I am starting a consulting firm. My client is in canada but will pay me in US currency. Should I create an LLC or S-corp


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I live in California USA. I have a client in Toronto Canada. They are paying me in US dollars and require a corp-to-corp realationship. Should I create an LLC or S-corp?

LLC California S Corp

asked Jun 15 '12 at 16:38
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Mitch
1 point

2 Answers


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LLC is not corp... You should start with clarifying the requirements. S-Corp is a tax term, legal entity is "Corporation" or "LLC" (they can both be S-Corp's for taxes).

Corporations and LLC's are very different entities, and I personally would prefer LLC (have preferred LLC, to be more exact), as it is much simpler. For corporations you need directors, officers, you must have a separate bank account (for LLC you should have a separate bank account), you must have records of every decision made, etc. Its tedious and is usually unnecessary for a sole-proprietor who just wants limited liability.

From tax perspective, there are certain advantages for treating your entity (either LLC or Corporation) as S-Corp as opposed to LLC:

  1. LLC are disregarded entities, it goes on Schedule C of your Federal taxes.
  2. LLC must pay $800 to the state (CA) each year. S-Corps too, but are exempt for the first year.
  3. LLC's have higher income taxes once they're liable for taxes ($250K gross receipts), but S-Corps are liable for taxes with lower incomes (but net, not gross).
  4. S-Corp must pay you a salary for services provided (which must be reasonable), but the income in excess of the salary is not self-employment income, i.e.: lower overall taxes.

So if you're creating a professional services company, and LLC is an acceptable entity, I would probably consider creating LLC as an S-Corp.

If you're required to be a Corporation - then S-Corp is the way to go. The other option is C-Corp, which means dual taxation unless you drain everything out with expenses and salary. You probably don't want that.

You might also want to read this answer I wrote on a similar topic.

This is not, of course, a tax or legal advice. You should seek a professional tax and legal advice that would take into the consideration all of your circumstances.

This answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer

answered Jun 15 '12 at 16:58
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Littleadv
5,090 points
  • Worth to mention, to those not familiar with the California way of doing business, that both LLC and S-Corporation are taxed in CA on entity level. This is not true for Federal taxes, and doesn't happen in most of the other states. – Littleadv 7 years ago

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@Mitch - I strongly recommend consulting with a Canadian MPA (CPA equivalent). My LLC based in Connecticut started doing business in Canada (also Ontario) several years ago. Each year, as NAFTA rules change, the tax treatment (treaty protection) for LLC's changes, and this changes the way I have to file Canada taxes.

For example, my LLC is taxed as a Sole Proprietorship in US (single-member LLC). If I had other members in my LLC, Canada would view my business differently - triggering Canadian 'corp' income tax. For a simple example, here is a snippet of a tax provision from the CRA (Canada IRS) website:

If the LLC elects in the U.S. to be classified as a corporation and is therefore taxable in the U.S. on its world income, it would be considered a resident of the U.S. for purposes of the Convention. The CRA considers that the U.S. LLC would then be "liable to tax" in the U.S. for the purposes of paragraph 1 of Article IV of the Convention. It is our position that a U.S. LLC which is unable to provide documentation from the IRS substantiating that it has elected to be taxed as a corporation (i.e. the IRS has confirmed that the appropriate form (Form 8832) has been filed and accepted, or a U.S. income tax return has been filed), should not be treated as a resident of the U.S. for purposes of the Convention.

http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rndr/trty_gdlns-eng.html I'm guessing your goal is to minimize the amount of taxes you have to pay, as it is with everyone. With Canada taxes, be prepared to be even more confused than dealing with the IRS - you are considered a non-resident alien, and it's been difficult for our firm to navigate without professional support.
answered Aug 16 '12 at 06:22
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Bforeste
11 points
  • @Mitch - considering your question is a couple months old, you might know this by now. But, you'll also need to start a business in Canada so you can file HST & pay taxes. It's not fun. – Bforeste 7 years ago

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