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Posted in: Practical Tips | Articles | Founder Issues | Starting Up

Sep 17, 2015

Choosing Between Federal or Provincial Incorporation

By Mat Goldstein and Andreea Andrei*

An early decision that many founders have to make is whether to incorporate their startup federally or provincially. A federal corporation is governed by the Canada Business Corporations Act (the "CBCA"), while an Ontario corporation is subject to the Ontario Business Corporations Act (the "OBCA"). Although materially the two statutes are similar, certain differences can impact their suitability from a founder's perspective.

National or Local Enterprise

One of the greatest differences between the acts, and the most important matter for founders to determine, is the ability to carry on business locally as opposed to nationally. Under the CBCA, a corporation may establish businesses, receive profits and market itself across Canada. Ontario does not charge extra-provincial registration fees, meaning a federal corporation would not be subject to a charge if its head office were located in British Columbia while the active sales branch is located and operating in Ontario.[1]

The CBCA is a good choice for founders seeking to establish an international presence. Unlike its provincial counterpart, the CBCA has no requirement for the majority of meetings of the directors to be held in Canada. Federally-incorporated entities also garner increased familiarity, prestige and recognition in foreign jurisdictions. However, operating under the CBCA may be more expensive in certain circumstances. Early on, founders should turn their minds to where their business will operate.

Cost of Operation

Upfront, it is cheaper to incorporate under the CBCA. It costs $200 to file online for a CBCA corporation while Ontario charges $360 for incorporation. However, the filing requirements for a business incorporated under the CBCA may be more onerous for a corporation that only carries on its business in Ontario. The CBCA requires a founder to file one annual return and one tax return per year.

These returns are kept as government records for the purpose of keeping track of Canadian corporations. The cost for a federal annual return ranges between $20 and $40. In addition to the filing requirements found in the CBCA itself, federally-incorporated businesses carrying out business in Ontario need to comply with the filing requirements of the Corporations Information Act and the Business Names Act in Ontario.

The advantage of the OBCA is that it combines both the tax and the annual filing requirement into one form. This means that corporations are responsible for just one filing per year. In addition to simplicity, this bundled process reduces legal and accounting fees.

Corporate Name

Registering a corporate name as early as possible ensures brand recognition, avoids potential fines and secures the desired name. Registration is easier under the OBCA because there is no requirement to clear a national search registry and obtain approval from Industry Canada. On the other hand, a provincial corporation seeking to carry on business outside of Ontario must conduct a name search in each province in order to ensure it is not carrying on business under an existing corporate name. Founders should be aware that a name search will not grant the use of the name for trade-mark purposes. Read our previous article on 10 common IP mistakes startups make.

Composition of the Directors and Shareholders

The location of the directors and shareholders, as well as their ability to travel, should factor greatly in a founder's decision of where to incorporate. Annual director and shareholder meetings are mandatory under both statutes. Under the OBCA, quorum exists where the holders of a majority of the voting shares are present or represented by proxy.

The CBCA provides more flexibility by recognizing quorum even where shareholders or directors are present electronically or over conference call. This is useful for founders where the directors and shareholders of the company are not in the same city. Federal corporations cannot completely avoid the Canadian residence requirement since both statues require at least 25 percent of the directors to reside in Canada. In cases where there are fewer than four directors, at least one director must reside in Canada.

As an alternative, other provincial corporate statues, such as British Columbia's, have no director residency requirements.

Conclusion

Each startup has its own diverse needs and business opportunities. It is never too early to consider incorporation. Founders should outline their business plan to determine which of the advantages granted by each respective statute is more appropriate. To become fully informed, businesses at the early stages should also peruse through our post on another fundamental legal milestone, the unanimous shareholders agreement.

The Aird & Berlis LLP Startup Team has a wealth of experience assisting startups with a range of activities including incorporation, shareholders agreements, protecting intellectual property and software agreements. For more information, please contact any member of our Startup Team.

[1] Corporation Centre.ca. (August 7, 2015) Online: http://www.corporationcentre.ca/docen/home/faq.asp.

*Andreea Andrei was a summer student at Aird & Berlis LLP in 2015.

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