A number of options are available for Canadian business owners when structuring a US cross border business. The best option for your business depends on a number of factors such as:
- The type of business venture such as whether it is a real estate investment; importation or sale of goods; online services; sales of goods or equipment with after sales servicing or other types of business.
- Whether Canadian employees or the owners will need to be physically present in the US
- The need to obtain a business visa, and the type of business visa being sought
- Business plan goals, both long term and short term.
- Tax Efficiency
Below is a non-exhaustive list of business structures frequently used in US - Canada cross-border business:
i. Sales into US, from Canada, with no physical entry or presence in the US: Some examples of this would be an e-commerce business based out of Canada, with goods shipped from Canada or from a US warehouse, or an online software as a service business offering its services to US consumers. The Canadian business does not have any presence in the US, however by virtue of doing business with US residents, the business is exposed to liability in the US as well as legal issues arising under trademark law.
ii. US branch of Canadian entity: this structure includes a Canadian entity operating in the US without forming a separate US entity. An example is a Canadian business that hires dedicated salespeople in the US, or has an office or storefront in the US operating through the Canadian corporation. In this situation the Canadian company is exposed to both Canadian and US liability as there is no separation of risk across the business entity. Additionally, the taxation of a branch is treated differently than when the Canadian business operates entirely from Canada. In this situation tax advice should be sought before establishing a permanent establishment in the US as it can affect the tax credits available under the US Canada Tax Treaty. Likewise, legal advice should be sought with respect to the risk exposure of your type of business.
iii. Canadian Parent Operating Company with a US Subsidiary Operating Company: This structure separates the liability of the Canadian and US operations so that the Canadian entity reduces its exposure to the business risks in the US operations. However, the US operations are exposed to the risks in the Canadian business. This means that a successful plaintiff in a lawsuit in Canada with a money judgment award could collect against the US assets.
iv. Canadian Sister Holding Company and a US Subsidiary Corporation: Maximum liability protection occurs when a Canadian operating company establishes a sister Canadian holding company that is the parent company of a US subsidiary company. In this structure, the risks in the Canadian operations are entirely separated from the US operations, and the risks in the US operations are entirely separated from the Canadian operations.
v. Limited Partnerships with a General Partner manager and limited partners: A limited partnership structure is most often seen in investment and real estate ventures where the limited partners are silent investors contributing to the capital of the business for acquiring and/or constructing real estate. The General Partner of the LP is typically a corporation, formed either in Canada or the US, and it assumes all of the management and liability of the Limited Partnership. The limited partners are not exposed to any liability of the partnership.
A Canadian business looking to do business in the US should consider a balance of factors when choosing a business structure. These factors include the costs of setting up and maintaining the chosen business structure, the risk exposure on both sides of the border, as well as the tax efficiency of each structure, including the tax treatment under the US Canada Tax Treaty.
** Disclaimer: This article contains only general legal information and is not intended to replace legal advice specific to the reader’s situation. We strongly encourage you to seek legal advice from your lawyer and tax advice from your accountant before acting based on any information given here.