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This is definitely a different flavor of a common question. Here are the basic stats:

  • Online only startup -- no physical presence.

  • Everyone works from home.

  • We have 8 people in 4 countries (5 in USA in 3 states).

  • We have not chosen an entity type / location yet.

  • We are not generating revenues yet.

  • We are not looking for funding and wish to stay private (meaning we don't need a c-corp).

  • 2 US owners, 1 Canadian owner

I understand that forming in the US will likely require us to eventually register in the 3 different states -- which to me seems like a complex amount of overhead as far as taxation is concerned. Sure we can go the 1099 route for a little while, but eventually we'll need real employees, real withholding, etc.

So maybe I have a crazy idea -- and that is "What if we form our corporation outside of the US? -- like Canada? If we did so, with only a single Canadian owner in the startup, could we do the following:

  1. Avoid withholding taxes on everyone except the Canadian?

  2. Keep everyone as a permanent contractor?

  3. Have 2 of 3 owners inside the US?

  4. Treat it like an LLC where all money is distributed as a pass-through entity regardless of revenue?

  5. Maintain limited liability for all owners.

  6. Only file taxes and register in a single location!

If this could work, it would greatly minimize our administrative needs. This isn't about mitigating taxes. Typically, an LLC just passes all revenues through to the employees where each employee declares and pays their own taxes, but when the employees are scattered all over the US and world, it gets particularly complicated.

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2 Answers

up vote 1 down vote

Canada and the US have a tax treaty that basically penalizes you in this scenario. With 2 owners in the US, assuming an equal split of shares between owners, the corporation created in Canada would be considered to be foreign-owned, under situation 3. Tax rates would be quite high as a result.

You really need to speak to an accountant familiar with the cross-border tax laws, though.

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up vote 3 down vote

Neat idea, but if you are serious about this ask a tax accountant with cross-border taxation experience.

I think 3,5,6 are possible.

You'll unfortunately miss the capital gains advantages of being a Canadian Controlled Private Corporation (CCPC) (<50 shareholders, Canadian controlled) if you sell the company.

There's also a slot on the Revenue Canada online payroll deductions calculator for overseas employees - I think they get deemed resident in Canada - so I don't think US employees will benefit from lack of tax deductions at source.

The only way to avoid the hassle of payroll taxes is to either (a) incorporate somewhere without income taxes, or (b) not have employees. i.e. use subcontractors.

Canada (like the US/UK) have rules intended to prevent employees being taxed as contractors. Many agencies require that self-employed contract staff are incorporated to reduce the risk of an employer-employee relationship being inferred. If the people working for you are choosing their own office hours, not directly supervised, and could (theoretically) pay someone else to do their work instead of them, you are probably safe. The Canada Revenue Agency web site has the gory details.

I'm not sure whether a Canadian corporation will achieve your objectives any better than registering in a tax-friendly US state (Delaware?), or a nice warm country (Bermuda).

But I'm not an accountant, and don't even want to play one on TV.

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