Planning your market entry
There are several different ways to enter the U.S. market. The major options are direct sales, selling through intermediaries and setting up an affiliate in the United States.
In this chapter
This is the most basic method of exporting. If you manufacture goods, it means that you sell directly from Canada to U.S. consumers or businesses, and have no business presence in the United States. If you’re a service company, it means that you provide services to U.S. clients directly from Canada, either by sending your personnel to the client’s location or by delivering the service online.
In this model, you sell to U.S. customers through an intermediary. The intermediaries most commonly used by Canadian exporters to the United States are agents and distributors. The major distinction between them is that distributors buy your goods from you and then resell these goods to their own U.S. customers. In contrast, agents don’t purchase your goods from you, but instead sell them to U.S. customers on your behalf.
The nature of your company, your product and the goals you hope to meet in your U.S. regional market determine the type of intermediary that will best serve your needs.
3.2.1 Agents
Agents are individuals or firms you employ to sell your products to wholesalers, retailers or end users in the target market. They generally have the following characteristics:
- An agent isn’t financially involved in the sales transaction itself. Once the agent has made the sale, invoicing and payment is between you and your U.S. customer.
- Agents are normally paid on commission after they have completed a sale on your behalf and you have received payment from the customer.
- If your products require installation, customer instruction and/or after-sales service, you’ll need to train your agent’s personnel to provide this support.
- Agents don’t normally handle logistics, so you’ll be responsible for the shipping and delivery of your product.
- Marketing and promotion aren’t usually part of an agent’s responsibilities, although this can vary according to the market and the capabilities of the agent.
3.2.2 Distributors
Distributors buy your product from you and then sell it to their own customers. While you have no direct control over the selling, branding or marketing strategies they use with your goods, this may be offset by the fact that they take these responsibilities off your hands.
The major characteristics of distributors include the following:
- Once your distributor has bought your goods, they are responsible for all financial transactions with the end user and any associated credit risks. They also set the price of your product within their U.S. market.
- The distributor handles all the details of importing your product, such as clearing customs, warehousing and logistics.
- They may help with promoting and marketing your products within their particular market, and can help develop a customer base for your product.
- They assume responsibility for after-sales service and may be willing to handle warranty issues as well.
Direct exporting or using intermediaries may not be a good fit for your company. An alternative may be to set up an affiliate, which is simply a company you establish in the United States so you can carry on business there. Note that establishing a U.S. business is governed by state and municipal laws, rather than by federal law. As a result, the rules for setting up an affiliate will vary from state to state.
There are two major types of affiliate: corporations and limited liability companies (LLCs).
3.3.1 Corporations
The corporation is the vehicle that most foreign companies use to establish a business presence in the United States. A corporation is a legal entity and is the preferred way to operate because of the structure of U.S. tax and liability laws.
There are no restrictions on ownership, so a U.S. corporation can be wholly owned by foreigners. There is no foreign investment approval process and there are no citizenship or residency limitations on the corporation’s directors or management. There are minimum capital requirements for a small number of industries, but there are no such restrictions on the rest.
3.3.2 LLCs
Like corporations, LLCs limit the liability of their owners and are essentially a hybrid of a corporation and a partnership. The basis of an LLC is the “Operating Agreement,” which sets the rules for operating the company and can be modified as the business grows and changes. Unlike a corporation, an LLC has no stock and there are fewer corporate formalities governing its operation.
Other forms of U.S. business presence
If you need a very basic U.S. business presence, there are two main alternatives to affiliates: representative offices and branch offices. A representative office does not need to be incorporated, is not considered a legal entity and can perform only a few functions. Branch offices don’t need to be incorporated and aren’t considered legal entities, but can engage in most forms of business activity. However, they are subject to state and federal corporate income tax and offer few or no advantages over setting up a corporation or an LLC.
A U.S. firm, including a foreign-owned one, is incorporated in only one state, known as its “domestic state.” If you want to set up a physical location for your company in another state as well, you will have to register as a foreign company in the other state.
3.4.1 Basic setup procedures
The following are the basic steps for establishing a U.S. corporation or LLC. Be sure to consult suitable legal and accounting professionals at each stage of the process.
- Decide on a name for the company and whether it will be set up as a corporation or an LLC.
- Do a trademark and trade name search to verify that your company name, trademark and product names are not used by other parties.
- Choose your state of incorporation (your “domestic state”).
- Incorporate the company in the state you have chosen.
- Apply to the Internal Revenue Service to obtain an Employer Identification Number and register with state tax authorities.
- Arrange a physical U.S. business address.
- Open a U.S. bank account.
Incorporating in Delaware
Depending on your business, incorporating in Delaware may offer some benefits. The procedure is very simple and can be done from outside the state. There is a lot of flexibility for structuring a corporation and Delaware companies do not pay state income tax if they aren’t operating there. That said, if your business isn’t physically located in the state, you’ll face additional costs and obligations that may negate these advantages. Check with a corporate tax professional before making your final decision about a Delaware incorporation.
3.4.2 Paying taxes
Foreign-owned corporations and LLCs, since they are treated as U.S. entities for legal and tax purposes, pay U.S. tax only on income that is generated by their operations within the United States. Note that Canada and the United States have signed a tax treaty to avoid double taxation at the federal level. This means you won't have to pay Canadian taxes on revenues earned by your U.S. business(es).
Effective in 2018, the U.S. federal corporate tax rate was permanently lowered from 35% to 21%. State income tax rates vary, but the state tax is deductible for federal income tax purposes. Municipalities can also levy income taxes, so your U.S. business may end up paying tax at the federal, state and municipal levels.
Before you enter the U.S. market, make sure you protect any intellectual property (IP) that contributes to the value of your products or services. It is best to get help from IP professionals when doing this.
Want to know more about Intellectual Property protection?
To learn more about protecting your IP in the United States, download EDC’s new IP eBook
The major tools for protecting IP in the United States are as follows:
3.5.1 Patents and industrial designs
Patents are granted for new inventions or for useful improvements to existing inventions, and are intended to keep people or businesses from using them without your permission.
Note that having a Canadian patent does not protect your IP in the United States. To obtain a U.S. patent or protect an industrial design, you must apply through the U.S. Patent and Trademark Office (PTO).
3.5.2 Trademarks
Trademarks are words, names, symbols, sounds, or colours that distinguish your goods and services from those manufactured or sold by others. As with patents, registering your trademarks in Canada doesn’t protect them in the United States. The PTO handles protection for this category of IP.
3.5.3 Copyrights
Copyrights cover both published and unpublished works. If you own the copyright to a work, you alone are allowed to produce, reproduce, perform or publish the work, or to permit anyone else to do so. Copyrights apply to original works of authorship, including literary, dramatic, musical and artistic, and certain other intellectual works. To register your copyright in Canada, apply to the Canadian Intellectual Property Office (CIPO).
A Canadian copyright, unlike patents and trademarks, does protect your work in the United States, at least to a degree. To be on the safe side, you should also register your IP with the U.S. Copyright Office. This will allow you to submit a copy of the work, which can act as evidence in a copyright infringement suit.
3.5.4 Trade secrets
Technologies or processes that can’t be protected under patent or copyright laws may still be secured by measures such as confidentiality agreements, confidentiality provisions in employment contracts and closely supervised distribution of the material. This can prevent your competitors from using your proprietary technology, designs and methods of operation.