Do I Incorporate Federally or Provincially?

When forming a business, the first step is deciding what type of entity is best (for example, a corporation or partnership). The best form of entity depends on structure, liability, tax and management considerations.

Most small businesses choose a corporation as a common form of entity because it allows owners (shareholders) or managers who desire:

• a predictable and recognized legal structure;
• limited liability; and
• perpetual existence.

When deciding to incorporate, there are a number of threshold issues to consider. The following is a list of key questions to answer and decisions to make before forming the corporation.

Before incorporating a corporation, you must determine which jurisdiction to incorporate in. Corporations are governed by the laws of their jurisdiction of incorporation. The jurisdiction of incorporation determines procedural rules for transactions, including:

• Shareholder rights and remedies
• Filing requirements to incorporate
• Annual filing requirements and fees

A federal (Canadian) corporation formed under the Canada Business Corporations Act (CBCA) is a popular incorporation for several reasons such as:

• The right to conduct business across Canada.
• The right to use its corporate name throughout the country.
• A federal law that is well-known to directors, investors and lawyers throughout Canada.

That being said, you should also consider where the corporation will primarily transact its business and if there are any business reasons for choosing a particular jurisdiction. For example, it is generally easier to clear the same corporate name under the Ontario Business Corporations Act, (OBCA) than under the CBCA because of the administrative scrutiny given to corporate names under the CBCA.

Also, if the corporation expects to have more than 50 registered shareholders, the CBCA requires even private corporations to adhere to proxy circular requirements that do not apply to a private corporation under the OBCA, irrespective of the number of shareholders. If the corporation is going to conduct a regulated business in a particular province or territory, it may be easier to obtain the necessary provincial licences if it is a domestic corporation within that province. For example, professional corporations are incorporated under the OBCA and other provincial and territorial laws, not under the CBCA.

Finally, the CBCA imposes requirements for a minimum proportion of directors (25%) to be resident Canadians. British Columbia, New Brunswick, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec and the Yukon do not impose any requirement for resident Canadian directors, but Ontario does!

When deciding whether to incorporate provincially or federally – call us, we’ll help guide you in your journey to starting a company!