A federation is characterized by the division of power between a central government and regional governments. Each level has jurisdiction over the same people and territory, but they have specified political power over different areas. Thus, each level of government will have the final decision making authority over certain activities. Federations generally possess a written constitution that stipulates which level of government has which powers. Naturally, not all the powers of government can be designated to one level of government or the other. Therefore, these left-over, or undesignated, powers known as residual powers lie in the hands of one of the two levels of government. In the constitution, the level of government which will assume responsibility for these residual powers is stated.

The basic essence of federalism lies in the nature of the agreement among both levels of government to share power and responsibility; these roles are typically enumerated in a constitution. In Canada, sections 91 and 92 of the Constitution Act fulfill this function. However, in a system of this nature, disputes are bound to arise between the two levels of government, as there will always be some degree of overlapping jurisdiction and joint efforts. Consequently, there must be some form of constitutional interpretation to resolve these disputes when they arise. The task of doing this is generally performed by the courts. There must also be a balance of power between the federal and regional governments in amending the constitution.

Federalism tends to be the product of large states with diverse populations or regional governments that were reluctant in coming together. The groups that have come together under a federal system do so because of the inherent benefits of unification such as a larger size for defense purposes, economic purposes, and so on. There are a variety of reasons for states establishing a federal system, but all have the similar rationale of obtaining a perceived benefit. For example, following the trauma of Hitler's government, West Germans formed a federation to prevent the emergence of another all-powerful central government.

Centralized federalism is marked by the domination of the central government and decentralized federalism is marked by the domination of the regional governments. A key element of any successful federal system is finding the right balance of power between the two levels of governments. If the system is too centralized, it may be characterized by a government that is inflexible and insensitive to regional interests. However, if the system is too decentralized, the state may cease to exist at all because it may become fragmented into small, independent states. There is clearly a need for a balance between these two extremes, but just what balance works best varies from one state to the next.

Asymmetrical federalism is characterized by the uneven division of powers between the regional governments. This means of organizing a federal system allows some regional governments to have greater autonomy and take on more responsibilities if they choose to do so. The flexibility of this system is beneficial for accommodating regions with different needs and desires. In comparison, symmetrical federalism is characterized by the equal division of powers. In interstate federalism, regional interests are felt to be best articulated by the regional governments. Whereas, in intrastate federalism, it is felt that regional interests are best articulated by regional representatives at the federal level of government.

Cooperative federalism is distinguished by the presence of relatively harmonious governmental relations on a continual basis. It tends to be the product of prosperous economic times such as that following the Second World War in many federal states. In comparison, executive federalism tends to be the product of economic downturns. Thus, it is logically characterized by much less cooperative governmental relations between the regional governments and with the central government as well.