How to Transition from a Sole Proprietorship to a Corporation in New Brunswick

Starting a business as a sole proprietor is simple, but as your company grows, so does your personal risk. 📈 If a client sues your sole proprietorship, your personal home, car, and savings are on the line. Because of this, many successful entrepreneurs in New Brunswick eventually decide to incorporate.

Incorporating creates a brand-new, separate legal entity. Whether your business is based in Fredericton, Saint John, or rural New Brunswick, transferring your existing operations into a new corporation requires strategic legal and tax planning. This guide explains how to properly restructure your business without facing massive tax penalties from the Canada Revenue Agency (CRA).

Step-by-Step Process in New Brunswick

Moving your business into a corporate structure is not as simple as just changing your name on a letterhead. 📋 You are technically selling your old business to your new corporation. Here is the standard process.

Step 1: Incorporate Your New Business

First, you must create the new corporation. You can choose to incorporate provincially through Service New Brunswick or federally through Corporations Canada. Provincial incorporation is highly popular for businesses that only plan to operate locally. You will need to file Articles of Incorporation, select a board of directors, and complete a NUANS name search to ensure your chosen business name is legally available.

Step 2: Execute a Section 85 Rollover

When you transfer your equipment, client lists, and inventory to the new corporation, the CRA normally views this as a taxable sale. 💵 To avoid paying immediate capital gains tax on this transfer, you must use a provision in the Income Tax Act called a Section 85 Rollover. This allows you to trade your sole proprietorship assets for shares in the new corporation on a tax-deferred basis. You will absolutely need a corporate accountant or tax lawyer to file these specific CRA forms.

Step 3: Transfer Licences, Contracts, and Banking

Your new corporation needs its own infrastructure. You must open a brand-new corporate bank account. Additionally, you must reach out to your landlords, suppliers, and clients to have them sign new contracts or assign existing agreements over to the new corporate entity. Do not continue using personal cheques for corporate expenses.

Step 4: Update Your CRA Tax Accounts

Your sole proprietorship was tied to your personal Social Insurance Number (SIN). Your new corporation will be issued a distinct Business Number (BN) by the CRA. 📫 You must open new corporate payroll accounts and a new HST/GST account. Once the transition is fully complete and all final personal business taxes are paid, you can formally close the sole proprietorship accounts.

How Much Does it Cost in New Brunswick?

Restructuring a successful business involves upfront professional fees, but it can save you significantly on corporate tax rates in the long run. 💰

• Government Fees: Filing Articles of Incorporation with Service New Brunswick costs $260 CAD. A NUANS name search report costs roughly $45 CAD.
• Legal Fees: Hiring a business lawyer to draft your incorporation documents, minute book, and share structure usually costs between $1,200 and $2,500 CAD.
• Tax Rollover Fees: Having a professional accountant execute a complex Section 85 Rollover typically costs between $2,000 and $5,000 CAD, depending on the volume of assets being transferred.

How Long Does the Process Take?

Getting the actual Certificate of Incorporation is quite fast. ⌛ If you submit your documents digitally through Service New Brunswick, your company can be legally formed within 1 to 3 business days.

However, the full transition takes much longer. Valuing your business assets, executing the Section 85 Rollover, updating supplier contracts, and moving funds to new bank accounts generally takes between 2 and 4 months to complete properly.

Frequently Asked Questions (FAQ)

Author: lawyerinfo.ca