Now that we’ve discussed the two big problems for U.S. LLCs that are owned 100% by Canadians—double taxation and branch profit tax—let’s look at solutions.
We’ll discuss what to do if you’ve already registered an LLC, as well as what your options are if you’ve not registered an LLC.
If You Don’t Have an LLC
Let’s look at a scenario where you don’t have an LLC. You’re still looking for an entity for you to work through in the U.S. in order to make investments—for example, buying a new business, opening a new business, purchasing real estate, or running an online/e-commerce business.
You have two options on the U.S. side—a Limited Partnership and a C Corporation. These two entities have the same tax status on both sides of the border, and you will be taxed in a similar way.
If You Already Have an LLC
Let’s look at the scenario for people who already have an LLC they are working through, and didn’t know about double taxation. Maybe they also didn’t know about the Branch Profit Tax. Either way, they have an LLC, they’re in a situation where they’re being double taxed, and now they are in a situation where they feel stuck.
Well, the good news is, you’re not stuck! You have options to rectify this problem.
Option #1 – Convert the LLC to a C Corp.
One option that you have is that you can change the classification of an LLC from a pass through entity to a Corporation. So that means this LLC becomes a C-Corp
This classification is done with the IRS (federal level) and not with the state because the LLC will remain in use for tax state purposes (typically, but we have to examine this on a case by case basis). For IRS purposes, the classification does change and becomes a C-Corporation. So, when it does become a C-Corporation, essentially you will have the same tax structure on the US side and on the Canadian side, and eliminate double taxation and the Branch Profit Tax.
There are certain things you have to take into account before you make this change. We do have to look at it in terms of how far have you gone, how long have you been in business, and what exactly you have done so far. This can impact the way we handle the shift, in order to help you transition seamlessly.
Option #2 – Convert the LLC to a Limited Partnership
The second option is to change the LLC to a Limited Partnership. That is, of course, done at the state level. It is not just done with the IRS (federal) changes. It is a change at the state level and also with the IRS.
These are two options that you can do, but we’ll offer one more alternative.
Option #3 – Reorganize in a Multiple Layer Structure
For some individuals with an LLC, it may make sense to reorganize in a multiple layer structure where a Corporation or individual can own the U.S. Corporation, which, in turn, can own the U.S. LLC. That becomes more complex. It’s not for everyone. But you do have an option. It is just more complex and needs to be a more complete structure, and you will probably need to have more personnel on your team to manage this structure.
Option #4 – Exit and Sell
One other scenario is when a person doesn’t want to change it to a Corporation, doesn’t want to change it to a Limited Partnership. At the time of exit, you can sell it and get out of the U.S. market, and you’ll sell the whole LLC as shares rather than as an asset within the LLC. This will give you a better tax advantage in terms of how the LLC is being taxed on the U.S. side versus the Canadian side at the time of sale.
So, if you are planning to sell, make sure you speak with a cross-border CPA to develop the right strategy.
Conclusion
Of course, there are a multitude of other options that get more and more complex. We truly view these scenarios on an individual, case by case basis, because each situation is unique. Whether you’re interested in an LLC, C-Corp, multi-layered structure, or planning an exit, we are happy to advise you and outline your options.
We maintain offices in Toronto and Houston, and our team is here to help.
🇺🇸 Houston Office – (713) 451 – 9700
🇨🇦 Toronto Office – (416) 800 – 2709
