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Canadian company with mostly U.S.-based online clients

Asked by: H.I.  — 15 July, 2011

I have a Canadian corporation and wish to start an online business connecting (mostly U.S. – based) freelancers with (mostly U.S.-based, but not exclusively so) employers through our online portal (think a site similar to Elance, oDesk, etc.).

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.


Answered by: admin  — 15 July, 2011


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.

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