A Guide to Setting Up a US LLC from Canada

A CEO's Playbook for US Market Entry: Forming Your US LLC from Canada

As the CEO of your "Business-of-One," expanding into the US market is a strategic move, not a tactical chore. It’s a decision that can fundamentally alter your growth trajectory by opening up the world's largest economy. But for a Canadian professional, this opportunity is surrounded by a minefield of cross-border tax complexity and a constant hum of compliance anxiety. Generic online guides often worsen this, creating more questions than answers by failing to address the fundamental structural problems a US LLC presents for Canadians.

This is not a guide. This is a playbook. We will equip you with a definitive 3-Pillar Decision Framework to evaluate your options based on what truly matters: Liability Shielding, Tax Efficiency, and Operational Simplicity. By applying these pillars, you can systematically build your US presence on a foundation of strength, not fear. By the end, you won't just know how to form a US entity; you will know with confidence which entity is the correct strategic asset for your business and how to manage it without constantly looking over your shoulder.

Why Bother? The Strategic Case for a US Business Entity

The first question any CEO must answer is foundational: why go through this effort at all? For a lean, global business, adding a corporate entity in another country can feel like a significant administrative drag. The burden is real, but the strategic payoff is immense. A US entity is not just about paperwork; it's about building a more robust, respected, and resilient cross-border business.

Here are the four concrete advantages this structure unlocks:

• Unlock the US Financial Ecosystem. This is the most immediate, tangible benefit. Operating as a Canadian sole proprietor billing US clients forces you into an expensive corner. Your clients pay in USD, and you are hit with forced currency conversions and international transfer fees. A US entity provides direct access to US-domiciled bank accounts and payment processors like Stripe US. This allows you to hold USD, pay US-based contractors in their own currency, and dramatically lower transaction costs. For context, Stripe often adds a 1.5% fee for international cards and another 1% for currency conversion on top of its standard processing fees. A US entity eliminates those cross-border layers, keeping more revenue inside your business.
• Project Unquestionable Professionalism. Perception matters in high-value services. When a large American company’s procurement department receives an invoice, "Apex Consulting LLC" with a Wyoming address and a US bank account signals stability and permanence. It fits seamlessly into their accounts payable system. An invoice from "Jane Smith, Sole Proprietor" in Vancouver with Canadian banking details introduces friction. It raises questions—however small—about tax compliance and operational risk on their end. A US entity removes that friction, making you an easier and more attractive partner.
• Build Your Liability Shield. This is the foundational purpose of an LLC. It erects a legal wall between your business operations and your personal life. This concept, known as limited liability protection, means that if your business incurs debts or faces a lawsuit, creditors can only pursue the assets owned by the LLC. Your personal assets—your home, savings, and vehicle—remain protected. For any serious business, this is not a luxury; it is a critical risk mitigation strategy.
• Establish a US Market Foothold. Think of your US entity as a strategic beachhead. It is a platform upon which you can build, holding contracts, owning intellectual property, and serving as the legal vehicle for hiring US-based talent. Furthermore, it is an essential prerequisite if you ever decide to pursue certain US visas. The E-2 investor visa, for instance, allows Canadians to live and work in the US to direct a business they have substantially invested in. Your US LLC is the vessel that holds that investment and demonstrates the seriousness of your venture.

The Default Dilemma: Understanding the US LLC Double-Taxation Trap

While the strategic advantages are compelling, executing this play incorrectly leads to a severe, self-inflicted financial penalty. This is the central problem that fuels compliance anxiety. If you form a standard US LLC and take no further action, you are walking directly into a tax nightmare. The issue stems from a fundamental mismatch in how the United States and Canada perceive the same legal entity.

As Toronto-based CPA and international tax expert Michael Atlas warns, "In the vast majority of cases, the use of U.S. LLCs by Canadians is certainly not a tax-effective strategy, and in certain cases, it can be really disastrous." Let's break down exactly how this disastrous outcome unfolds.

• The IRS View (The Problem Starts Here): For a single Canadian owner, the Internal Revenue Service (IRS) treats a US LLC as a "disregarded entity." For tax purposes, the IRS doesn't see the LLC as separate from its owner. The business's profits "pass through" directly to you, the individual, and you are required to report that income on a US personal tax return (Form 1040NR) and pay US income tax on it.
• The CRA View (The Trap Springs): The Canada Revenue Agency (CRA), however, takes a completely different view. It does not recognize the "pass-through" status of a US LLC. Instead, the CRA classifies the US LLC as a foreign corporation. Consequently, it views any money you move from the LLC's bank account to your personal Canadian account not as a simple transfer of your own earnings, but as a foreign dividend paid from a corporation to a shareholder.
• The Catastrophic Result: This structural conflict creates a brutal double-taxation scenario. First, you pay personal income tax to the IRS on the LLC's net profits. Then, when you pay yourself that same money, the CRA taxes it again as a dividend. Because the two tax agencies classify the income differently—one as personal business income, the other as a corporate dividend—the provisions in the Canada-U.S. Tax Treaty that normally prevent double taxation often fail to apply. You generally cannot claim a foreign tax credit in Canada for the US taxes you paid, leading to a cripplingly high effective tax rate.

To put it plainly, the default path punishes you for following the rules of each country.

Your 3-Pillar Framework for a Sound US Expansion Decision

That punishing outcome, however, is entirely avoidable. It is the direct result of using a default tool for a specialist’s job. Instead of reacting to cross-border tax problems after they arise, an effective CEO makes proactive, framework-based decisions to prevent them entirely. To do that, you must evaluate your entity structure not on one feature, but on a holistic combination of three core pillars.

Pillar 1: Liability Shielding

This is the most fundamental purpose of any corporate entity: the legal separation between your business activities and your personal life. It ensures that if your business incurs debts or faces a lawsuit, your personal assets—your home, car, and family savings—are not at risk.

• The Verdict: Both a Limited Liability Company (LLC) and a C-Corporation accomplish this primary goal effectively. They establish your business as a distinct legal person, ring-fencing professional risk from your personal wealth. This pillar is table stakes; the truly strategic decision hinges on the next two.

Pillar 2: Tax Efficiency (The Most Critical Pillar)

This is where the default path leads to disaster and where a strategic choice creates a significant financial advantage. The goal here is simple but absolute: neutralize the double-taxation trap. An efficient structure ensures your profits are taxed once, at a predictable rate, by allowing the Canada-U.S. Tax Treaty to function as intended.

• The Verdict: A standard US LLC fails this test catastrophically. The conflicting views of the IRS and the CRA create a structural mismatch that leads directly to double taxation. Conversely, an entity treated as a C-Corporation by both countries passes this test perfectly. Because both the IRS and CRA agree on its corporate status, tax obligations are clear, and the treaty can be used effectively to prevent the same income from being taxed twice.

Pillar 3: Operational Simplicity

At first glance, the LLC appears simpler. Its formation can be faster and its internal governance rules are more flexible. For a Canadian operating in the US, however, this is a dangerous illusion. True simplicity is not about the ease of setup; it is about the long-term predictability and clarity of your compliance obligations.

• The Verdict: A C-Corporation, or an LLC that elects to be taxed as one, provides far greater operational simplicity in the long run. While it requires more administrative formalities, such as holding annual meetings, these actions create a clear, unambiguous record. More importantly, its tax treatment is straightforward and understood by both revenue agencies. This clarity avoids years of complex, expensive accounting gymnastics required to navigate the double-taxation mess created by a standard LLC.

The Strategic Choice: Using a C-Corporation Structure to Win

The 3-Pillar Framework analysis leads to a clear and powerful conclusion: for a Canadian professional building a serious cross-border business, the most resilient and financially sound structure is a US entity taxed as a C-Corporation. This single decision dismantles the double-taxation trap and replaces compliance anxiety with strategic control.

You have two primary pathways to achieve this superior structure.

Option A: The Hybrid Power Play—LLC with a C-Corp Tax Election

This sophisticated approach combines the best of both worlds. You form a US Limited Liability Company in a business-friendly state like Wyoming, then make a crucial election with the IRS.

• The Key Action: You file Form 8832, Entity Classification Election, with the IRS. This form officially tells the US government that, for federal tax purposes, you want your LLC to be treated as a C-Corporation.
• The Strategic Advantage: This move gives you the streamlined internal management of an LLC while adopting the tax identity of a corporation. This corporate identity is universally understood by both the IRS and the CRA, creating the alignment necessary to prevent tax conflicts.

Option B: The Traditional Fortress—A US C-Corporation

The second path is to form a US C-Corporation from day one. This is the classic, unambiguous corporate structure that financial and legal systems in both countries recognize without hesitation. While it involves more administrative formalities—such as appointing a board of directors and holding annual meetings—its primary benefit is absolute clarity. There is no risk of misinterpretation by the CRA. This is the preferred route for founders who prioritize long-term stability and may be planning to seek US venture capital or pursue an E-2 visa.

How This Structure Solves the Core Problem

Regardless of which path you choose, the end result is the same: the dangerous mismatch between the IRS and CRA is gone. Here’s how it works:

1. Entity Alignment: Both the IRS and the CRA now view your US entity as a separate corporate taxpayer.
2. US Corporate Tax: Your US company pays US federal corporate tax on its net profits at the current flat rate of 21%. This tax is paid by the corporation, not by you personally.
3. Strategic Compensation: You can pay yourself from the corporation's post-tax profits in a treaty-compliant way, typically through a reasonable salary for your services. This salary is a deductible expense for the US company, further reducing its US tax burden.
4. Foreign Tax Credits Work: The US taxes paid—both by the corporation and any personal taxes on your salary—can now generally be claimed as foreign tax credits on your Canadian tax return. The Canada-U.S. Tax Treaty can finally function as designed, eliminating double taxation.

Executing the Plan: Your Step-by-Step Formation Checklist

With the strategic foundation in place, the path forward shifts from decision-making to deliberate action. This is a clear, mechanical process to build your new corporate structure.

Step 1: Choose Your State Strategically

Your state of formation is a foundational choice. For most Canadian professionals, the decision distills down to two primary contenders: Wyoming and Delaware.

For most service-based businesses—the consultant, agency owner, or software developer—a Wyoming LLC provides the ideal blend of privacy, asset protection, and low administrative burden. If your roadmap includes raising millions from US venture capital, the credibility of a Delaware C-Corporation is the more strategic choice.

Step 2: Appoint a Registered Agent

As a non-resident, you are legally required to have a Registered Agent in your state of formation. This service acts as your company's official physical point of contact in the state, designated to receive official legal documents and tax notices. This is a critical piece of your compliance infrastructure.

Step 3: File Your Formation Documents

This is the official act of creating your company.

• For an LLC: You will file the "Articles of Organization."
• For a C-Corporation: You will file the "Articles of Incorporation."

This document formally registers your business name and address with the state. Once the state approves this filing, your company legally exists.

Step 4: Obtain Your EIN as a Non-Resident (No SSN/ITIN Required)

This is a critical step where many non-residents get stuck. You do not need a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) to get an Employer Identification Number (EIN) for your US company.

Here is the precise method:

1. Complete Form SS-4: Download the "Application for Employer Identification Number" (Form SS-4) from the IRS website.
2. Fill it Out Correctly: On line 7b, which asks for an SSN or ITIN, write "Foreign" or "N/A."
3. Fax the Form: Fax the completed and signed form to the IRS. For international applicants, this is the most reliable method.
4. Receive Your EIN: You can typically receive your EIN by fax within a few business days. Alternatively, you can call the IRS international line roughly two weeks after faxing to get your EIN confirmed over the phone.

Step 5: Draft a Robust Operating Agreement

Even for a single-owner company, a written Operating Agreement is a vital internal document. It is the legal contract that governs your LLC's operations, proving you are treating it as a separate legal entity, which is essential for maintaining your liability shield. It should define ownership, management, capital contributions, profit distribution, and dissolution procedures.

Beyond Formation: Managing Ongoing Compliance (and Avoiding the $25,000 Penalty)

Formation is a one-time event; compliance is an ongoing discipline. Treating it with the seriousness it deserves is the key to protecting the very asset you just built. Here is the essential checklist you must manage.

• The Critical Form 5472: Pay close attention. If your Canadian-owned US entity is taxed as a corporation, you must file Form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation." This form discloses "reportable transactions"—like payments or loans—between your US company and you, the Canadian owner. The penalty for failing to file, or for filing an incomplete form, is a staggering $25,000. This is a bright red line you cannot cross.
• Annual State Reports: Most states, including Wyoming, require an annual report to keep your company in "good standing." This report confirms your company's basic details and is accompanied by a modest fee. Missing the deadline can lead to late fees, loss of good standing, and eventually "administrative dissolution," where the state unilaterally shuts down your company.
• FBAR/FinCEN Form 114: If the combined total of all your financial accounts outside Canada (including your new US account) exceeds $10,000 USD at any point during the year, you must file a FinCEN Form 114, "Report of Foreign Bank and Financial Accounts" (FBAR). This is filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS. Penalties for non-compliance are severe.
• Federal and State Corporate Tax Filings: Your US entity, when taxed as a C-Corporation, must file an annual federal corporate income tax return using Form 1120. This is mandatory even if your company had zero income or is not profitable. A "nil" return is still required. A key advantage of Wyoming is that it has no state corporate income tax, simplifying your annual filings.

Activating Your Entity: The Practical Guide to US Banking and Payments

With your compliance roadmap clear, the final step is activating your entity financially. A company that can't get paid is merely a collection of documents. This is where many non-resident founders get stuck, but the modern solution is straightforward.

Choosing the Right Financial Platform

Forget walking into a traditional bank branch. The solution for a cross-border business lies with financial technology platforms built for global founders.

• Look for Fintech-First Solutions: Platforms like Mercury and Relay Financial are standout choices because their entire onboarding process is designed for remote, non-resident founders. They don't require an SSN and are experts in handling documentation for foreign-owned US entities.
• Understand Their Structure: These are financial technology companies, not banks themselves. They partner with FDIC-insured banks to hold your funds, giving you the security of the traditional banking system with the modern, remote-friendly interface you need.

Preparing Your Document Package for a Smooth Application

To ensure a fast and successful application, gather your documents beforehand to demonstrate that your business is legitimate and properly structured.

• Your Formation Certificate: The official document from the state (e.g., "Articles of Organization").
• EIN Confirmation Letter (Form CP 575): The single most important document for US banking.
• Valid Foreign Passport: A clear copy of your valid Canadian passport to verify your identity.
• LLC Operating Agreement: A professionally drafted Operating Agreement strengthens your application by showing the bank you have a clear governance structure.

Connecting to the US Payments Ecosystem

Once your US bank account is active, you have unlocked the primary advantage of this entire structure: direct access to the American financial ecosystem. You can now apply for accounts with payment processors like Stripe or PayPal using your US entity's details and EIN, allowing you to receive payments in USD directly.

By taking these final steps, you transform your LLC from a legal concept into a powerful operational asset, fully equipped to do business efficiently in the world's largest market.

Conclusion: You Are Now in Control

By following this playbook, you have moved beyond generic advice and now possess a durable framework to structure and launch a US entity that serves as a powerful, tax-efficient asset—not a source of compliance fear. This clarity is the ultimate form of control.

You understand the IRS-CRA conflict that creates the double-taxation trap and, more importantly, you know precisely how to solve it. You can anticipate and manage critical compliance obligations, transforming them from unknown threats into a predictable operational rhythm. You have the practical knowledge to secure an EIN and open a US bank account from your home office in Canada. You are no longer reacting to the complexities of cross-border business; you are the empowered CEO, equipped with the foresight to make strategic decisions.

This playbook was designed to give you the confidence to expand into the world's largest market. The final step is to execute your plan with the guidance of a qualified cross-border professional. An expert will ensure every detail is woven into your entity's structure, optimizing it not just for a correct launch, but for sustained success. You are ready.