Canadian Plastics

So you want to be a multinational

When you decide the time is right to expand your operations to the U.S., it pays to seek help early. Will it be a branch of the Canadian entity, or a separate corporation? What about the trendy "Limit...

August 1, 2000   By Cindy Macdonald, associate editor



When you decide the time is right to expand your operations to the U.S., it pays to seek help early. Will it be a branch of the Canadian entity, or a separate corporation? What about the trendy “Limited Liability Company (LLC)”? Do you duplicate core adminstrative functions or centralize them at the head office?

“It’s worth some up front costs for professional advice, because some of these mistakes can be hard to fix later,” says Carey Singer, a U.S. tax accountant with Mintz and Partners, LLP (Toronto).

For example, the LLC status is very popular right now in the U.S. but has little benefit for a Canadian corporation or individual. Within the American legal and taxation system a LLC gives shareholders the legal protection of a corporation, but provides flow-through for taxation purposes, explains Singer. Revenue Canada, however, gives a LLC the same taxation status as a corporation, so there’s no advantage to Canadian shareholders, he adds.

One common option for establishing a U.S. operation is to have the new entity operate as a branch of the Canadian firm and not legally be a U.S. entity.

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The benefit to operating as a branch is the administrative simplicity. The branch is not a separate legal entity from the parent. As well, says Singer, start-up losses of the U.S. branch can be used to shelter Canadian income.

But drawbacks of this set-up are twofold, explains Mike Monaghan of Plante & Moran, a Michigan-based management consulting firm. Although the branch is not a U.S. entity, the Canadian parent must still file a U.S. tax return, and the determination of what income and expenses are related to activity in the U.S. can be complicated. The second disadvantage that Monaghan notes is the parent company’s lack of liability protection. Legal proceedings against the U.S. branch could arguably include all the Canadian assets.

The added layer of legal protection is one argument that both consultants make in favor of setting up a separate U.S. corporation. As well, U.S. corporate tax rates tend to be lower, and dividends paid to the parent company are only subject to a five percent withholding tax by the U.S. instead of its usual 30 percent tax.

“Most companies start with the branch structure and then incorporate when the new operation appears to be a success,” reports Singer. But don’t wait to long to incorporate, he cautions. Once the U.S. branch has inherent value, there can be a Canadian tax when it becomes incorporated, because the Canadian parent is deemed to have disposed of an asset.

INDEPENDENT OR INTERDEPENDENT OPERATIONS?

On the topic of operational structure between parent and subsidiary, the situation of Coroplast Inc. illustrates that each location will have unique requirements. Coroplast is an extruder of corrugated plastic sheet, with operations in Granby, Que., Dallas, TX and–coming soon–Vanceburg, KY. Coroplast is owned by the Jim Pattison Group of Vancouver, B.C.

The Dallas site is the head office for Coroplast. The Kentucky site will be nothing more that a manufacturing operation, with all order processing, customer service, scheduling, and other administative functions centralized in Dallas.

The Canadian operation, on the other hand, runs in a very decentralized manner, explains Barbara Stone, director of finance for Coroplast. “Because of language differences, currency and taxation issues, we find it easier to let that operation run on its own.”

Coroplast’s decision to locate the new facility in Kentucky was largely dictated by market demographics, as are most site selection decisions. But while customers and market may suggest a geographic region, be sure to shop around for your actual plant location. There are many incentives at the state and municipal levels that should be explored.

In Kentucky for example, a program called the Kentucky Rural Economic Development Act (KREDA) permits 100 percent of a company’s state corporate income taxes to be applied to the cost of land, buildings and equipment. Similarly, an amount equivalent to all the company’s employees’ personal income tax can also be put toward the cost of land, buildings and equipment. “This program has the potential to pay for all of the costs of starting up a plant in Kentucky,” says Kevin Brown, marketing director with East Kentucky Corp. (Hazard, KY).

JOIN THE CROWD OR STRIKE OUT ON YOUR OWN?

A sizeable and vibrant plastics community may be a desireable feature when considering sites, but it is not a necessity. A strong industry presence usually leads to the existence of an industry infrastructure, such as training resources, skilled workers, associations and research centres.

For those who value an existing plastics community, Business Facilities magazine recently ranked states according to their growth in the plastics industry. The ranking was based on a number of factors, including growth in number of plastics establishments, growth in exports of plastics and growth in plastics employment. Also considered were total plastics employment and number of plastics establishments.

HERE ARE THE TOP 15 GROWTH STATES FOR PLASTICS:

1. Texas

2. Michigan

3. Illinois

4. Tennessee

5. North Carolina

6. California and Indiana

7. Pennsylvania

8. Georgia

9. Ohio

10. Wisconsin

11. Minnesota

12. Virginia

13. Arizona

14. Massachusetts

15. Oklahoma

However, a pre-existing plastics industry is not critical to success. Royal Group Technologies Ltd. (Woodbridge, Ont.) has experienced tremendous growth over the last five years in Nevada, a state which doesn’t make the list, or even get a mention among the “states to keep an eye on” according to Business Facilities.

Royal’s subsidiary, Royal Sierra Extrusions Inc. began with a 40,000 sq. ft. plant in Sparks, NV in 1994. That plant grew to 250,000 sq. ft., and the company has now announced it will develop a multi-plant industrial complex just east of Sparks focused on producing Royal’s home improvement and consumer products. Phase one of the industrial complex will be to build a larger plant for Royal Sierra Extrusions.

Vic De Zen, Royal’s chairman, president and CEO, says the expansion in Nevada is due to strong demand in the southwestern U.S., and is supported by talented and dedicated employees in the region.

When choosing your location remember to consider up-front versus long-term value of incentives and make informed choices about company structure.


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