… Things No One Else Will Tell You
I frequently assist clients to commence business in the United States. Without doubt, the giant United States market is very enticing place to explore the international business world. As the experience of many Canadiana companies can attest (Second Cup, Canadian Tire, Home Oil), there are some very serious pitfalls awaiting the eager Johnny Canuck south-side. These pitfalls can be avoided, or at least managed by the savvy business person with the assistance of qualified legal and tax experts.
1. Same Language = Same Laws, Right?
The language and cultural similarities of the U.S. and Canada belie important differences in all manner of legal affairs: corporations, taxes, trade-marks, patents and copyrights, litigation procedures, real estate transactions and financings, immigration, product liability, insolvency, securities and banking to name a baker’s dozen.
Any one of a multitude of these legal distinctions can delay, damage or destroy your business if not properly handled at the outset.
Your local Ontario lawyer cannot do the legal work for you: he/she is not competent to do so, and their professional insurance will not cover them (or you) for the inevitable mistakes which are made.
However, your local lawyer can help by introducing you to an attorney in a U.S. firm with whom there is an ongoing relationship or a recent history of cross-border work. The pre-existing relationship or experience is crucial, in my view, to a good referral (that is, so you don’t get hosed).
And while you’re at it, you may as well resign yourself to hiring a State-side accounting firm too, because the tax laws are totally different federally and by state. There are some states to avoid, as they impose corporate income taxes on all corporate income as if a branch office is the head office.
- Retain a qualified American corporate/commercial law firm before any sales are made, or an office is established
- Get good U.S. tax advice at the outset
2. Americans Just Love New Canadian Businesses!
Sure they do, as long as the Canadian looks, acts, walks, talks and for all intents and purposes comes across as an American business! I’m not kidding. “Buy American!!” is not just a slogan, it’s an operating policy of private industry and governmental authorities.
American are quite xenophobic and chauvinistic at the same time. Something like Albertans… While Canadians assume someone else can do anything better than we can, Americans believe just the opposite.
Have a look at various U.S. federal and state requirements for mandating the use of an American company for certain things, the foreign ownership rules in some states, and residency requirements for various commercial activities.
American business loves American business, mainly. Lower the maple leaf flag, raise the stars and stripes, quit saying “eh” and “you know” all the time, and utilize a local state or Delaware corporation, and then some of your “foreign-ness” may be forgiven or ignored. You’re not hitchhiking through France now, you’re trying to blend in.
Remember, unlike the Canadian economy, the U.S. economy is dominated by domestic trade. Only about 5% of the U.S. GNP involves export trade, whereas in Canada, it is more like 25%. Immigration to the U.S. is very restricted relative to immigration to Canada, and not just for terrorists and murderers, but business immigrants, too!
- Do everything, and I mean everything, the American way
3. America the Free
Don’t be fooled by the ignorant generalizations of the anti-Canadian demigods, like say, the realtors turned opposition MP’s. They denounce governmental regulation here as unwarranted interference and an abrogation of basic personal freedoms.
They praise the free and unfettered enterprise system in the U.S. They are dead wrong: there is just as much or more governmental regulation, restrictions and interference in business in the U.S. as there is in socialistic Canada. The extent of government red tape and taxes very much depends on the particular business sector and the location. If you want to ranch in Wyoming, then you’re pretty free. If you want to open an office in New York City or San Francisco, it’s a different ball game.
In some jurisdictions, there is a dizzying array of State, County, City laws, policies, taxes and rules, the likes of which you have never seen. From capital taxes on corporations to franchise laws to blue sky state and federal securities laws to environmental edicts, it can be quite a lot of fun to do business in certain areas and industries (and quite a shock coming from the Great White North).
And typically, the penalties and enforcement of these laws is significantly more harsh than is similar legislation here. The fines can be huge, damages huge (can you say, “treble damages”?). Have you ever noticed that the U.S. promoters of international trade are service providers, like large law and accounting firms?
- Careful research on aspects of your proposed business, working with your trusted professional and business advisers, before you commit to an activity or location
- Budget for extra compliance and set-up costs
4. Respect the Local Yokels
Many Canadian businesses initiate their frontal assault on the U.S. market by appointing their best Canadian Vice President or Sales Manager to head the new operation. It is understandable that a Canadian company should favour one of its own, someone who knows the business, is trusted and has proven to be capable. Wrong, wrong, wrong.
This approach is doomed from the start, unless of course the VP or Sales Manager is actually U.S. citizen, experienced in that business in that location. Invariably, a U.S. office led by a Canadian is defeated before the first year end is reached, largely because the Canadian Head Office guy or gal assumes that business can be done there like it has been done here with such success.
Things are just too different down there. A foray into the American market should get the attention it deserves directly from the CEO and/or the Board of Directors. If you can’t find the right person to lead the charge, you shouldn’t be doing it. It would be better to retain an agent, appoint a distributor, or enter into a joint venture with a local party.
I’ve seen mature, well-run public companies almost brought to their knees by an ill-conceived and poorly executed American adventure led by transplanted Canadians.
- Hire a qualified local person, or don’t go south.
5. Think Regional
It is a well known fact that 90% of the Canadian population resides within 100 miles of the U.S. border. Most transportation routes are on an East-West axis: trucking, rail, air, telecommunications. God knows how much economic activity is controlled by offices, plants and stores in southern Ontario. Everyone in the hinterland hates Toronto. Almost all of the large businesses (home grown and foreign owned) are national in scope.
Well, it’s entirely different in the U.S. Entirely. People don’t need to hate New York, because in downtown Buttmunch, North Dakota, New York is largely irrelevant. Minneapolis might be important, or Bismarck. The U.S. market, in almost every sector, is regional in nature. There are gigantic companies, much bigger than their Canadian colleagues, which only operate in one or two regions, or states.
- Never attempt to conquer the whole United States of America at once.
- Pick a convenient region in which to suffer your growing pains.
6. Newco is Your Friend
As a general rule, always incorporate, and immediately use a new U.S. corporation. American states have many more types of corporations than do we (e.g., “S Corporations” and hybrid limited partnerships. Delaware is something of a haven for national companies (weak shareholder rights), but it is not necessarily the best choice of law for you. There is no federal incorporation in the U.S.
It is desirable to use a U.S. corporation in order to appear as an American business, as per the analysis above, but also, it is necessary in order to avoid significant liabilities for all manner of things which could arise: negligence liability, product liability, human/civil rights actions, buy local policies, whatever.
Yes indeed, Americans are erstwhile litigators! To some of them, it’s just one way of conducting their business: offensive or defensive lawsuits. To others, litigation is their only business/sport. If you’re going to do business in the U.S., then sooner or later, you’re going to get sued, and sued again. Even the best planning and professional advice cannot shield you from litigation.
My Two-Bits Worth:
- Never operate in a personal capacity, or subject the Canadian parent company to potential liability from U.S. operations.
- Carefully choose the type and jurisdiction of corporation to ensure the new American corporation meets your tax and business objectives.
- Implement creditor-proofing structures and practices to protect you as the owner, the directors, and the parent Canadian company
- Buy insurance!
6. And You Think We’re Expensive!!
The fees of my legal colleagues in the United States make me look like a legal aid lawyer. The billable hour is just the starting point for their calculation of your bill.
There are documented cases of law firms charging two, three or more times the hours incurred on a file, and that’s in U.S. dollars! The U.S. is a legalistic business society, and surviving in that atmosphere can be expensive.
I have argued that you really must obtain qualified expert, local legal and tax advice. The trick is to manage that process, or to work with someone who can do so on your behalf.
You are wise to:
- obtain written estimates, monthly bills to keep on top of the ongoing costs
- micromanage the scope of services, to avoid costly digressions
All of the foregoing is just the start, a superficial overview. I could go on. Believe or not, I really admire and enjoy American business people, and by and large, the way they do business. They tend to be direct, friendly, and aggressive. I like that.
A business which approaches the entry into the United States market in a thoughtful manner, using high quality referrals, local experts and employees, works with qualified professional advisers, and budgets twice (or three times) the amount of the original forecast will be forewarned and forearmed.
Just remember: the Americans may not have invented capitalism, but they sure as hell have perfected it. Never, never underestimate how tough it can be to make and keep a dollar in the U.S.A.