Canadian company with mostly U.S.-based online clients
Our site would handle payment processing between the 2 parties, and take a small % fee of the total value of the project.
At the end of the year, I would need to generate 1099 forms for the U.S.-based freelancers, and so would need to work with a payroll company, and thus need to get a U.S. EIN to be able to do this.
Alex Zehn and Robert Kowalski, I have read your answers to similar questions, and it seems that opening a U.S.-based LLC could be a good option. However, can you explain how exactly this would work in my unique scenario?
Specifically, would the U.S. - based LLC be "buying" the matching-and-payment-facilitating services of the Canadian company? Remember, it would not be a zero-profit scenario for the U.S.-based company, because the LLC / U.S. bank account would be receiving all the payments from employers, by deducting a fee and then passing the remainder on to the freelancers. Essentially, all the work would be done by the U.S.-based LLC, and it would just pass on the profits to the Canadian company (if it's even necessary to do so-- it can very well remain in the U.S. bank account).
Any idea of the tax implications? Would really appreciate your insight.
From your description I understand that most of the actual business activity around the core of the business would take place in the US, while the actual R&D and management will take place in Canada. As such I presume you would maintain a Canadian company to oversee the back-end of the business, while the US company are you inquiring about would be a nominal entity to simplify the processing of transactions that would take place among the users of your system.
If my understanding is correct then yes, having a US LLC would be a pretty good idea, albeit not absolutely a must (you could register a Foreign Entity of your Canadian company in the US, but honestly just forming a US LLC would be easier).
This is how I see it: your Canadian company (lets call it CA-1) will provide technical support to your US company (lets call it US-1, and that entity can be either owned by CA-1 or owned by the owners of CA-1). For that service US-1 would pay CA-1 according to an agreement between the two entities. US-1 would then be responsible for collecting the payments from commercial users and making payments to freelancers for their work. Obviously it would need a bank account and a probably a few other accounts (e.g. PayPal etc.).
From tax point of view it could be a good idea to balance the profit retained by CA-1 and the one retained by US-1, but for that you need to consult an accountant that specializes in international accounting and tax laws of Canada and US. In any case, CA-1 would need to obtain EIN.
I'm not sure I can add more to that answer, but if you have other questions regarding this scenario please do ask.