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How to do business in Canada: Choosing a business structure

By Terry Van HorneIn standard7th April, 2016

In the post expanding your service based business into Canada, we discussed some considerations you should examine before you begin to move a service-based business into Canada. In this post, I will explain the different types of legal entities that can be used to do business “with Canada” and “in Canada.” The legal structures open to your business are many, so taking the time to choose the best one for your needs is an important part of the process for a successful expansion. One of the best references for information about doing business in or with Canada is found on the Canada Trade Commission site. You’ll find information on everything from Visa and immigration to investing in Canada.

A U.S. or other foreign-based company has many options to choose from when selecting a business structure in which to carry on business in Canada. The entities available to do business include:

  • Corporations
  • Partnerships
  • Joint Ventures
  • Agencies
  • Distributorships
  • Franchises
  • Licensing Agreements

The business type you choose to set up will depend upon:

  • Having a Canadian resident participant in ownership or management
  • Your current type of business
  • Whether you are planning to set up physical operations in Canada
  • Tax implications involved in the choice of your business

In the end, a major consideration in the type of business entity you choose will depend upon whether you want to do business “with Canada” or whether you want to do business “in Canada.” The one thing that is constant about almost all business types, is the need for an address and a Canadian resident that can be served documents. A Post Office Box is not an acceptable business address for this purpose, however, a Business Centre like Telsec Business Centres, which provides mail forwarding services and an address, is acceptable as a business address. There are also services available for serving documents, or for fulfilling government requirements to run a business here in Canada.

Doing business in Canada

A United States or foreign corporation wanting to do business in Canada will find that there are many ways to go about it. Either can open a branch office or subsidiary corporation, but, may also choose to use a partnership, limited partnership or joint venture to do business in Canada. The choices for business structures for a business or incorporated company will depend on tax implications, the cost of launching the new enterprise and protecting trademark and other intellectual properties.

Partnerships and joint ventures

Smaller U.S. or foreign businesses may find that one way to mitigate knowledge of the market and other needs for doing business in Canada is to identify a Canadian business and form a partnership, limited partnership or joint venture. This allows them to leverage their Canadian partners knowledge and market contacts, infrastructure and workforce, to sell their product/service or fill needs that can’t be meant by the U.S. market. An example of that would be a digital product that would benefit from a local presence in its marketing, and increasing its pool of skilled labour.

A U.S. or foreign business may find one of these legal structures useful when wanting to do business in Canada with another Canadian business. One obvious benefit of being a Canadian business is that you will know the market better and will fulfill the Canadian resident requirements for corporations and other legal entities. The foreign business could enter into these agreements using almost any structure it wishes, but would still need to meet and address the Canadian resident requirements these public and private legal business structures require.

Corporation: Branch office versus subsidiary

Larger U.S. and foreign companies wanting to carry on business directly in Canada must first decide if they wish to do so as a branch of its parent corporation, or a subsidiary corporation where either may require registration in multiple provinces as a limited or unlimited liability corporation (in order to protect or enforce trademarks). Note that if you are based or registered in Quebec, you will also be required to have a French name. One thing U.S. and foreign entities should understand is that much of what you read on this subject will suggest that any province you do business in requires registration. This is true in regards to trademarks, however, if you are not doing business from the province (residency), then it may not be necessary to register in the province in order to sell there.

There are a number of factors that determine which is the best choice for U.S. and foreign businesses, but they mainly are determined by whether the business is private or public, the tax implications of each and the degree of liability the parent entity has if things turn out badly. Basically, registering as a branch means the parent company is fully liable for all losses, whereas with a subsidiary, they are only liable for the amount of the investment in the corporation. The tax rate may also vary between the two, however, in both cases management fees can accrue to the parent as an expense to either a branch or subsidiary organization.

Doing business with Canada

If your company only wishes to do business with Canada, then you may choose to operate it through an agency, distributorship, franchise or licensing agreement. Before doing so, we highly recommend that you seek legal and tax advice from a professional before moving forward. United States and foreign businesses that have trademarks and other similar circumstances looking to just do business with Canada, need to consider that other business structures – though more costly and more cumbersome to arrange – may provide a higher degree of protection and ability to use such things as trademarks in all provinces and territories. The advantages of these structures is that they do not really require residency or individuals to serve documents because they are contractual in nature with no presence in Canada.

Conclusions

Those of you who regularly read this blog are very aware of the benefits of using a business centre for a virtual office address or an office space or workspace with built-in waiting areas, break rooms and meeting rooms. For businesses that are starting out, there is no other solution that enables them to:

  • Only pay for what they require in any month
  • Grow exponentially and keep your address and phone number constant
  • Reduce overhead expenses such as furniture and business equipment

Remember, before you go forward with any of this, be sure to seek the guidance of a lawyer, accountant and other professionals as they will help you to get off on the right foot in your journey to a successful Canadian expansion.