Tag Archives: Delaware corporation

Often Forgotten: Registering as a Foreign Corporation

Your company may be a foreign company.  Where your company, for example, has operations or makes sales, outside of its home jurisdiction it may be required to register as a foreign corporation in those other jurisdictions.

The most common situation I encounter is a federally (Canada) incorporated company operating in any Canadian province or territory.  While federal incorporation involves listing the company’s head office, the company is still required to register extra provincially where it is doing business.  For example, a federal corporation with a head office in BC would register extra provincially in B.C.

On the U.S. side, the same applies to a Delaware corporation that has a head offices in another state, for example California, and requiring the company to register as a foreign corporation in that other state.  As such, all Delaware incorporated startups based in California are (or should be!) registered foreign corporations in California.

Each jurisdiction has different rules defining when your company has to register as a foreign corporation.  A head office is only one way to be considered a foreign corporation.  As a founder, it’s less important to understand the exact requirements (that’s the lawyers job) than to understand that doing business in jurisdictions outside of where you are incorporated may require the company to register as a foreign corporation.

The Canadian – U.S. Swap: Moving an Early-Stage Canadian Startup to the U.S.

In previous blog posts I suggested that incorporating in Canada is not a substantial hindrance to receiving U.S. investment.  In some situations, the U.S. investor could require the Canadian company to become a U.S. (likely Delaware) company.  While this sounds simple in practice, how does this Canadian-U.S. company swap work?

While each investment is different, one approach is as follows:

1.  The investor and Canadian company reach an agreement on investment terms.  This agreement also lays out the steps that must be completed as part of the deal (both before the deal is closed, and after) to facilitate the swap.

2.  A U.S. company is incorporated (likely Delaware).  This company will receive investment from the U.S. investor.

3.  The U.S. company acquires the Canadian company through a share exchange whereby shares of the U.S. company are exchanged for shares of the Canadian company.  Through this exchange, the Canadian founders/other shareholders receive equivalent equity in the U.S. company as they had in the Canadian company and the Canadian company becomes owned, 100%, by the U.S. company.

4.  Investment is made in the U.S. company.

There are also additional considerations, such as how the Canadian subsidiary will be used going forward and ownership of intellectual property.  Ultimately, the steps above aim to show you that a Canadian incorporated startup can be later swapped for a U.S. company to satisfy an investor.

Should I Incorporate my new Canadian Startup in Delaware?

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.