Our LLC has never distributed anything, does that matter?
It is often where the difficulty is sharpest. The United States looks through the entity and taxes the owner as profit arises, so tax is paid there in the year the business earns it. Canada treats the entity as a corporation, so for the Canadian owner the income generally arrives when something is distributed. A company that reinvests everything therefore produces a real US charge in years when Canada sees nothing, and the position reverses later. The credit mechanism is built to relieve one charge against another on the same income in the same hands, and there is nothing here for it to pair. Retaining profits does not postpone the problem. It pushes the two charges further apart.
What can I use instead of an LLC for a US business?
A US corporation, a partnership, a branch of the Canadian company, or a different entity altogether. Each resolves the classification mismatch in its own way and each produces a different withholding outcome when profit comes home, which is usually where the comparison is decided. A corporation is opaque to both systems, so the disagreement does not arise, but distributions bring withholding. A branch keeps everything inside one legal person. A partnership sits differently again. There is no default answer here, which is exactly why the choice is worth an hour's analysis before formation rather than a repair afterwards.
Can I just dissolve the LLC and start over with something else?
You can restructure, but not for free. Unwinding a limited liability company is itself a taxable event in at least one country, so the exit has a cost that has to be measured before it is chosen. That cost is compared against the annual cost of leaving the structure in place, and the answer is not always the same. What you should not do is dissolve first and ask afterwards, because the charge lands in the year of the unwind and there is usually no way back. Cost the exit, cost staying, then decide.
Why can't I claim credit for the US tax my LLC paid?
Because the credit needs the two charges to line up, and here they do not. The United States looks through the entity and taxes the owner as the profit arises. Canada looks at the entity as a corporation and taxes the owner on what the corporation distributes. So the US charge and the Canadian charge attach to different persons, and often in different years, on what is economically the same profit. Foreign tax credit rules are built to relieve double taxation of the same income in the same hands. When the hands differ, there is nothing for the credit to attach to.
My business partner is American — does an LLC still cause problems?
It can cause problems for you and none at all for them, which is what makes these structures hard to unpick later. The US owner sees a transparent entity behaving exactly as their adviser intended. The Canadian owner sees an entity Canada treats as a corporation, with a credit that does not connect. The entity is doing two different things to two people in the same business. Run the analysis per owner rather than for the company, and settle it before formation, because by the time it shows up in a return the cheap options have gone.
What should I check before signing US LLC formation papers?
Check what each country will treat the entity as, because that is the question everything else follows from. Check who will hold the interest and whether the answer differs between the owners. Check what it will cost to get profit home under the route you actually expect to use. Then compare the alternatives on those same points rather than on formation cost or on how quickly the entity can be registered. Do this before formation, because unwinding the entity later is a taxable event in at least one country and that charge is avoidable only while the papers are unsigned.
What is Form 5471 and who has to file it?
The information return a US person files about a foreign corporation they own or control, in one of several filer categories that determine which schedules apply. It is not a tax computation, which is exactly why it gets missed — and why the penalty regime is severe. The consequence people underestimate is that a missing 5471 can keep the limitation period open on the whole return, not merely on the foreign company's figures. See Form 5471.
Why are corporations double taxed?
Corporate double taxation happens because the company and its owners are separate taxpayers. The company pays tax on its profit; when the after-tax profit is distributed, the shareholder pays tax on the dividend. Canada softens this with the dividend gross-up and credit, which is meant to leave a shareholder roughly where they would have been earning the income directly. The United States taxes the C corporation and then the dividend, with no equivalent integration. See dividends to a foreign parent.
