To summarize the last few blog posts: I advocated that Canadians should incorporate in Canada and, if located in B.C., incorporate in B.C. instead of federally.  The next decision to make concerns the company’s share structure.

I recommend incorporating your startup with a single class of common shares – simple.  Often I am asked about more complex share structures, such as a preferred class, a non-voting class or a section 85 class.  While there are situations where I recommend creating these classes, do not request their creation without understanding why you need them.

Preferred shares, while desired by investors, typically are not created until the investment is secured as you do not know the structure of the preferred shares the investors will want and each investor is different.  There are types of preferred shares that can be molded for future investors (blank cheque preferred) but I tend to stray away from these shares as they are divisive among investors and lawyers.

Non-voting shares can be used for friends/family investors and awarding employees without diluting your voting power.  Erring on the side of simplicity, I recommend using common shares for these purposes but tying the common shares to a voting rights/trust agreement (or proxy agreement) that restricts how those shares are voted.  This maintains corporate structure simplicity while achieving the same goals.  Again, if you don’t have an exact reason for creating these shares, then I recommend against it.

Section 85 shares are used for a tax-deferred transfer of valuable assets to the company.  For example, if you owned an expensive mainframe and wanted to transfer it to the company (without loaning money to the company in order to buy your own mainframe).  Most startups do not have valuable assets to transfer to the company so this structure is not needed.  Instead, simply have the company buy the assets for a reasonable sum.

Finally, I always recommend creating a share structure familiar to investors.  To that end, a common share only structure is frequently seen in U.S. and Canadian startups and will be familiar to those investors.

SUMMARY:  Like any other item you buy, only buy a company structure when you understand why you need it.

You decided to incorporate your startup in Canada (instead of the U.S.)  Next, you must decide what jurisdiction to incorporate in.  Since our clients are frequently based in British Columbia, the question often asked is “do I incorporate federally or in British Columbia?”

I usually recommend incorporating in British Columbia.  This comes down to the two main (in my opinion) differences between B.C. and federal corporations.

1.  Residency.  Federal corporations are required to have a board of directors containing 25% Canadian citizens resident in Canada or, if four or fewer directors, 1 resident director.  Conversely, B.C. corporations do not have any director residency requirements.  As most startups are interested in receiving foreign (often U.S.) investment, I find that the federal residency requirements may pose barriers in the future if a company receives multiple foreign investments (and multiple foreign directors).

2.  Extra Provincial Registration.  B.C. corporations must register in each province in which they do business (called an extra-provincial registration) but, since they are incorporated in B.C., do not need to register extra-provincially within the province.  Conversely, federal corporations must register in the province where the registered office is located and any other provinces where business is carried on.  As such, at the moment of incorporation, federal incorporation involves additional costs and administrative requirements to register extra-provincially in the province where its registered office is located (and, if different, the provinces where it does business.)

Combined, these two differences lead me to recommend incorporating in B.C. when the startup is based here.  Nonetheless, there may be additional considerations to take into account when choosing where to incorporate and I recommend running your particular situation by your legal advisors.

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.  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.