The expert team at Stemp & Company can incorporate your business.
What is Incorporation?
Incorporating your business is a process for creating a separate legal entity for your company. When you incorporate your business, it is legally considered an ‘individual’ and has many of the same rights and responsibilities as a person, including the ability to make a contract, own property, take out a loan, and to sue and be sued.
One of the main benefits of business incorporation is that the owner/shareholders are no longer personally liable for business debts and lawsuits. Unlike other business structures such as a sole proprietorship and a partnership, creditors can only make a claim against the corporation’s assets, not the business owner’s personal property and assets.
How to Incorporate Your Business
Any business can incorporate, even small businesses and new businesses, regardless of size.
The first step to incorporating is choosing a name. In Alberta, you can either choose a numbered company name, for example, 123456 Alberta Ltd., or a named company. If you want a named corporation, there are a few rules to keep in mind. The name of
the corporation must be distinctive, descriptive, and legal.
- Distinctive element means that the name should have a unique element, for example, a unique word or location.
- Descriptive element means that part of the name should refer to what your corporation does, for example.
- Legal element means that the business name must include a legal element at the end of the name, for example, Ltd., Inc., or ULC. Certain professions such as accountants and dentists can also use ‘professional corporation’ in their business name.
Bow River Baking Ltd. is a fictitious example of a name that includes all three required elements.
After you have decided on a name, here are the steps to incorporate your business.
- Get a NUANS Report. An Alberta NUANS report is a name search to check whether there are any other Alberta corporations with the same or similar names to your proposed business name. After you obtain a NUANS report, your proposed business name is reserved for 90 days.
- Complete incorporation forms. To apply for incorporation, you must complete 3 forms with information about your corporation: Articles of Incorporation, Notice of Address, and Notice of Directors. The registered office of your business or the records address must be a physical location in the province of Alberta, so you can receive legal documents to that mailing address.
- Submit application. Once your incorporation application is complete, a registry agent checks that you meet all the requirements. If you do, your business will be filed in the corporate registry and you’ll receive a certificate of incorporation.
Stemp & Company Incorporation Services
Incorporating your business has many benefits, but is also more complicated administratively compared to other business structures. A lawyer can help ensure that your incorporation is set up correctly and that you meet the start-up and ongoing requirements for your incorporated business.
The experienced incorporations team at Stemp & Company offer a variety of incorporation services, including:
- advice regarding setting up a company.
- information on electing shareholders and directors.
- how to prepare minute books.
- maintaining your incorporation status annually.
Benefits of Incorporating
There are a number of benefits to incorporating your business, including:
- limited liability for the business’s debts
- substantially lower tax rates
- the ability to attract investors by issuing different types of shares.
Are you considering incorporating your business? Our knowledgeable incorporations team can help advise you on incorporating and explain the specific benefits for you and your business.
Intellectual Property and Benefits of Incorporation
If you own or want to apply for intellectual property such as a patent, copyright, or a trademark, there are additional benefits from incorporation that are worth considering.
Tax Implications of Personal Intellectual Property Rights
If you personally own an invention and apply for a patent in your personal name, any revenue which comes to you through commercial exploitation of the invention, through selling your patent rights, or licensing your patent rights to a manufacturer will be taxed personally.
Any such revenue will be added to whatever personal income you are making at that time. That means you will pay tax to Canada Revenue Agency (CRA) on your total annual income. Therefore, the tax paid on revenue generated through your invention and patent would not be the percentage of tax that you now pay on your annual income. Instead, the tax rate will be calculated based on the additional income which you enjoy as a result of your invention. As a result, your income tax rate might increase substantially.
Tax Benefits From Incorporating
However, if you incorporate a new company and have it hold the rights to your invention, any income enjoyed as a result of the invention will be taxed to the company, typically at a lower rate.
The company’s tax is not dependent on whatever income you may have now or in the future, or the tax which you pay on that income. Instead, the corporation will pay tax to CRA based on its net income: the gross revenue received by the company during its fiscal year, less all proper deductible expenses or costs of doing business, including depreciation on physical assets owned by the corporation.
If you license your intellectual property rights to a manufacturer, when they use your patent or trademarks, they will pay any royalties or license fees to your corporation. If you wish, this income can be retained by the corporation and not paid out personally to yourself. The corporation can then use this income (after paying its corporate tax) to make various investments through the corporation.
Other Tax Benefits From Incorporating
By incorporating a company, you can also take advantage of other tax-saving measures. Deferred profit-sharing plans enable you to reduce the corporation’s taxable income without increasing your own personal taxable income. Paying yourself money as a dividend from the corporation can also be a smart way of pulling money out of the corporation. Deferred profit-sharing plans and payment of dividends can only be used if you have incorporated your business.
By having your personal corporation hold the patent and trademark rights, you will also find that you have more credibility with a potential manufacturer or distributor of your product. Those manufacturers and distributors will tend to approach you and your product differently when your patent and trademark rights are held by a corporation.
If you have gone to the trouble of arranging a new company for yourself, the potential manufacturer or distributor usually will assume that you have a certain level of knowledge or expertise in these areas. This can only help you in your negotiations.
Incorporating a company to hold your patent and trademark rights helps you attract investors. It is easier for an investor to agree to invest funds into your project if the investor is receiving some type of stock interest.
If you have not incorporated a company, all you can offer is a “piece of the action” in the product or invention. This can be secured by a written agreement between you and the investor, but this type of arrangement can be awkward or cumbersome.
Instead, if you have incorporated a company, you can offer to sell the investor a certain percentage of the shares in your company which holds the rights to the invention and any trademarks which you plan to use in promoting the sale of the product. These shares can be “preferred shares” or “common shares”.
Within these two classes of shares, you can organize your company with any number of classes or series of shares. The classes or series of shares would be different types of shares holding different voting rights, or dividends that may be payable on the shares. It also may determine whether the dividends would be payable each year as a fixed liability of the company, or would be a liability which the company and its directors could decide upon each year in terms of payment or accrual of the dividend to a later year.
Involve Investors at a Higher Level
Having a corporation also enables you to invite your investors to become advisors or directors of your corporation. They may have expertise in various areas, and you can use this to your company’s benefit. Actively involving these people in your corporation could not only help you to pursue the marketing of your product, but it could also help you to obtain financing or additional investment capital. That’s because any lender or investor prefers to become involved in a business or company that has experienced and knowledgeable people behind it.
Selling Your Company
If you should decide to sell your company but wish to retain ownership of the patent and trademark rights, incorporation can make that easier. You can do this by holding the patent and trademark rights in your own name and licensing the right to use these to your company.
If you sell your company and retain personal ownership of the patent and trademark rights, these rights are kept by you and do not go to the new owner of the company. You could also incorporate another company to own the patent and trademark rights and have the first company (which you have now sold) pay royalties or license fees to the new company. Again, these royalties and license fees would be taxed in the hands of the new company as corporate income, rather than taxed as personal income.
Estate Planning Benefits
By incorporating a new company you can also become involved in helping your children financially, through what is known as “estate planning”. This allows you to organize the affairs of your corporation to benefit your children and to lessen the tax burden in the event of your death.
By issuing shares in the corporation to your children, you provide them with the benefit (during your lifetime) of being part owners of your company. By giving up some of the ownership of the company to your children, you can better plan for your future and the future of the company, rather than owning the company by yourself and giving the company to your children upon your death.
Contact Stemp & Company
If you have any questions about incorporation, how incorporating your company can benefit you, and how incorporating can help you make the most of your intellectual property rights, our legal team at Stemp & Company can help!
We can draw from over 40 years of experience with intellectual property and incorporation to help you protect your rights and income. Call us today to learn more about our incorporation services!
Frequently Asked Questions
How much does it cost to incorporate my business?
There is a $275 government fee for incorporating your business in Alberta. Additional fees include NUANS report fee, legal fees, and potentially others, depending on where and how you choose to incorporate your business.
How does incorporating by business help save on taxes?
Incorporating is a good way to maximize tax efficiency. By incorporating, you can access a lower corporate tax rate and additional tax benefits such as tax deductions, deferred profit-sharing plans, and more.
Can I hold my intellectual property rights in a corporation?
Yes, you can hold patents, trademarks, and copyrights in a corporation. In fact, incorporating a business to hold your intellectual property rights has many advantages, including tax benefits, access to investment capital, credibility, and more. An intellectual property lawyer or incorporation lawyer can help explain how incorporation can help you make the most of your intellectual property.
If I incorporate my business, can I be sued personally?
One of the primary benefits of incorporation is that it protects you from being sued personally. An exception to this is if you open yourself up to shareholder liability. A lawyer can help you understand and prevent legal risks when incorporating your business.