As globalization continues to increase, many Canadian taxpayers are looking to do business in the USA. AG Tax often receives inquiries regarding the best possible ways of starting up a USA operation, and which form of entity (or company structure) would be most beneficial from a tax perspective. Unfortunately there is no ‘one size fits all’ answer to this question, and each solution must take into account the unique facts of each set of circumstances. However, we would like to try and inform readers as to some general issues they will need to address when doing business in the USA.
Which Entity is the Best?
In general, the details of the formation of a business in the United States are up to the legal person creating the entity. A company can be incorporated in any of the fifty states or the District of Columbia. Jurisdiction choice and business entity type is up to the party forming the business. You may consider setting up an export company, one of many different types of corporations, or a franchise. Depending on your situation, you may wish to start it on your own as a sole proprietor or a partnership. Each of these different entities comes with their own tax implications in both the USA and Canada, so the facts should be carefully considered before registering any sort of entity.
What Tax Obligations will the US Business Encounter?
After deciding which type of entity to form, the legal person will need to register itself with the Internal Revenue Services (IRS) and the State/Local Tax Authorities. The IRS will issue an Employer Identification Number (EIN) which is to be used for both Federal and State Tax purposes. After receiving an EIN and beginning operations in the USA, the entity will be responsible for filing all applicable forms and remitting all taxes owing to the IRS and potentially state revenue agencies as well. Here are some common tax categories that will most likely be encountered:
Income Tax: All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. Income tax has both state and federal tax implications.
Self-Employment Tax: Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves, and generally paid on an estimated basis.
Payroll & Employment Taxes: In case your corporation happens to employ people who work in the USA, as an employer you may have additional tax responsibilities that you must file and pay, such as: Social Security and Medicare Taxes, Federal Income Tax withholding and Federal Unemployment Tax.
Excise Tax: These taxes are paid when you manufacture or sell certain products, operate a particular kind of business, use different kinds of equipment, and/or receive payments for certain services. Excise tax has both state and federal tax implications.
Please be advised – depending on your circumstances the tax treaty between your home country (in this case Canada) and the USA may provide different elections concerning the above entities and taxes that may affect their treatment and reporting beyond domestic Canadian or USA tax laws. A cross border tax advisor should be consulted when setting up operations in the USA.
AG Tax LLP Can Help
The thought of starting a business is daunting, and doing business internationally comes with its own set of challenges. However, if you have a clear business plan in your mind, and the right product/service for the target customers, you are half way there. Bring your plan to AG Tax, and let our experienced cross border tax specialists help you identify which entity and strategies are most tax beneficial for your situation. With proper planning we can ensure your business structure is set up correctly the first time, rather than trying to fix it later on.
Additionally, if you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance. As a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.