’ll need to sell your assets to the company. But, people often overlook this step.

You have to do a formal process without being taxed on it. This is called an asset rollover. If you don’t do it, you’ll get a nasty surprise with Revenue Canada or Revenue Quebec.”

Is there a point in the evolution of a business when its legal constitution needs to be questioned? Which one?

“When you have multiple projects, take into consideration all the things I mentioned above.

Another case is when you have collaborative projects with other artisans or when you decide to export your products abroad. Sometimes it is more advantageous to have an incorporated company. That’s why you should consult a lawyer. Maybe your incorporation is correct or maybe you need to start another business in Ontario because you are thinking of getting grants.

On the other hand, if for example you want to export your products without giving your partners access to the activities of your main business. And, if it is a specific project where you decide to organize a festival with them. In this case, it may be appropriate to create a company separate from yours. I would say that when an entrepreneur exports, even to form partnerships, I suggest revising the structure.

The other case is when the business generates significant revenue.” Translated with www.DeepL.com/Translator (free version)Also, the CO-OP is a very solidarity-based model. In this sense, the additional revenues of the cooperative are redistributed among the members. Also, its operation is similar to that of an NPO since there is a board of directors and the founder is exposed to the risk of being expelled.”

What advice would you give to an artisan thinking about incorporating their business?

“I would say surround yourself with professionals, speak with an accountant, a lawyer or both. The accountant will be able to determine if this is a good option for the craftsperson. The lawyer will be able to assess if it’s worth doing at this point in time.”

What are the pitfalls to avoid?

“If you’ve been self-employed for several years and you start making a lot of money and have a lot of inventory, assets, etc., at the time of incorporation, you’ll need to sell your assets to the company. But, people often overlook this step.

You have to do a formal process without being taxed on it. This is called an asset rollover. If you don’t do it, you’ll get a nasty surprise with Revenue Canada or Revenue Quebec.”

Is there a point in the evolution of a business when its legal constitution needs to be questioned? Which one?

“When you have multiple projects, take into consideration all the things I mentioned above.

Another case is when you have collaborative projects with other artisans or when you decide to export your products abroad. Sometimes it is more advantageous to have an incorporated company. That’s why you should consult a lawyer. Maybe your incorporation is correct or maybe you need to start another business in Ontario because you are thinking of getting grants.

On the other hand, if for example you want to export your products without giving your partners access to the activities of your main business. And, if it is a specific project where you decide to organize a festival with them. In this case, it may be appropriate to create a company separate from yours. I would say that when an entrepreneur exports, even to form partnerships, I suggest revising the structure.

The other case is when the business generates significant revenue.”

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