Like peeking over a cliff before starting your descent, incorporating an existing sole proprietorship can be a bit overwhelming.
Want to know what you're in for? This article will help you feel confident in the steps you have to take to incorporate your sole proprietorship.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
As a Chartered Professional Accountant who helps many small businesses take the leap, clients often ask:
"I have a sole-proprietorship – what are the steps to incorporating?"
This process has quite a few important stages that you aren’t going to want to miss.
Step # 1: Determine Goodwill and Fair Values
In our last article, I discussed the implications of goodwill and fair values when transitioning from a sole proprietorship to a corporation.
If you haven’t already checked out that article, please do so before proceeding. It is a really important step!
Most of our clients won’t don’t use a Section 85 election discussed in that article and I am going to assume you are in the same boat.
This article is applicable for you as long as you aren’t using a Section 85 election.
Step # 2: Incorporate
Next, reach out to your chosen lawyer and create your corporation.
A recent client of mine was groaning in my office because of the information they learned years after incorporating.
They were frustrated to have lost opportunities.
Be sure to check out our videos resources on how to set up a corporation for things to consider.
Share structure and ownership set the foundations for tax planning and a few key decisions can save you thousands down the road.
"Share structure and ownership set the foundations for tax planning and a few key decisions can save you thousands down the road." – Jillian Battaglio, CPA, CA
Step # 3: Set Up Your Corporate Bank Account
Once your incorporation is complete you can bring your ‘banking package’ to your favourite financial institution.
I would recommend setting up a savings account and a corporate credit card in addition to a regular chequing account for the most flexibility.
Your bank will ask for documents from your incorporation such as:
An incorporation certificate
Incorporation application
Notice of Articles
Register of Directors
Central Securities Register
Articles of Incorporation.
Many clients’ eyes glaze over when I prattle off this list.
If you’ve used a lawyer they can prepare this package for you.
If you’ve self-incorporated you’ll need to gather these documents before making an appointment with your bank.
Step # 4: Set Up New Tax Numbers
After incorporating a busy sole-proprietorship my client certainly let out a loud sigh of resignation when I mentioned new tax numbers were needed.
This can be frustrating because new accounts and log-ins will need to be set up.
For Canada Revenue Agency you will need a new GST/HST number and a new Payroll number associated with your corporation.
You cannot continue to use your sole proprietorship tax numbers (sorry).
You are likely to need a new Provincial Sales Tax number and a new WorkSafe number so be sure to reach out to your provincial authorities.
Step # 5: Move Your Sales, Contracts, Expenses, and Bookkeeping to Your Corporation
Yes – this part is a lot of work.
To benefit from your corporation you are going to need to move your revenue streams, official contracts, and operating expenses into your corporate bank accounts.
If you miss this step, then revenue and expenses will continue to be associated with your sole proprietorship and you’ll lose out on the benefits of incorporation.
You will also need to set up new bookkeeping records. This enables you a fresh start as entirely new records must be created.
Step # 6: Don’t Forget Payroll
If you have employees be sure to transition them as well.
This will involve issuing Records of Employment (ROEs) to your employees from your sole proprietorship and providing them with T4s.
Then begin submitting payroll remittances under the new payroll number that you previously set up.
Step # 7: Transfer Your Assets
You are going to need to “sell” or transfer all assets in your sole-proprietorship. Assets will include computers, equipment, machinery, tools, inventory, and any intangibles like goodwill.
Some of these items you’ll end up retaining personally while others will be moved to your corporation. Either way, they need to be transferred at their fair market value.
For most assets, you can do this with documentation.
I’d recommend issuing an invoice to either yourself personally or to your corporation from your sole-proprietorship identifying the items being moved.
You’ll record the assets in your new corporation at the transferred fair market value.
As a quick bookkeeping tip, you’ll offset these additions against your shareholder loan account. This is a concept we dive into in a future article.
**A special note: your vehicle is a bit different**
Check out our motor vehicle videos to determine whether your vehicle should be owned by your incorporation, or not.
Proceed with caution or reverse tax planning can apply and you may end up paying more tax in the end.
If you decide to move your vehicle over, you’ll need to change the registration with your provincial government. Internal documentation isn’t going to cut it.
Step # 8: Don’t Forget the Sales Tax
GST / HST / or PST may apply to assets you are transferring.
But I do have a few exceptions for you.
Consider using the GST44 form to avoid GST but beware!
Timing is crucial!!
The form must be filed before the deadline of the GST remittance the transaction occurs in.
For example, if the transfer occurred Nov 3rd, 2022 and your GST period is from Jan - Dec then the GST/HST44 form has the same due date as your Jan - Dec remittance. You will have to file two forms – one under your sole proprietorship and one under your corporation.
If any of these steps are missed the GST/HST 44 form will be denied and you’ll have to pay GST at fair market value on the assets transferred into your corporation.
If you live in British Columbia an exception to PST is also available. Check out the PST Bulletin 210 for more details.
Step # 9: File Your Taxes & Close Your Accounts
Finally – the last step!
To wrap things up you’ll have to file your tax returns taking into consideration all the asset transfers and changes you’ve been making.
The deadline is your normal tax filing deadlines – this isn’t done early.
Essentially, you’ll need to file your final income tax return, GST/HST return, provincial sales tax returns, and WorkSafe returns.
Once all your tax returns have been filed and any outstanding balances paid or refunds collected, go ahead and close your tax accounts.
On your personal tax return for your sole proprietorship, this involves ticking a box along the top of your T2125 Statement of Business Activities.
For your sales tax accounts like GST/HST and PST you’ll need to call the Canada Revenue Agency or close down your account online through your online portals.
Step # 10: Celebrate!
Yay!! You did it!
This process has quite a few important steps and can take a full year to complete.
Great job for persevering.
I hope you now feel confident in the steps you must take to incorporate your sol proprietorship. That's all I have for today.
Read this article a few times as you progress. We also have a very helpful handout to keep you on track for our website subscribers.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.