Doing Business in the U.S. Part 2

If you are doing a substantial amount of business in the U.S., and Permanent Establishment, or Nexus applies to you, then you must carefully consider the best entity to use to do the U.S. business.  There are typically 4 Structures used in the U.S. to do business:

          1. C-Corporations

          2. S-Corporations

          3. Limited Liability Corporations (LLC's)
          4.Trusts

Here are some basic points on each:

C-Corps:

•          Taxed similar to Canadian Corps except dividends are treated different. (no gross up or dividend tax credit)

•          Anyone can own a C-Corp.

S-Corps:

•          You typically have to be a U.S. Citizen or Resident (U.S. Person) to own an S-Corp.

•          With S-Corps there can be no Corporate tax.

LLC's

• These are not advisable for Canadians as there may be a possibility of double taxation

Trusts:

•          Typically are only used by U.S. persons.

•          Trusts can be effective when partnering with a U.S. person

There are more options than what I’ve listed here and there is much to know about each.  You should also consider where to incorporate.  The decision on where to incorporate generally depends on where the corporation does/will do business. If the company is primarily doing business in one state, it is generally recommended that the incorporation should be done in that state. If the company is doing business in several states, you can incorporate in Delaware and file to qualify to do business in the other states the company conducts business in. The company only pays tax in Delaware if it actually is doing business there (there is a nominal annual fee paid to Delaware). The company files tax returns in each state it is doing business generally using the allocation method in which profit is allocated to an individual state based on property, payroll and sales factors.  For companies with no presence in any state, the Delaware Corporation is typically recommended, however it is not the only option. 

This now wraps up our series on Cross Border.  If you have any questions or comments on the blogs, please let me know.  We work closely with Cross Border experts so if we can’t answer your question, they will. In my next blogs we will get back to Canada which is more my expertise.  

Utilizing Dividends

If you were a shareholder of your private Corporation then you may be able to receive Dividends from your Corporation. Canadian Dividends are a very tax advantageous type of income due to the large Dividend Tax Credit that comes with them. The Corporation can only issue dividends in the amount of positive retained earnings. Retained Earnings is simply the sum of profits and losses, less dividends, throughout the life of the Corporation. Dividends are paid out after the Corporation pays its Corporate Tax, which is currently 14% for Private Corporations making under $500,000 active net income in Alberta. If Dividends are your only source of income you may be able to make up to $35,000 without paying any personal tax. If you have other tax credits and tax deductions, then this number continues to get larger, paying no personal tax. You also pay no CPP or EI on dividends. Dividends are issued to Shareholders 18 or older, and may be issued to Holding Companies tax free, and to Trusts that are Shareholders.