LLC Partnership Ques - partners will be USA corp & CAN c

famo · Post by **famo** » Sat Jan 29, 2011 7:17 am

Hi,

Hope all is well. I have a question for you regarding LLC's & taxation in California. My partner and I would like to start an LLC. We will be partners and his S Corp will own 50% of the LLC while my Canadian Corp will own the other 50%. Our revenue source will be from a Japanese company that is located in Japan :) My staff and I are physically located in Canada, whereas my partner and his staff are located in California.

Firstly, can my Canadian corporation own part of the LLC? My research indicates yes. What do u think?

Second, the LLC will be a partnership, with taxes flowing down to our respective corporations, so where would we be paying taxes? Obviously, my partner who is based in California and will pay taxes there. As for my corporation, that is situated in Canada, will I be paying taxes just in Canada or will I have to pay taxes in the USA as well because the LLC is situated in California? What do you think?

Third, my partner's accountant, who is not an expert in CAN/USA taxes, advised him that, there will there be withholding taxes on my corporation because of California laws? Is this true?

Any help would be highly appreciated. Thank you in advance.

JGCA · Post by **JGCA** » Sun Jan 30, 2011 5:41 pm

As a Canadian I do not think you can firstly be an ownwer in a US S corp , as far a the taxes go I believe that the LLC will have to withold tax when it pays or allocates your persentage of profits to the Cnd corp partner there will be witholding tax at the Federal level also.

famo · Post by **famo** » Sun Jan 30, 2011 9:39 pm

Hi JGCA,

My partnership/ownership will be in the LLC not a US S corp.

Are you positive with respect to the withholding tax? Is there anyone else that can verify this?

Thanks for the feedback.

Regards.

JGCA · Post by **JGCA** » Mon Jan 31, 2011 11:04 am

The reference can be found in the Fifth Protocal to the Canada-US tax treaty signed on Dec 15, 2008. It basically recognized that while LLC were fiscally transperant entities for US purposes and flow though all their income in the US to the Shareholders that before thgis was not recognized by Canada and a 25% witholding tax was imposed on payments like interest , royalties from Canada to US. So Effective Feb 1 2009 the treatment in your case a dividend paid by the LLC to a Canadian Copr sharehaolder that is connected ( owns more than 10%) will be subject to only 5% witholding tax Federally instead of the usual 15% but only on dividends paid to the members in the flow through group.

You should be able to refeence this in the Fifth Protocol section of this forum. I am not sure about california since the state does not have to abide by the Federal tax treaty but Federally its 5% which is low.