• Business planning and strategy

Choosing Between Federal vs Provincial Incorporation

Guest Blogger | February 23, 2022

If you’re an entrepreneur looking into incorporating your business, you probably have lots of questions. Incorporating is a big decision, and there is a lot of advice that can make it far more complex than it needs to be.

One of the big questions to ask yourself is “should I incorporate federally or provincially?”

The answer is: it depends.

There are a few things you should know before you make this decision. That’s where we’re here to help.

What does it mean to incorporate your business?

First, what does incorporating your business even mean? A few things, actually.

Incorporating means separating your business legally from you personally. A sole proprietorship or partnership business is not separated legally or for tax purposes from the owner(s). Sure, an owner pays their taxes as a business and claims business expenses, but at the end of the day, income earned by the business is still personal income.

This also means that the owners of the business are personally liable for all the operations of the business, including debts and legal obligations. This means that if there are ever any debt collections or lawsuits, those actions will be brought against the owners of the business rather than the business itself, exposing the owners to possible financial risk and loss of personal assets, such as real estate, cars, computers, etc.

In contrast, a corporation is an entity that is legally separate from its owners and is governed by the corporation legislation in the region it’s incorporated, whether that’s federally or provincially. A corporation has directors and shareholders, and legal responsibilities to keep their incorporation documents up to date and to file any changes.

Once you reach a tax threshold with your business, you may want to consider incorporating, thus saving money you can invest back into your business. Win, win!

If you do decide to incorporate your business, the next step is to decide if you’re going to incorporate federally or provincially.

Choosing between federal vs provincial incorporation

While the primary difference between incorporations and sole proprietorships is the separation of legal entities, including finances, there are also differences between incorporating federally and provincially.

Here’s a rundown of the differences between provincial and federal incorporation:

Incorporating your business provincially

Incorporating your business provincially means you are only conducting business in that province in which you are incorporated. For many small business owners, this is perfectly okay. However, if you want to expand into other provinces or territories, you might run into difficulties.

Incorporating provincially means that your company then operates under the provincial legislation that governs corporations in your region. For the most part, incorporating provincially means the same across provinces, however there are some variations. It’s best to become familiar with the requirements of your own province.

When you incorporate provincially, your business name is then protected in that province. But that province only. There might be another business in another province that is incorporated under the same name, and this is entirely legal. If you want to protect your business name across Canada, you’ll have to do so federally.

For many small business owners who don’t intend to conduct business across Canada, incorporating provincially is far more time and cost effective than incorporating federally. When incorporating provincially, you only need to file your documents on a provincial level. Provincial incorporation fees tend to be less than federal, and the extent of documentation is less onerous.

However, regardless of whether you’re incorporating provincially or federally, undertaking this process alone can be a challenge, and hiring a lawyer can be cost prohibitive. Using a service to help you incorporate your business can save you time and money. And costly errors!

Overall, here are the main points:

  • Provincial incorporation means only conducting business in that province
  • Provincial incorporation protects your business name in that province only
  • Provincial incorporation is usually less expensive and time consuming than federal incorporation

Here are some provincial resources:

Incorporating your business federally

Federal incorporation in Canada is governed by Corporations Canada, and offers generally wider protections.

Federal incorporation allows you to conduct business in all provinces and territories. If you incorporate provincially, you can only conduct business in that province. If you want to expand into another province or territory, you’ll need to incorporate in that region as well. This can increase costs of incorporation. Federal incorporation requires more annual paperwork than provincial incorporation, and the initial cost of incorporation is higher than provincial.

However, if you incorporate federally, you’ll still need to incorporate in the province in which your business resides. For example, if you are an Ontario business owner and want to incorporate federally, you’ll need to do so both with Corporations Canada and the Province of Ontario. By incorporating federally however, you will be allowed to conduct business all across Canada.

Alongside being able to conduct business across Canada, incorporating federally also gives you federal business name protection, a factor that is important to a lot of business owners and a big reason why they choose to incorporate federally. If you incorporate provincially and find you need to incorporate in another province, there is a chance you will have to operate under a different business name. There may also be the added complication that if you only have name protection in the province or territory you operate in, there might be another business in another jurisdiction that is operating under the same or a very similar name as yours.

Overall, here are the main points:

  • Federal incorporation allows you to conduct business across Canada
  • Federal incorporation protects your business name across Canada
  • Federal incorporation is more expensive and time consuming than provincial incorporation
  • If you incorporate federally, you’ll still need to incorporate your business in the province in which you primarily operate

Making the final decision: federal or provincial incorporation

Making the final decision to incorporate your business can be a tough one. You might want to talk to some colleagues and other business owners in your community. Finding a mentor is also a great idea as they are savvy in the business world and can help guide you through these decisions.

A few questions to ask yourself are:

  • Am I looking to expand into other provinces in Canada?
  • Do I want name protection across Canada or just my province?
  • What resources do I have available to undertake incorporation?
  • What are my future business growth goals?

Regardless of whether you incorporate provincially or federally, you’ll most likely need some guidance. Where lawyers can be costly, Ownr makes it simple for you to set up your business’ legal structure, so you can focus on growing your business.