A key legal decision in starting or growing your business is choosing the business structure that's right for you. If you incorporate, you'll need to decide whether to incorporate provincially, under the relevant province's incorporation legislation, or federally. There are differences between the two, and between individual provinces / territories, each with pros and cons.
Here are five key considerations to discuss with your legal team to help you make that decision.
- Investor-readiness. Investors might prefer
federal incorporation because it gives them consistency and greater
certainty. Provincial incorporation might not be a deal breaker,
but an investor might insist that you later switch to federal
incorporation – and that will cost you money and time.
- Target Market. Generally, a provincially
incorporated company is entitled to carry on business in that
province but, with a few exceptions (for example, New Brunswick and
Nova Scotia have a reciprocal exemption), must register
extra-provincially in the other provinces or territories in which
it wishes to do business. A federally incorporated corporation can
carry on business anywhere in Canada and though it must still
register in each province or territory in which it does business,
there may be less red tape to do so. Some people also believe that
federal incorporation conveys a higher level of prestige,
particularly if you plan to do business outside of
Canada.
- Share Structure. Provincial incorporation may
offer more flexibility in structuring your shares. Nova Scotia, in
particular, offers significant flexibility by permitting a company
limited by shares or by guarantee or an unlimited company (aka an
unlimited liability company, ULC or NSULC); Alberta and British
Columbia also permit unlimited liability companies. Unlike a
limited company, the liability of a ULC's members is unlimited.
Federal incorporation allows unanimous shareholder agreements that
can restrict the powers of the directors and reallocate liability
from the directors to the shareholders; this is available under
some provincial legislation – but not all.
- Directors. Federal incorporation and
incorporation in most provinces and territories require that the
directors be Canadian residents. New Brunswick, Nova Scotia, Prince
Edward Island and British Columbia, however, have no residency
requirements for the directors of their provincially incorporated
companies, so all the directors may be non-residents of
Canada.
- Registered Office, Reporting & Business Name. A federally incorporated company can have its registered office in any Canadian province or territory; a provincially incorporated company must typically have its registered office in the province or territory of incorporation. The annual reporting requirements for federally incorporated companies may be less stringent than those for provincially incorporated companies, although federally incorporated companies are also typically required to complete annual filings in provinces or territories in which they are carrying on business. However, it might be harder to obtain a business name for a federal corporation because the scope of the required name search and approvals is broader (though remember, either way, obtaining the name doesn't alone give the corporation the right to use the name as a trade-mark).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.