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Legal Consideration for Canadian
Business Expansion into the United States
Access US – January 2011
The United States and Canada enjoy the most comprehensive economic and trading relationship in the world. Through October 2010, over $450 billion in imports and exports have been exchanged, with over $230 billion in imports to the United States from Canada. As a result of the flourishing economic and trading relationship, Canadian businesses often seek business opportunities across the international border.
While there are many similarities in the laws and customs of the two countries, Canadian companies should be mindful of the legal and business considerations discussed below when conducting business in the United States.
Intellectual Property Considerations
It is important to understand that intellectual property rights are territorial and limited to the country in which they are obtained. As such, intellectual property protections afforded in Canada (such as patents and trademarks) generally do not provide any measure of protection or freedom to operate in the United States. Before committing to import, manufacture, distribute or commercialize new products or services in the United States, Canadian businesses should consider pursuing intellectual property protection for their products and services in the United States.
Additionally, intellectual property rights should be investigated. Obtaining legal opinions that encompass the markets the business wishes to enter can help avoid patent, trademark and other forms of intellectual property infringement. A wise first-step is to clear and protect any cross-border products, as well as trademark and branding strategies. This can help a Canadian company avoid the expense of having to cease and re-brand should it accidentally encounter preexisting rights owned by third parties in the United States.
Sales and Commercial Considerations
Canadian businesses often initiate their cross-border expansion by selling products to purchasers in the United States either through direct sales efforts or through indirect methods such as resellers, distributors or franchises based in the United States. It is important to understand that the sale of goods in the United States creates a relationship between the parties and is governed by Article 2 of the Uniform Commercial Code (UCC). The UCC facilitates the sale of goods and covers, among other things,
rules regarding offers and acceptance relating to the sale of products, certain statutory terms incorporated into the sale, and express and implied warranties that attach to the products provided under the sale. Canadian businesses should understand the implications of the UCC with respect to the products that are being sold (or that will be sold), as well as how to disclaim certain provisions of the UCC that may be less than advantageous to the Canadian business (or its United States subsidiary).
Tax and Corporate Considerations
U.S. entities are often formed by Canadian businesses to conduct operations in the United States. If structured properly, the formation of a United States based business entity may provide many advantages to the Canadian parent organization, including more favorable tax treatment and the isolation and limitation of liabilities for United States based operations. Legal entities are formed under and governed by state law, and are often formed where business and tax implications are optimized, which is not necessarily where the business will actually be conducted.
The types of entities most often formed in cross-border business expansions are limited liability companies, corporations, and limited partnerships. Each has its own advantages and operating requirements and the choice of entity is often dictated by the needs of the business. One of the most frequently selected entities is the limited liability corporation (LLC). LLCs are preferable to traditional corporate forms due to favorable tax attributes and the ease with which financial and membership interests may be made by citizens outside of the United States.
In summary, sound business structuring and a good measure of due diligence can provide a solid foundation for Canadian business expansion into the United States. With hundreds of billions of dollars exchanged annually for everything from raw materials to high-tech products and services, cross-border opportunities abound for Canadians who can successfully navigate the legal landscape in the United States.
 Statistic from the US Census Bureau (http://www.census.gov/foreign-trade/balance/c1220.html#2010)
Thomas E. Popek is an attorney in Phillips Lytle’s international practice group and focuses in the areas of intellectual property, technology transfer and corporate law.