Registered vs. Incorporated

Registration in the tax accounts
April 20, 2021
How to incorporate a business in Quebec
May 3, 2021

Many start-up entrepreneurs wonder whether they should be "registered" or "incorporated". The differences between these two ways of running a business are significant.

Registered company

A so-called "registered" business is in fact a sole proprietorship (self-employed person), which registers with the Registraire des entreprises. Registration is not required if the sole proprietorship operates under the name of its owner. If the business operates under another name, it must register and pay the annual fees.

A sole proprietorship is not a separate entity from its owner. Therefore, the liability of the owner is unlimited. The owner can be sued personally for faults committed in the operation of the business. Furthermore, from a tax point of view, the income from the sole proprietorship is business income subject to the personal tax rate.

Incorporated company

On the other hand, the corporation (or the incorporated company) constitutes an entity distinct from its shareholders, called a "legal person". The latter requires the filing of articles of incorporation with the Enterprise Registrar or Corporations Canada, depending on the regime chosen. The general rule is that the liability of the shareholders is limited to the payment of the subscribed shares only, which confers a protection in terms of liability. The contracts in which the corporation intervenes are signed in the name of the corporation, which is represented by its officers for the signature. Furthermore, in order to benefit fully from the protections afforded by corporation, it is important (and mandatory) to use the legal name of the corporation in its contracts and invoices, including the "inc." or "ltd." at the end of the name, so that third parties are informed that they are dealing with a corporation.

For tax purposes, the corporation must keep separate accounts and file its own income tax returns. The company's income is subject to corporate tax rates, which may vary depending on whether or not it is a Canadian-controlled private company. Profits are distributed to shareholders through the declaration and payment of dividends. The shareholders may also be employees of the company and therefore be compensated by salary.

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