Deciding Between Federal & Provincial Incorporation: 5 Key Considerations
Published:
August 9, 2016
Author(s):
This publication has been updated as at January 27, 2023.
A key legal decision in starting or growing your business is choosing the business structure that’s right for you. If you decide to incorporate, you’ll face a number of decisions. One decision is whether to incorporate provincially, under a chosen province’s incorporation legislation, or federally. There are differences between the two, and between individual provinces and territories, each with pros and cons. Here are five key considerations to discuss with your legal team to help you make that decision.
1. 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 as an “extra-provincial” corporation 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 could be less red tape to do so. Some people also believe that federal incorporation conveys a higher level of comfort or prestige, particularly if you plan to do business outside of Canada. In other cases, a federal corporation could be beneficial if you want to deal with stakeholders, like investors, outside of your home jurisdiction.
2. Share Structure
Provincial incorporation could offer more flexibility in structuring your shares. Nova Scotia in particular offer significant flexibility by permitting a company limited by shares or by guarantee or an unlimited company (aka an unlimited liability company, ULC or NSULC); Prince Edward Island, Alberta and British Columbia also permit unlimited liability companies, and New Brunswick is considering doing so. 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.
3. Director Residency
Federal incorporation generally requires that at least 25% of the corporation’s directors be Canadian residents or citizens. However, most provinces (including all of the Atlantic provinces) have no residency requirements for the directors of their provincially incorporated companies, so all the directors can be non-residents of Canada. This gives you a great deal of flexibility when choosing the directors you want, regardless of where in the world they’re located.
4. Registered Office
A federally incorporated company can have its registered office in any Canadian province or territory, though shareholder approval is required to move the registered office from one province or territory to another. A provincially incorporated company must typically have its registered office in the province or territory of incorporation.
5. Business Name
It’s usually harder to obtain a business name for a federal corporation because the scope of the required name search and approvals is broader (Canada-wide). However, many want to gain additional certainty that they could eventually use their preferred name in other provinces and territories. However, whether you incorporate federally or provincially, obtaining the name doesn’t alone give the corporation the right to use the name as a trademark.
Please contact your McInnes Cooper lawyer or any member of our Corporate & Business Law Team @ McInnes Cooper to discuss whether federal or provincial incorporation is right for you.
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McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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