Several different business structures may be used to conduct business in Canada. Non-residents looking to engage with Canadian businesses, or those intending to carry on business in Canada, should familiarize themselves with such structures.
First, it is important to note that non-residents may not require a Canadian business structure in order to engage in business with Canadian counterparts, i.e. buying or selling goods or services from outside of Canada. There a number of factors to consider when making such a determination. Furthermore, there are various contractual arrangements (e.g. joint ventures, franchising and licensing) that a non-resident can enter into with Canadian counterparts in order to conduct business in Canada, which could also negate the need to have a Canadian resident business structure of their own.
Second, where a Canadian business structure is required, selecting the most appropriate form requires an initial assessment of the nature, current structure, existing locations, and specific goals and intentions of the non-resident business. The decision also requires a case by case analysis involving other considerations, including liability mitigation and tax planning. Finally, Canadian law permits non-resident entities to do business in Canada by way of a “branch office” (through a licensing process), which is not a separate legal entity. For various reasons this rarely is the structure of choice.
Set out below is a high level overview of the common types of business structures used in Canada.
A corporation is the most common form of business structure in Canada. It is a separate legal entity, distinct from its shareholders and directors, and has the rights, powers and privileges of a natural person in that it can own property, carry on business, borrow, lend, and sue or be sued (in each case in its own name). The advantages of incorporation include limited liability for shareholders, flexibility for financing and business planning, and the possibility of existing beyond the term of any given shareholder’s lifespan or ownership. Corporations in Canada are not generally flow through vehicles for tax purposes; the one exemption being the “unlimited liability company” available in some, but not all provinces.
Federal or Provincial Incorporation. A company may be incorporated either federally or provincially. Each of Canada’s 10 provinces have comparable legislation although their laws differ in some respects. Federal incorporation provides the opportunity to conduct business under a chosen corporate name across Canada, although extra-provincial registration of the federal corporation is required in each of the provinces and territories in which the business is to be conducted.
Stakeholders. In Canada, there are three groups of corporate stakeholders: directors, officers and shareholders of the corporation. The shareholders elect the directors, and the directors, in turn, appoint the officers. Directors are responsible for managing the overall affairs of the corporation, and may incur personal liability for certain acts of the corporation which contravene specific legislation (although insurance coverage for certain liabilities is available). Under federal laws, and some provincial corporate laws, a certain percentage of the directors (typically 25%) must be Canadian residents. Some provinces do permit entirely non-resident boards. Officers are responsible for the day to day affairs of the business. Shareholders are owners of the corporation, but are not, in absence of a unanimous shareholders agreement stating otherwise, responsible for its management.
A partnership exists when two or more individuals or entities carry on business together with a view to profit. Partnerships are a flow through structure for tax purposes. In Canada, each province has enacted its own partnership legislation. The common law provinces of Canada (all provinces excluding Quebec) recognize both general partnerships and limited partnerships, while Quebec also recognizes the undeclared partnership. In a general partnership, each partner is personally liable for the debts and obligations of the other partners and partnership on an unlimited basis. Exposure to liability can be minimized by using a limited partnership. A limited partnership is composed of at least one general partner (which is usually a shell corporation) and any number of limited partners (typically the investors). General partners manage the affairs of the partnership and are liable to an unlimited extent. Advantageously, the liability of a limited partner is restricted to the extent of its investment, so long as it takes a passive role in the business and governance of the limited partnership.
Sole proprietorship is the name given to businesses that are owned and operated by an individual. They are the simplest form of business organization, and best suited for small enterprises. All benefits and liabilities of a sole proprietorship flow through to the individual. This straightforward business structure allows for non-capital startup losses to be offset against personal income. However, it also carries with it the downside of having no shield from liability, i.e. personal assets may be seized to meet business obligations. In addition, the opportunities for succession and tax planning are more limited.
In the next topic of this blog series, we will explore Canada’s tax system.
Successful international expansion requires a robust strategy and a valuable partner. Canada has unique considerations when it comes to feasibility analysis (e.g. product/service adaptation), structuring (e.g. priority of regions and optimum corporate structures) as well as its laws. Dickinson Wright’s capabilities and extensive network make us an excellent partner to facilitate your growth in the ever-expanding and lucrative Canadian market.
This article is published to inform clients and contacts of important aspects and developments in Canadian law. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright lawyer if you have specific questions or concerns relating to any of the topics covered here.