Should I Incorporate my new Canadian Startup in Delaware?

Startup and video game law, from a Canadian and U.S. perspective

Generally, no.

I am often asked whether a new startup should incorporate in Delaware, instead of Canada. This question stems from concerns that a Canadian corporation will limit a startup’s ability to raise U.S. investment (California angels/VCs) whereas a Delaware corporation will increase their chances of investment as Delaware is the most common incorporation state among U.S. startups and, as a result, most familiar to U.S. investors.

Back to my “No” response. There are multiple expenses (and problems) involved in the Canadian-Delaware Startup if the founding team is based in Canada:

1. U.S. Visas. If you don’t have a U.S. visa, you can’t work for your own Delaware-incorporated startup in the U.S.! You need a U.S. visa to work in the U.S. and merely incorporating a U.S. company does not eliminate this requirement. This is not to say that obtaining a VISA from your own company is impossible but will likely be a challenging and expensive process.

2. Tax Consequences. A Delaware startup operated by Canadians in Canada will raise U.S. and Canadian tax issues that will likely require the experience of one, if not more, cross-border accountants in addition to Canadian and U.S. tax filings. As with the visa issue, these tax consequences will increase your early-stage startup’s professional fees at a point when this money could be better spent on development.

3. Tax Credits. A Delaware startup may not be able to use all (or any part) of Canadian tax credits, including but not limited to SR&ED and IRAP, which would otherwise have been available if your startup was incorporated in Canada. In addition, when you sell your Delaware startup, certain Canadian personal tax exemptions (see: capital gains exemption) will not be available, which may create a sizeable personal tax hit on exit.

4. U.S. and Canadian Legal Teams. If your Delaware startup is operating out of Canada, U.S. and Canadian laws will apply to it (for example securities, employment and intellectual property laws) and require Canadian and U.S. legal advisors (shameless plug: Voyer Law Corporation acts as a single advisor on both Canadian and U.S. law). Again, as with the tax point above, these legal fees will cut into your development funds.

However, if your founding team contains U.S. citizens, a Delaware startup may be right for you.

Don’t lock yourself into Delaware before you know where your investment comes from. Based upon the cost and complexity of operating a Delaware startup from Canada, I recommend that you incorporate in Canada at the start. Where a future U.S. investor requires you to incorporate in Delaware (or another state) your legal advisors can assist with this transition. Conversely, Canadian investors may prefer to invest in a Canadian company!

Tip: your product/service is important, not the place of incorporation.