Hi.
I am a Canadian resident running successful moving business in Toronto. I have quite many International customers, especially Canadian – US.
Considering how many international activities I have done in past year, I am seriously considering establishing a foreign entity in USA.
Naturally, I plan to operate my business in NY state, but I believe that Delaware state is more favorable tax wise and is withing reachable distance from NYC.
I guess I have grasped major points of Foreign Qualification:
1. Choose the state where and establish Foreign Entity
2. Get EIN from IRS
My question therefore is – can I as a Canadian legal resident and business owner be denied Foreign Qualification on some kind of basis? And if I plan to be a sole owner of the company, but will have several employees, which company type would be more suitable.
Thank you very much in advance.
I eagerly look forward to receiving your reply.
Have a great evening.
Regards,
Eva K
Dear Eva,
First of all lets see if Foreign Qualification is what you really want to do. Typically Foreign Qualification is done when a US company registered in one state decides to establish physical presence in another state (the term is a bit confusing, but “Foreign” actually refers to “different jurisdiction” and not necessarily a different country). You could still qualify your Canadian company in one of the US states, however it might just make more sense to register a new US entity (you can do it of course, see my answer to Canadian registering a US business).
The advantage of registering a new entity (such as LLC) in the US as opposed to qualifying your Canadian company in the US is the relative ease of the first solution as compared to the second (and it is also faster and cheaper). For example, if you where to do foreign qualification you would need to first obtain a Canadian equivalent of Certificate of Good Standing and then certify it through a US embassy (since Canada is not a signatory of the Hague Convention and therefore does not issue Apostilles. Instead, Canada requires, and is required to provide a Certificate of Authentication on documents that one plans to use abroad).
Having a US entity would allow you to conduct business in the US using that entity, and then if needed provide services by the Canadian company to the US company, and vice versa.
Now to the question of which state to form the new entity in: it is a common misconception that when you choose a state with no corporate income tax one will actually save on taxes. It could be partially true, if the entity in question is C-Corporation and if the company in fact conducts business in that state. However, when it comes to LLCs, those are pass-through entities, meaning all the profits and losses are passed without tax to the owners of the entity, and then taxed on their personal tax returns, based on the personal residence of the tax payer.
Delaware is one of the incorporation friendly states (along with Wyoming and Nevada) for variety of reasons, however when you form your company you should also consider those states where you will be doing most of your business. For example if you plan to have physical presence in New York state you might as well form your LLC in New York. Alternatively you can start by forming your LLC in Delaware, and later qualify that LLC in New York as a Foreign Entity.
I hope I made the picture a bit clearer for you.
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