Going from a Sole Proprietorship to a Corporation

As a business owner, you may reach a point where it makes sense to convert your business from a sole proprietorship to a corporation. If you are still thinking about whether this change makes sense for you, take a look at our article comparing the different types of business organizations in Ontario.

The process of converting an existing business to a corporation is a bit more complicated than simply starting out as a corporation, which is why I strongly suggest that you seek a legal professional instead of trying to do it yourself.

The process involves two major components:

1. Establishing a corporation; and

2. Transferring your business assets to the corporation.

Establishing a Corporation

You first need to create the new business entity (the corporation) that will become the new vessel for your business. It is critical to make sure that, when establishing your corporation, that you are not simply registering a corporation and leaving it at that. Corporations are incredibly powerful tools but they involve a number of formalities and ongoing requirements – and, in order to get the benefits of incorporation, you need to structure your corporation properly.

Here are some of the steps at this stage of the process:

1. Choose whether to incorporate provincially or federally – there is a difference!

2. Name your corporation

3. Determine the share structure of the corporation and any restrictions on the transfer of shares or the type of business being conducted and draft articles of incorporation accordingly

4. File articles of incorporation – you can do this yourself but, especially with an existing business, it just makes sense to get advice tailored to your circumstances

5. Post-incorporation tasks (not an exhaustive list):

   • Issuing shares

   • Creating a minute book for the corporation

   • Adopting corporate by-laws – necessary to structure the internal management of the corporation and empower individuals, such as directors and officers, to do certain tasks

   • Calling a shareholders meeting to elect directors, etc.

   • Registering a new BN (if applicable) and obtaining CRA account numbers

This may seem like a lot of work – and, let’s be honest, it can be – but it is important to establish the necessary foundations for the corporation. There are legal record-keeping obligations and failure to meet these obligations can result in financial penalties and other consequences. Plus, there is a great deal to be said for the peace of mind that comes with knowing you have done things the right way.

Transferring Business Assets to the Corporation

Perhaps the most complex part of the process of converting a sole proprietorship to a corporation involves the transfer of the business assets to the new corporation. There are tax and legal consequences resulting from this type of change. However, it is possible to transfer most business assets on a tax-deferred basis to a Canadian corporation by using rollover provisions in the Income Tax Act.

Expert advice is incredibly important at this stage to make sure that adverse tax consequences are not accidently incurred.

The above provides information of a general nature only and does not constitute legal advice. All transactions and circumstances vary and specific legal advice is usually required to meet your particular needs. Please consult with a lawyer if you have a legal question.