A Canadian Perspective on Setting Up a Business Entity in the USA
Canadian businesses looking to expand to the US have a lot to gain from the move, but will also face some tough decisions.
Broadly speaking, Canadian corporations can either operate in the US through their Canadian business, or establish a new US subsidiary. The right move for your business depends on the nature of your operations.
Here are some of the key factors that will determine your optimal solution:
- The size of your Canadian business and the size of your current and proposed US operations.
- Your infrastructure and personnel requirements, including whether employees will working on the ground in the US.
- If you ever need to physically work in the US.
- Financial considerations like how much revenue you intend to make with the US business.
- Your tolerance for tax planning.
This article outlines some key considerations to make if you’ve decided that establishing a US entity is the right move for your business. We then walk through the steps required to establish a US subsidiary corporation.
Your Revenue Base
While a Canadian company with a handful of US clients can easily manage its operations within Canada, expansion to the US can grow the US client base for a Canadian company by giving your clients a more direct line to work with you.
Expansion also proves your company’s commitment to doing business in the US, which can help to establish trust with your customers.
Banking and Payment Processing
When you own a US entity, it’s a lot easier to get a US bank account and payment processing accounts like PayPal and Stripe.
America’s taxation and visa rules can be far more complex than Canada’s, so it’s crucial to understand the US rules before opening a business there.
You don’t always need a US visa to incorporate a business in the US, but you’ll need one if a significant portion of your clients are located in the US and you must be physically present to serve them.
As a Canadian citizen conducting business operations in the US, it is important that you know the different visa options and which – if any – apply to your situation.
The E-2 Visa
The most common visa chosen by business owners living outside of the US is the E-2 Visa, which is comparable to the Canadian Start Up Visa.
The E-2 visa is for individuals that have already invested – or are planning to invest – a significant amount of capital in a US business. There’s no set requirement, but it’s tough to get this visa if you invest anything under $100,000 USD.
You have to prove that you hold a controlling stake of the business, which means more than 50 percent. The E-2 is a temporary five-year work visa that’s indefinitely renewable in two year increments – so long as you meet the requirements.
The EB-5 Green Card Visa
The second visa option for Canadians investing into a US business enterprise is the EB-5 Green Card Visa. This visa is for individuals who invest into a US business enterprise that creates jobs for US citizens.
To be eligible for this visa you need to invest at least $1.8 million into a new commercial enterprise that will create at least 10 full-time positions for US citizens. If you obtain an EB-5 green card, you’ll be considered a lawful permanent resident of the USA.
If you’re a Canadian doing business in the US through a Canadian entity, you need to be aware of the possible tax consequences.
Any income that’s associated with the US can be taxed by the IRS. Even if your business isn’t directly taxable by the US, you’ll still have to submit US tax filings in most cases.
Since each state comes with its own unique tax requirements, it’s important to understand the regulations in your targeted state before incorporating.
Permanent Establishment (PE) Classification
If your US company is classified as having a permanent establishment in the US, your company will be subject to US taxation. As a Canadian with a US permanent establishment, you can usually claim foreign tax credits on your Canadian tax return.
Although US-connected income for Canadians gets taxed in both countries, filing for tax credits can help you avoid the double taxation problem. Foreign tax credits help by removing or reducing the extra amount of tax paid to both countries compared to what you would have paid if your operations were only in Canada.
Steps to Setting up a US Entity
Deciding which state to register your business in is an important decision. If your clients are in the same state, it’s an easy choice.
But if you serve clients across the country, you should consider registering your business in a state with lower taxes. States like Nevada and Delaware have some of the lowest tax burdens and easiest registration processes.
The process to register your business varies from state to state, but the fundamental steps are the same.
1) Choose your state.
This will determine which naming, business organization and taxation rules will apply to you.
2) Choose your business name, then register it in every state you plan to do business.
If you want country-wide name protection in the US, register your business name as a trademark with the US Patent and Trademark Office.
3) Determine whether your business will be a limited liability company (LLC) or a corporation.
Limited Liability Company (LLC)
The LLC company structure is unique to the US. LLCs protect their owners, referred to as “members,” from personal liability. They act a pass-through entity for federal income taxation, which means that monies earned by LLCs are taxed at the individual members’ level, not at the LLC’s level.
When money gets made in different jurisdictions, the tax authorities of those jurisdictions each have an incentive to tax the income. In these situations, the US will aim to tax the income earned by your US company.
Because the US can’t tax your LLC, they’ll look to impose US taxes on you personally, which can lead to owing income taxes in the US and Canada. While the US federal government does not recognize LLCs as a taxable entities, you still have to file a US tax return and self-classify as a corporation, partnership, or sole proprietorship.
Your LLC might not be automatically classified as a corporation, in which case you’ll submit Form 8832 to select a classification.
On the Canadian side, the Canada Revenue Agency views LLCs as most similar to Canadian partnerships and applies the same tax rules. This means that income made by a Canadian resident through a partnership-like entity is taxed at the individual level in accordance with personal income tax rates.
Aside from these federal cross-border tax rules, certain states do tax LLC income, so it is important to be well advised of the applicable law ahead of time.
A corporation, particularly a C-Corporation, is better suited for non-US residents. C-Corporations are similar to Canadian corporations because they shield the shareholders from liability, but are also taxed as separate entities. This means that the US would firstly look to tax your company – not you as a shareholder.
That said, all taxation entities seek to widen their tax base, so there’s always a risk that the US will try to tax your personal income on top.
Just like LLCs, C-Corporations have to file a federal tax return in the US every year. The withholding tax agreement between the countries might apply to you, which serves to reduce your Canadian tax bill based on the US tax you’ve already paid.
It’s always advisable to have a consult with a cross-border tax professional to see what tax laws apply in your situation.
4) File Your Document Charter.
A document charter is a formal legal document that confirms the registry and existence of a company in a particular state or region.
To register an LLC, you’ll draft and file an Article of Organization.
To register a C-Corporation, you’ll draft and file Certificates of Incorporation.
5) Get an Employer Identification Number (EIN).
Your EIN is a form of Tax ID obtained by applying to the IRS through a US third-party designee.
You’ll need an EIN to open a bank account, get a US credit card, file US tax returns, hire employees, apply for permits & licences, and obtain US accounts with companies like Amazon, Stripe, or Google AdSense.
6) File your Statement of Information (LLC) or incorporation report (C Corporation).
These reports provide your state with non-tax information about your corporation and must be done separately from any tax filings.
LLCs have to file an information report every two years. Corporations have to file every one to two years, depending on the state.
7) Determine if you’ll need a “doing business as,” or DBA name.
A DBA is a filing done by an LLC or corporation to inform the government that the entity is doing business under a name different from its legal name. Some banks won’t work with you unless you have a DBA.
8) Obtain the necessary business licences, permits and registrations.
Licensing requirements vary wildly based on the jurisdiction and the nature of your company.
Once you have completed these 8 steps, as well as any additional requirements in your targeted state, you can begin your US business operations.
If you’re thinking about setting up a business entity in the US, we would be happy to provide you with customized information aligned with your company goals.