eCommerce Seller guide to Incorporate in Canada

One of the most important questions when setting up your eCommerce business is about incorporation in Canada. You have an option to run your business as a sole proprietorship, partnership or a corporation. Each comes with their own pros and cons. Corporations have many unique advantages but the decision to incorporate is not always an easy one. 

Below is a guide to help you understand different aspects of incorporation which are generally overlooked by most new business owners. 

Incorporation Tax – How does it work?

When a business owner(s) incorporate their company, it becomes its own individual entity which is separate from its owner(s). The new corporation is almost like a person – in legal terms called a separate legal entity – that can enter contracts, do business, own property etc. 

As a separate legal entity it also has separate tax and regulatory filings. Tax laws are also very different for corporations than individuals. Any income, expenses, purchases of assets or obtaining loans that takes place within a corporation stays in it. 

Therefore, simply put any profit that the business earns (income net of expenses) is taxed at the corporate rate and not the personal rate. 

Benefits of an incorporation in Canada for eCommerce sellers

Below are some of the benefits of incorporating in Canada. Regardless of you incorporating federally or provincially the benefits will apply. 

Limited Liability

By incorporating you protect your personal assets from liability. For example, as an eCommerce business, if a client, supplier or lender was to file a lawsuit – only assets within the corporation would be at risk. These assets would include things such as inventory, PPE (if applicable), company car etc. 

The benefit is that your personal assets such as your personal car, home, jewelry and other valuable items would not be exposed in case the lawsuit goes against you. 

Small business tax 

As a qualified small business, your tax rate would be much lower than what it would be on your personal tax (as a sole proprietor). This is a great benefit while growing your business as you can keep the money in the corporation and pay minimum taxes.

Planning

The amount of planning that can be done for a corporation is much greater than sole proprietorship. Some examples include method of paying out income (dividend, salary etc.) and income splitting between family members.

LCGE and Sale of business

As you grow your eCommerce store, you may want to sell it if there is a great offer on the table. Small qualified corporations have a great benefit of being exempted on $800,000+ of capital gains tax!

Succession Planning

Ready to pass on your mature business to kids? Shares can be structured in a way where needs of different family members are met. 

When incorporating it is important to keep the future in mind. Please contact a professional accountant or lawyer to understand the best structure of your corporation.

Federal vs Provincial incorporation

Federal incorporation is good if you would like corporation name protection throughout Canada. It also allows you to do business in any part of Canada (no limitations on office location or where company records should be). As an eCommerce seller this does not mean you are restricted to selling only in one province, you can still sell your products all over Canada. 

Downside of federal incorporation in Canada is that it is more time consuming and costs are higher. Along with federal corporation you will need to register in each province you are doing business. There is also additional filing for federal corporations. 

Incorporate online in Canada

One of the easiest ways to incorporate is to do it online using various servicing websites. You follow the step by step process provided. Most companies also provide sample articles of incorporation which can be followed. One important point to keep in mind is that the structure of the corporation should be appropriate for your long term tax planning and strategy. Please consult a professional accountant. 

When you do decide to incorporate you need to choose if you want an incorporation number or a business name associated with the corporation. Sometimes it is simpler to get the incorporation number and register a business name under the corporation. There are some added costs for getting a specific corporation name. 

The downside of incorporating

Unlike the setup for sole proprietorship, the rules around corporations and compliance are more strict. This creates additional work and filing requirements which must be adhered to on a regular basis throughout the year. 

Some complications include keeping completely separate and clean records for the business (including a separate bank account), filing corporate tax returns (along with personal returns) and payroll filings. The cost for corporations is also much higher than personal tax returns – generally though the benefits almost always outweigh the costs. 

Should I incorporate my eCommerce (amazon, eBay, shopify etc.) business?

The question will be very specific to your personal situation and business plans. If you are simply testing the waters it is better to stick with a simple structure then move up when your intention firms up. If you want to scale up the business fast and are expecting reasonable profits then better to incorporate. It is best to discuss with a professional accountant before taking any steps.