Moving your sole proprietorship into a new BC company: the legal steps

You have run your business as a sole proprietor for a while, and you and your accountant have decided it is time to incorporate. A common assumption is that once the company exists, the business is inside it. In law, it is not.

A new company starts with nothing. Everything the business uses, from equipment to customer contracts to the lease, still belongs to you until it is transferred. This article sets out the legal steps to move an established sole proprietorship into a new BC company and the points where you will want your lawyer and accountant working together.

Why incorporating does not move the business

A company is a separate legal person. Under section 17 of the Business Corporations Act, its shareholders together form a company capable of exercising the functions of an incorporated company. The business you built as a sole proprietor, however, is made up of property, contracts and permits held in your own name. Nothing in the incorporation process transfers them.

Until each piece is moved, you are still carrying on that part of the business personally, with personal responsibility for it. Obligations you took on as a sole proprietor also generally remain yours even after the business moves, unless the other party agrees to release you.

Step 1: set up the company with the transfer in mind

The share structure should be decided before the transfer documents are drafted, because the shares issued to you will usually form part of the price the company pays for the business. Decide with your accountant which classes of shares the company needs and who will hold them, then incorporate with articles and a notice of articles that reflect that plan. If you are still deciding whether to incorporate at all, see should you incorporate your small business in BC.

Step 2: document the transfer of the business assets

The core document is an asset transfer agreement between you and the company, with a bill of sale or assignment for each type of asset: equipment, inventory, receivables, goodwill, domain names, trademarks and other intellectual property. The price is normally the fair market value of what is transferred, paid in shares of the company and sometimes a promissory note.

The section 85 tax election

Selling assets to your own company at fair market value can trigger tax unless you plan for it. Section 85(1) of the Income Tax Act lets a taxpayer who transfers eligible property to a taxable Canadian corporation, for consideration that includes shares, jointly elect with the corporation on an agreed amount. The election is made on CRA form T2057.

Timing matters. Under section 85(6), the election is due by the earliest date on which either party must file its income tax return for the year of the transfer. Section 85(7) allows a late election within three years of that date, but with a penalty. Your accountant sets the elected amounts; the legal documents need to match them.

GST and PST on the transfer

For GST/HST, section 167 of the Excise Tax Act allows the seller and buyer of a business to jointly elect so that no tax is payable on most of the transferred property, where the buyer acquires all or substantially all of the property needed to carry on the business. The election is not available where the seller is a GST registrant and the buyer is not, and it is made on form GST44.

BC PST is a separate question. PST generally applies to taxable goods such as equipment in a business transfer, but the Province's Bulletin PST 210 describes exemptions for some transfers of tax-paid assets to a new corporation owned by the previous owner. Those exemptions carry conditions about timing and how long you keep the shares, so confirm them before the transfer closes.

Step 3: move contracts, the lease and customer relationships

Contracts do not follow the assets automatically. Supplier, customer and service agreements need to be assigned to the company or replaced with new contracts in its name. Many contracts require the other party's consent to an assignment.

Your premises deserve particular attention. Most commercial leases require the landlord's consent before the lease can be assigned, and a landlord may ask you to give a personal guarantee of the company's obligations. If the business has employees, the company becomes their employer; plan how their service and terms carry over with advice, rather than simply issuing new contracts.

Step 4: licences, registrations, accounts and real estate

• Licences and permits. Business licences and regulatory permits are often issued to a specific person and may not transfer. Check with each issuing body whether the company needs its own.
• Tax accounts. The company has its own business number and will need its own GST, payroll and PST accounts where they apply. Your personal accounts for the sole proprietorship will eventually need to be closed.
• Banking and insurance. Open company accounts, move payment processors and update insurance so the company is the named insured.
• Business name. If you registered a business name for the proprietorship, decide whether the company will use it and update the registration.
• Real estate. If you own the building the business uses, transferring it into the company can raise property transfer tax and other issues. Many owners keep the property personally and lease it to the company. Get advice before deciding.

Common mistakes to avoid

• Invoicing through the company while the contracts and assets are still in your name.
• Leaving the lease or major supplier contracts unassigned, so the company has no rights under them.
• Missing the section 85 election deadline, or signing transfer documents that do not match the elected amounts.
• Skipping the organizing resolutions and share issuances that show the company actually received the business. After the move, the company has its own annual compliance obligations.

Moving your business into a company? Plan the transfer before you sign

Our business lawyers can set up the company, prepare the asset transfer agreement and assignments, deal with your landlord and key contracts, and coordinate the documents with your accountant's section 85 and GST elections.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.