INCORPORATION Differences USA vs Canada

Contact Neufeld Legal for Canadian incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Incorporating a business in Canada versus the United States involves navigating two distinct legal philosophies, particularly regarding jurisdiction and corporate reach. In the United States, incorporation is almost exclusively a state-level affair; a company incorporates in a specific state (often Delaware or Wyoming for their favorable laws) and must register as a foreign entity to do business in any other state. In contrast, Canada offers both provincial incorporation (comparable to state level incorporation) and federal incorporation (which has the perception of national level incorporation). Nevertheless, as we have discussed at length, and in contravention of many other commentators, we strongly discourage US businesses from undertaking federal incorporation, for a broad array of substantive reasons.

The most significant structural difference lies in the availability of business entity types, specifically the Limited Liability Company (LLC). The LLC is the most popular vehicle for small to medium-sized businesses in the United States because it combines the liability protection of a corporation with the flexible, "flow-through" taxation of a partnership (more on advantages of US LLCs). Canada, however, does not have a true equivalent to the LLC. Canadian businesses generally incorporate as standard corporations, which are subject to a separate level of corporate tax before profits are distributed to shareholders (though the "Small Business Deduction" can significantly lower this rate). This distinction is critical for cross-border planning, as a US LLC is often treated as a corporation by the Canada Revenue Agency, potentially leading to punitive double taxation for Canadian residents investing in American LLCs (more on US LLC double taxation in Canada).

A unique barrier to entry in Canada that surprises many American investors is the residency requirement for directors. Under Canada’s federal laws (and in provinces like Manitoba and Saskatchewan), at least 25% of the board of directors must be "resident Canadians." This means a foreign entrepreneur cannot simply incorporate a federal Canadian company alone; they must hire a resident Canadian to sit on the board. Major provinces like Alberta, British Columbia, and Ontario do not impose such an impediment, making incorporation with those provinces far more attractive for foreign investment, which is similar to the United States having no residency restrictions for its directors, allowing a foreign national to be the sole director and officer of a US corporation or LLC from anywhere in the world.

Ongoing compliance and privacy obligations also diverge significantly between the two countries. Canadian corporations are legally required to maintain a physical or electronic "minute book", a strictly regulated collection of corporate bylaws, resolutions, and ledgers, which is often scrutinized during audits or sales. In contrast, US LLCs often have fewer formalities and may not even require annual meetings depending on the state. Furthermore, Canadian government, with respect to federal corporations (which we tend to discourage), is aggressively moving toward transparency with publicly accessible "Beneficial Ownership" registries to combat money laundering. Conversely, while the US recently introduced the Corporate Transparency Act requiring ownership disclosure, this data remains strictly private and accessible only to law enforcement, preserving a higher degree of anonymity for American business owners.

Finally, the legal environment regarding liability and fiduciary duty creates a different atmosphere for directors. In the United States, particularly under Delaware law, the primary fiduciary duty of the board is to maximize shareholder value (shareholder primacy). Canadian courts, however, have established that directors owe their duty to the "corporation" itself, which allows them to legally consider the interests of other stakeholders, such as employees, creditors, and the environment, when making decisions. Additionally, Canada’s "loser pays" litigation model, where the losing party in a lawsuit often pays a portion of the winner’s legal fees, tends to discourage the volume of frivolous commercial litigation often seen in the more litigious US business environment.

So if your United States-based business enterprise is looking to undertake business in Canada, or is currently engaged in business in Canada, and requires incorporation-related legal services, contact our law firm at 403-400-4092 / 905-616-8864 or via email at Chris@NeufeldLegal.com.

Please Note: Our law firm's remote legal services are meticulously structured to meet or exceed all applicable provincial law society client identification and verification protocols, ensuring full compliance and robust protection against fraud and money laundering. Completing all required client identification and verification protocols is an absolute prerequisite for our providing any legal services, and we retain the right to discontinue the provision of legal services should any concern arise as to the legitimacy of the client or its business activities, at the sole and exclusive discretion of this law firm.