Insights

September 21, 2026

Launching a company is exciting. You have a great idea that you believe can help solve real world problems, disrupt markets and set your life up for an early retirement. But once you have that great idea, where do you go from there? For many founders, the sole focus is on turning that idea into a viable product or service and getting that out to market as quickly as possible—legal housekeeping rarely tops their priority list. While I hate to be that lawyer, legal should be the next thing you turn your mind to.

The legal architecture you build in your company’s first few months dictates everything that follows. This includes how company ownership is divided, how key company decisions are made, how capital in the company is distributed, how core assets, such as intellectual property, are owned and protected, how capital can be raised and what an eventual exit might look like.

The following is a set of guidelines that each founder should consider before embarking on their startup journeys.

Every founder should ask themselves the following two-part question: am I looking to build a business solely through organic growth, or do I also want to scale rapidly through investment? How your business will be structured from the start will depend on the answers to these questions. A business scaling through investment should be setup so that it is suited for investment and potential acquirers, while a business scaling solely through organic growth may want to be structured in a way that is more conducive for family and estate planning purposes.

In other words, before you actually start your business, have an idea of how you want to eventually exit, whether that is transferring ownership to a related party, selling your company to a third party acquirer or, less commonly, going public and listing on a stock exchange. If you are not sure (which is typical at the startup phase), many founders assume the more common exit scenario, which is a sale transaction.

From there, try to map out what you would want the division of ownership and distribution of capital to look like at exit. This can be done in an excel spreadsheet, where each anticipated equity holder’s target ownership and capital distribution amounts based on the company’s target valuation at exit are set out (a lawyer experienced in this area can often provide a template for this). In order for this exercise to be useful, you should research comparable company valuations, ideally at exit, and be as realistic as possible about each equity holder’s ownership dilution (a lawyer experienced in this area can often provide insight here). While this exercise is based on estimates and actual outcomes and amounts will likely differ, doing this exercise at the outset often helps founders visualize what exit could look like and determine whether the venture is even worth pursuing before investing substantial time and capital. It also helps founders looking to scale through investment remain disciplined when negotiating funding rounds with investors to protect against overdiluting their ownership interests.

There are three main ways to carry on business in Canada: through a sole proprietorship, a partnership or a corporation. While sole proprietorships and partnerships could work for startups in their very early stages, especially where little to no intellectual property is created, scaling typically requires a corporation. 

Incorporating provides three major benefits:

a. Tax Advantages:

• Small Business Deduction. The small business deduction effectively lowers your corporate tax rate to approximately 11.2% in Ontario on the first $500,000 you make each year, provided that the corporation meets certain eligibility requirements. Generally, this deduction is only available on active business income (i.e., not income from passive investments) and to Canadian Controlled Private Corporations, which are essentially private corporations resident in Canada that are not directly or indirectly controlled by one or more non-resident persons. 

• Lifetime Capital Gains Exemption. If you eventually sell shares of your business, for example, in a sale transaction to a third-party acquirer, you may not have to pay capital gains tax on your proceeds from the sale up to a lifetime exemption limit of approximately $1,275,000, provided that certain eligibility requirements are met. Note that in order for an individual to take advantage of this exemption, they have to hold their eligible shares for at least 24 months—the clock does not start if they do not hold shares, such as options or an instrument that may be exercisable for, or convertible into, shares. 

b. Limited Liability: A corporation is considered a separate legal person. As such, personal assets generally remain separate from the corporation’s debts, obligations and liabilities. However, there are exceptions to this separation. For example, you can be personally liable where you personally guarantee obligations of the corporation, as is common in connection with a bank loan or rent on a commercial space. Directors are also held personally responsible for unpaid taxes of the corporation. 

c. Raising Capital: A corporation can help facilitate raising capital. Capital helps your business grow and allows you to rapidly scale without relying solely on organic growth. By operating through a corporation, you open up the possibility of issuing shares to investors in exchange for their investment. You also open up the possibility of raising capital through alternative forms of debt and equity financing, such as a simple agreement for future equity or a convertible debt instrument. The options to raise capital are significantly less when not carrying on business through a corporation. 

If feasible, we recommend that startups—especially those looking to scale—operate through a corporation from the outset. While companies can incorporate after carrying on business as a sole proprietorship or partnership, doing so typically requires careful tax planning with an accountant and a restructuring with the help of a lawyer to ensure that company assets and liabilities can be transferred into the corporation in a tax-efficient manner. If you can afford to incorporate at the outset, then such restructuring can usually be avoided.

There are two main types of corporations in Canada: a federal corporation and a provincial corporation. Federal corporations are incorporated through Corporations Canada under the Canada Business Corporations Act and provincial corporations are incorporated through their provincial government registries and under their provincial corporate statutes. For example, Ontario provincial corporations are incorporated through the Ontario Business Registry under the Ontario Business Corporations Act.

Some key differences between federal and provincial (Ontario) corporations include the following:

• Name Protection: Federal corporations offer nationwide name protection, whereas provincial corporations only provide protection within the province that they are incorporated in. That being said, if name protection is a major concern, then obtaining a registered trademark should be considered regardless of which type of corporation you select.
  
  

• Director Residency Requirements: Federal corporations require that at least 25% of the directors are Canadian residents, whereas Ontario provincial corporations do not have director residency requirements. If your founding team consists of international residents, then an Ontario provincial corporation may be ideal.
  
  

• Corporate Approvals: Ontario provincial corporations tend to have less stringent requirements for passing shareholder resolutions relative to federal corporations. This can be critical for corporations with a larger shareholder base or shareholders that may be difficult to contact.
  
  
• Extra-Provincial Filings: It is often easier to move a federal corporation’s operations to another province since doing so simply requires a change of registered office address and filing an extra-provincial registration in the new province. Also, it is typically easier to effect name registrations as a federal corporation in different provinces, as most provinces do not require a new name search (NUANS) report when filing an extra-provincial registration as a federal corporation.

Successful startups have been incorporated under federal and provincial regimes. Determining the right one for your startup will depend on the nature of your business and where you plan to operate. If you later on determine that the type of corporation you picked is not the right one for your business, then the corporation can be reincorporated (or continued) under a different jurisdiction while retaining its existing assets, liabilities and corporate history as if it had always been formed there.

To incorporate the business, articles of incorporation must be prepared and filed with the appropriate government registry. If you want the corporation to have a unique name, then you would also need to obtain a name reservation (NUANS) report before filing. Once the articles of incorporation are properly filed, you will receive a certificate of incorporation. The certificate and articles of incorporation are the documents that bring your corporation into existence. Proper preparation of your articles of incorporation is vital to your business, as it sets out the foundation of the corporation, including the classes of shares that can be issued and any transfer restrictions, voting rights, dividend rights and rights to receive the remaining property of the corporation in the event of a dissolution. For startups looking to scale, we would optimize the equity structure in the articles so that it is suited for future venture capital financing rounds. 

After incorporating, you will receive a business number and corporate income tax number for the corporation. These numbers are assigned automatically by the Canada Revenue Agency (CRA) when you incorporate.

In addition, you may obtain an HST and/or payroll number. Obtaining an HST number is required once revenue exceeds $30,000 over a single quarter or across four consecutive quarters. From the HST you collect, you can deduct HST that you paid out on your purchases and are generally only required to remit the difference to the CRA. Obtaining a payroll number is required if you are hiring employees, including paying yourself as an employee, and you must remit source deductions to the CRA. Note that once you get HST and/or payroll numbers, you will have regular filing obligations to complete.

Organizing the corporation generally involves: (a) completing organizational resolutions to enact by-laws, authorize share issuances and other matters, appoint directors and officers, set up banking arrangements and appoint an accountant; (b) issuing shares to the founder(s) and, if applicable, with appropriate vesting arrangements; and (c) setting up the corporation’s minute book, among other things. Note that investors, tax auditors and potential acquirers will scrutinize the corporation’s minute book during their due diligence processes, so it is important to ensure that the minute book is properly maintained at all times.

If there are multiple shareholders, we also recommend preparing and entering into a shareholders’ agreement in connection with organizing the business. The shareholders’ agreement is a contract between the shareholders of the corporation that regulates their rights and obligations in a variety of different situations, such as appointment of directors, issuances of new securities, restrictions on share transfers, processes for selling the business, etc. For startups looking to scale, it is worth noting that the shareholders’ agreement you put in place at incorporation will typically be replaced with a more detailed set of shareholder agreements that investors will expect to have in place as a condition to investing. A corporation with multiple shareholders that does not have a shareholders’ agreement in place, or has an improperly drafted one, can lead to outcomes that are catastrophic to the business.

• Intellectual Property Assignment and Confidentiality Agreements: Intellectual property developed prior to incorporation generally belongs to the individuals who created it—not the corporation. All founders, employees and contractors should sign robust intellectual property assignment and confidentiality agreements, which transfers ownership of any relevant intellectual property to the corporation. This should be done prior to entering into any founder, employment or contractor relationship and for adequate consideration to help ensure enforceability of the assignment and confidentiality provisions. For startups looking to scale, investors will typically require this as a condition to investing, so getting this done at the outset can help avoid painful bottlenecks later on. 
  
  
• Employment, Contractor and Advisor Agreements: Startups should consider having standard form employment, contractor and advisor agreements in place for when it becomes necessary to start engaging service providers. These forms should include robust intellectual property assignment, confidentiality and termination provisions, and be tailored for the jurisdictions from which the service providers will operate. Contractor agreements should also clearly define the scope of work and other contractor arrangements to avoid potential tax penalties for misclassifying contractors as employees. For startups looking to scale, investors will typically require, as a condition to investing, that all employees and contractors of the business, including the founders, have signed employment and/or contractor agreements in place.
  
  
• Terms of Service and Privacy Policies: Businesses that operate online platforms should have compliant terms of service and privacy policies. Terms of service should set terms for user conduct, limit liability and define legal jurisdictions. Privacy policies should detail what personal information is collected, how it is used and how users can request data removal. Note that if you handle personal information, it is mandatory under the Personal Information Protection and Electronic Documents Act (PIPEDA) to have a compliant privacy policy in place. 
  
  
• Insurance Policies: Obtaining insurance applicable to the industry of your business can be an effective way to manage your business risks—especially those that corporate structures cannot completely protect against. For cash-strapped startups, it is not uncommon to obtain commercial general liability insurance at the outset and then obtain other relevant insurance policies, such as directors and officers insurance, errors and omissions insurance and cyber liability insurance, when feasible.

Directors and shareholders are required to have a meeting (or sign written resolutions in lieu of a meeting) each year to address various annual corporate matters, including approving the company’s financial statements, appointing accountants and other matters. Federal and Ontario provincial corporations are also required to file an annual return each year. Note that this is in addition to the requirement of corporations to file their tax returns. For federal corporations, the annual return filing is done through Corporations Canada, and for Ontario provincial corporations, the filing is done through the Ontario Business Registry. Note that failing to timely file an annual return can eventually result in the dissolution of your corporation.

While there are many legal considerations that founders should turn their minds to when building their startups, addressing these considerations earlier on in the process can help prevent costly structural errors, reduce bottlenecks and save your business significant capital over time.

If we can help support you with your startup, please contact us.

September 18, 2026

Image source: Gerry Dewan/CTV News London

Canada’s defence ecosystem stands at the brink of a major industrial expansion. Domestic supply chains are expanding, governments are increasing defence spending and contractors are actively seeking reliable domestic partners.

For many suppliers in the defence sector—particularly those in technology, precision machining, tooling, and automotive supply chains—defence work represents a lucrative, long-term revenue stream. While recent announcements by Prime Minister Mark Carney highlight commitments to grow defence supply chains across Canada, they do not guarantee contracts or establish automatic eligibility for suppliers.

So how do suppliers prepare for Canada’s defence expansion? Suppliers will need to ensure operational and compliance readiness to satisfy the rigorous standards required in this highly regulated environment.

Prior to committing capital or bidding on defence contracts, boards and executive teams should consider the following questions:

• Governance: Can our internal enterprise systems pass rigorous due diligence processes imposed by prime contractors and/or the ultimate customer?
• Controlled Goods and Export Controls: Have we assessed our exposure under controlled goods and export control laws and regulations in Canada and potentially other relevant jurisdictions, such as the United States? 
• Cybersecurity: Are robust cybersecurity frameworks in place?
• Administrative: Have we established internal systems capable of managing variable contractual requirements?
• Intellectual Property: Is ownership of intellectual property clearly defined? Are signed intellectual property assignment and confidentiality agreements in place for all of our employees, independent contractors and other personnel with whom we engage?
• Human Resources: Is a strategy in place to recruit and retain the right personnel within the relevant timelines? Is there a succession plan in the event a key person departs?
• Contract Terms: Have flow-down obligations, indemnities, audit rights and termination provisions been scrutinized?

These points are discussed in more detail below.

Entering the defence sector as a supply chain business should not be viewed merely as opening a new sales channel. It requires participation in a fundamentally different operating environment with distinct market dynamics. Generally, defence sector contracting can be characterized by the following:

• Higher barriers to entry involving regulated security, export and compliance barriers.
• Higher standards of accountability and oversight involving extensive audits, security checks and strict reporting mandates.
• Longer procurement cycles involving prolonged planning horizons and qualification phases. For most suppliers, it is estimated that the procurement process will take around a minimum of six months to one year from starting the process to securing their first purchase order.
• Extensive due diligence processes involving deep scrutiny of supplier enterprise governance, risk management, systems and controls.

The due diligence process is where many suppliers fail to secure defence contracts. The process involves a risk management assessment conducted on potential suppliers across several enterprise functions. The objective of this process is to determine whether a supplier has adequate compliance infrastructure in place. Put simply: a supplier with modest production capacity but robust compliance infrastructure is often preferred by prime contractors and ultimate customers over a higher capacity competitor with weak governance controls, as the former is viewed as lower risk. Suppliers are frequently assessed against the following due diligence criteria:

• Corporate Governance and Leadership: Clear oversight structures, risk management frameworks and business continuity planning.
• Cybersecurity and Data Protection: Robust cybersecurity controls, employee training and incident response protocols.
• Regulatory Compliance: Proven compliance mechanisms for controlled goods and export control laws and regulations.
• Quality and Information Management Systems: Standardized quality management systems paired with meticulous record-keeping.
• Financial Stability: Long-term solvency capable of withstanding delayed procurement cycles.

As a supplier in the defence sector, it is important to ensure that your business can satisfy these considerations, ideally before commencing the procurement process to reduce the risk of losing out on a potential contract to a competitor that is already compliant.

Many suppliers often underestimate the operational and administrative requirements that defence contracts impose. Addressing any gaps in these requirements proactively is critical to qualify for defence contracts before procurement windows close. The following sets forth some of the key operational and administrative requirements that suppliers should keep in mind when bidding on defence contracts.

1. Controlled Goods and Export Controls
   
   Participation in defence-related business activities, especially those involving tactical components or sensitive technical data, typically requires compliance with Canada’s Defence Production Act, Controlled Goods Program and related regulations and potentially other security obligations. Such obligations may require suppliers to obtain additional security clearances and/or designations in order to perform their responsibilities under relevant contracts, such as a designated organization screening, facility security clearance, document safeguarding capability, and/or production capability designation. These requirements can significantly affect many areas of a supplier’s business, including privacy practices, cyber and physical security measures and human resource processes.
   
   In addition, defence-related technologies, software and technical data may be subject to export control laws and regulations in Canada, such as Canada’s Export and Import Permits Act, Customs Act, Customs Tariff, Export Control List, Import Control List and Special Import Measures Act, as well as similar laws and regulations in other jurisdictions, such as the United States Defence Production Act of 1950, International Traffic in Arms Regulations and Export Administration Regulations.
   
   Failing to comply with applicable controlled goods and export control requirements can result in significant financial penalties and other legal and commercial liability.
   
   
2. Cybersecurity
   
   Cybersecurity is one of the biggest barriers to entry in the defence sector. Suppliers are expected to maintain robust cybersecurity practices, formal incident response protocols and strict network access controls in addition to other data protection measures. For suppliers bidding or working on defence contracts with the Canadian government, it may also be mandatory to obtain additional certifications, such as the Canadian Program for Cyber Security Certification, which sets verifiable cybersecurity standards to protect the unclassified information that suppliers handle. Ensuring that robust cybersecurity frameworks are in place not only helps suppliers contain and remediate cybersecurity incidents without compromising sensitive data, it also helps suppliers secure defence contracts by setting themselves apart from the many competitors that are still catching up.
   
   
3. Administrative Considerations
   
   The administrative overhead of servicing a defence contract can quickly erode a supplier’s profit margins. Suppliers should maintain internal systems capable of managing the variable requirements in a defence contract, such as design modifications, vendor certifications, change orders, compliance reporting and customer audits. Doing so proactively will help suppliers anticipate issues that may arise during the contract lifecycle and address them efficiently, which helps avoid potential legal and commercial setbacks.
   
   
4. Intellectual Property
   
   For suppliers in the defence sector, the ultimate deliverable is often second in value to the underlying intellectual property. Many suppliers underestimate the breadth of what intellectual property can encompass. It can include the deliverable itself, modifications, derivatives, production processes, custom software and specialized know-how, among other things. Entering defence supply chains without a clear intellectual property strategy risks giving away these valuable assets.
   
   Before entering into any contract, suppliers should take into account the following key intellectual property considerations:
   
   
   • Foreground vs. Background Intellectual Property: Suppliers should clearly delineate pre-existing company intellectual property, such as proprietary software, processes and know-how (known as background intellectual property) from innovations developed in connection with the relevant contract, such as customer deliverables, modifications and derivatives (known as foreground intellectual property). In each defence contract, it is crucial for suppliers to clarify ownership of their background intellectual property to ensure that it remains protected and to clearly define the ownership of any foreground intellectual property to reflect the intention of the relevant parties to the contract.
     
     
   • Commercialization Rights: Suppliers should ensure that defence contracts that they enter into do not unreasonably restrict them from operating their business in the ordinary course. Defence contracts should permit suppliers to apply any general process improvements or manufacturing techniques to other customers, including in non-defence commercial sectors. Otherwise, suppliers run the risk of entering into an unintended exclusivity relationship depending on the extent of the limitations on commercialization in the contract.
     
     
   • Intellectual Property Assignments and Confidentiality: Suppliers should ensure that their employees, independent contractors and any other personnel with whom they engage to provide services—especially those who may develop or contribute to company intellectual property—have signed robust intellectual property assignment and confidentiality agreements. This should be done prior to entering into any employment or contractor relationship and for adequate consideration to help ensure enforceability of the assignment and confidentiality provisions.
     
     
5. Human Resources
   
   Recruiting and retaining specialized technical personnel is a persistent challenge for supply chain businesses. In the defence sector, that challenge is amplified by strict requirements for security clearances and regulatory compliance. Suppliers should consider how long it takes to clear new technical staff and whether the relevant contract delivery milestones can accommodate that timeline. Suppliers should also consider whether critical enterprise knowledge is concentrated in a few senior personnel in addition to implementing retention strategies and succession plans in the event that such personnel depart.

How suppliers manage their contracts can be a direct driver of profitability. It is crucial to ensure that the contracts suppliers enter into contain provisions that are acceptable from both a legal and commercial perspective. Before signing any contract, suppliers should carefully take note of the following contractual provisions:

• Flow-Down Obligations: When dealing with prime contractors, prime contract terms are often passed directly down the supply chain. These flow-down obligations often consist of strict compliance standards imposed by the ultimate customer on the prime contractor. Suppliers can find themselves bound by compliance standards originating from prime contracts that they have never reviewed directly. Before entering into a contract, it is important for suppliers to request and review any relevant agreements and standards that they are expected to be bound by.
   
• Indemnification: Suppliers should carefully scrutinize broad indemnity clauses, especially those that create unlimited liability. Clear limitations of liability, reasonable representations, realistic warranty periods and appropriate insurance thresholds should be negotiated if not already present.
  
  
• Audit and Inspection Rights: Defence contracts routinely grant prime contractors and ultimate customers broad rights to review cost structures, inspect operating facilities and audit compliance practices. Suppliers should ensure that the scope and timing of these audit and inspection rights are feasible and would not materially interfere with their operations.
  
  
• Termination: Termination provisions should be carefully reviewed. Defence contracts can grant customers the right to terminate agreements on short notice. In the event of a termination, it is important for suppliers to ensure that termination remedies adequately cover their costs, such as non-recoverable capital outlays, works-in-progress and raw material costs.

While the operational and compliance standards in the defence sector are rigorous, Canada’s expanding defence footprint offers significant growth potential for qualified suppliers. Long-term success demands an enterprise-wide commitment to governance, regulatory compliance, cybersecurity, intellectual property protection and operational and contractual risk mitigation. If we can help support your organization with its defence-sector readiness, please contact us.