International Business

Expanding to Texas: Legal and Tax Considerations for Canadian Companies

Vanguard Legal PLLC — U.S. Counsel for Cross-Border Business Expansion

Texas continues to attract a growing number of Canadian businesses looking to expand their U.S. presence. With its strong economy, central location, and pro-business regulatory environment, Texas offers exceptional opportunities for companies in energy, technology, real estate, logistics, and professional services. Houston and Dallas, in particular, have become major commercial gateways for Canadian investors seeking long-term growth and access to the U.S. market.

At Vanguard Legal PLLC, we assist Canadian companies with the legal, tax, and regulatory aspects of entering the Texas market — from entity formation and governance to acquisitions and joint ventures.

1. Choosing the Right Business Structure in Texas

When establishing operations in Texas, Canadian owners typically consider three primary structures:
(a) a U.S. corporate subsidiary,
(b) a limited partnership, or
(c) a limited liability company (LLC).

Each structure has distinct tax and legal consequences under U.S. and Canadian law.

A. U.S. Corporate Subsidiary

A Texas corporation (often a C corporation) is the most common structure for Canadian companies expanding to the United States.

  • Advantages: A corporation provides limited liability protection and a clear separation between U.S. and Canadian operations. It is treated as a separate legal entity for tax purposes, which simplifies compliance under both U.S. and Canadian tax regimes.

  • Tax Benefits: Corporate income tax is paid only in the United States, and dividends can generally be repatriated to Canada under the U.S.–Canada Tax Treaty at a reduced withholding rate (typically 5% or 15%, depending on ownership percentage).

  • Practical Use: This structure works well for operating companies that employ staff, maintain offices, or enter into contracts in Texas.

B. Limited Partnership (LP)

For closely held or family-owned enterprises, a limited partnership can be an efficient vehicle.

  • Structure: The Canadian parent or principal may act as the general partner, with ownership interests held by individuals or related entities as limited partners.

  • Advantages: LPs offer flexibility in profit allocation and governance while limiting liability for limited partners.

  • Tax Treatment: An LP is generally treated as a flow-through entity for U.S. tax purposes, allowing profits and losses to be reported directly by the partners. However, careful coordination with Canadian tax advisors is essential to prevent double taxation or unintended reporting obligations.

C. Why an LLC Is Usually a Poor Choice for Canadian Owners

Although U.S. limited liability companies (LLCs) are popular among American entrepreneurs, they often create unfavorable tax outcomes for Canadian investors.

  • Double Taxation Risk: The Canada Revenue Agency (CRA) does not recognize the LLC as a flow-through entity. As a result, income may be taxed in both countries without full treaty relief.

  • Administrative Complexity: Additional filings and compliance costs can arise to reconcile the mismatch between U.S. and Canadian tax treatment.
    For this reason, Canadian businesses are generally advised to use a corporation or limited partnership rather than an LLC when entering the Texas market.

2. Expanding Through a Corporate Acquisition

Another pathway for Canadian businesses is to acquire an existing Texas company.

  • Strategic Advantages: Acquisitions can provide immediate access to established customer relationships, skilled employees, local permits, and operational infrastructure.

  • Legal Considerations: Buyers should conduct thorough due diligence on contracts, real estate, employment practices, environmental compliance, and intellectual property.

  • Deal Structures: Transactions can be structured as asset purchases (which may provide tax benefits and liability protection) or stock/share purchases (which preserve continuity of operations).

  • Cross-Border Coordination: Canadian acquirers must also evaluate U.S. regulatory requirements, such as antitrust filings, CFIUS review (in sensitive industries), and proper structuring under the U.S.–Canada Tax Treaty.

3. Why Texas?

Texas consistently ranks as one of the most business-friendly states in the U.S.

  • No state income tax on corporations or individuals.

  • Streamlined regulatory environment that facilitates quick formation and expansion.

  • Strong workforce and infrastructure, with international airports, energy corridors, and logistics hubs connecting North America and global markets.

  • Major commercial centers:

    • Houston — global hub for energy, engineering, life sciences, and logistics.

    • Austin — thriving technology and real estate markets with growing Canadian investment.

    • Dallas – an emerging regional financial hub.

For more resources, check out DoingBusinessinTexas.org, presented in partnership of the Canada-Texas Chamber of Commerce and Vanguard Legal, PLLC.