US LLC for founders in Canada

Why do founders in Canada form a US LLC?

• US customers and platforms. A US entity helps with US banking, marketplaces and contracts.
• Before choosing an LLC, compare it with other structures, because Canada's treatment of LLCs changes the result.

How do you set one up from Canada?

1. Check the home-country position first

   How Canada will tax the LLC and its profit.

2. Choose the state and form the LLC

   Online, through a registered agent.

3. Get the EIN

   Without an SSN or ITIN, by fax, mail or phone.

4. Open a US account

   With a bank or provider that onboards non-resident owners.

5. Keep books and a transfer log

   For Form 5472 and your Canada return.

See how to open a US LLC from outside the US and the best state for a non-resident LLC.

What does the US require?

A single-member LLC owned by a resident of Canada is disregarded for US income tax. If it has no US office, employees or dependent agents, it usually has no income effectively connected with a US business and owes no US income tax. It must still file Form 5472 with a pro forma Form 1120 each year it has transactions with you, by fax or mail; the penalty for each missing form is $25,000. See Form 5472 and yearly filings for a foreign-owned LLC.

The US-Canada treaty can remove US tax on business profits without a US permanent establishment. It has specific rules on income earned through fiscally transparent entities such as LLCs, and in some cases those rules deny treaty benefits. Get advice on how they apply to your structure. See tax treaties and your US LLC.

How does Canada tax it?

Canadian residents are taxed on worldwide income. The CRA generally treats a US LLC as a corporation. For a Canadian owner that means:

• The LLC is a foreign affiliate, so its profit is generally not your income until distributed, unless passive income rules apply.
• If the US taxes you personally on the LLC's profit, because the US sees it as transparent, Canada may treat the later distribution as a dividend, and credit for the US tax may be limited.
• You may need to file Form T1134 for the foreign affiliate, and Form T1135 if your specified foreign property costs more than CAD 100,000 in the year.

Can managing it from Canada make it a Canadian company?

Yes. Canada treats a company as resident where its central management and control is exercised. A US LLC run entirely by a Canadian-resident owner from Canada may be resident in Canada, and taxable there as a Canadian corporation, subject to the treaty's tie-breaker rules.

Which structures do Canadians use instead?

Common alternatives are a US C corporation, which both countries treat as a corporation, so the classification mismatch disappears; a US limited partnership, which both countries generally treat as transparent; or a Canadian corporation that registers to do business in the US where needed. Each has its own US and Canadian filings, so compare them with a cross-border adviser on your actual numbers before forming anything.

How should money move?

If you go ahead, keep the LLC's account separate, document every transfer, and agree with your Canadian adviser how distributions will be treated. See taking money out of a US LLC and LLC or C corp for a foreign founder.

What are the common mistakes?

• Forming a US LLC without checking the Canadian classification.
• Missing Forms T1134 or T1135, which carry their own penalties.
• Assuming US treatment as transparent carries over to Canada.

The general position for every country is in US LLC and tax in your home country.

This guide is general information. It is not tax or legal advice for your situation.