LLC or C-Corp for My E-2 Business?

Two different questions get answered here, and only one of them is a tax question. Whether a structure supports your E-2 is immigration law and belongs to your immigration lawyer. On the tax side the answer usually comes out as a US C corporation, mostly by elimination: an LLC formed while you’re still a Canadian resident lands in a classification mismatch Canada doesn’t fix, and an S corporation is closed to a nonresident alien shareholder. What moves the answer is the date your US residency starts.

Is choosing an entity for my E-2 business an immigration question or a tax question?

Both, and they get answered by different people. Whether a given structure supports your E-2, including the ownership-nationality test that goes with it, is immigration law, so it belongs to your immigration lawyer and nothing on this page answers it. What’s left once they’ve told you which structures work for the visa is a tax question, and that one turns on which country you’re a tax resident of on the day money actually moves.

The immigration answer is a constraint on the tax answer. A structure that fails the visa test isn’t on the menu whatever it saves.

Why is a US LLC usually the wrong default while I’m still a Canadian resident?

Because the two countries classify it differently and Canada’s answer is the one that costs you. For US income tax purposes a single-member LLC is disregarded from its owner unless it files a Form 8832 and elects corporate treatment (IRS, whose words the comparison table below carries verbatim), so the profit is yours personally as it’s earned. The CRA reached the opposite conclusion and calls a US LLC a corporation, so Canada can tax the same profit again when it comes out.

“we have concluded that these entities are corporations for Canadian tax purposes” (Income Tax Technical News No. 38, archived, so it’s the CRA’s stated position rather than fresh guidance)

That mismatch, the way it strands your US tax, and the four repairs for it are a guide of their own: why a US LLC is usually a tax trap for a Canadian resident. It’s the closest neighbour to this page, and this page doesn’t rebuild it.

What does a US C corporation actually cost me in tax?

Two layers, and the second layer’s rate depends on where you’re resident when the money is paid out. The corporation pays US federal income tax at “21 percent of taxable income” under IRC 11(b), before any state tax. What’s left gets taxed again in your hands when it’s distributed, because the part of a distribution that’s a dividend “shall be included in gross income” under IRC 301(c)(1).

“if a resident of the other Contracting State is the beneficial owner of such dividends, the tax so charged shall not exceed: … (b) 15 per cent of the gross amount of the dividends in all other cases” (Canada-US Convention, Article X(2))

That treaty ceiling on the US half of the second layer runs while you’re still a resident of Canada. Be careful which rate you’re reading. The lower one in subparagraph 2(a), now 5 percent after the Fifth Protocol replaced it, applies where “the beneficial owner is a company which owns at least 10 percent of the voting stock of the company paying the dividends” (Schedule VI, Article 5). An individual shareholder isn’t a company, so 2(b) and its 15 percent is the paragraph that reaches you. Paragraph 2(b) is unamended by any of the six schedules, so the original Convention text is still operative for it.

Two things that cap is not. It’s a ceiling on what the United States may charge and says nothing about Canadian tax on the same dividend, and it’s a treaty position you claim rather than a rate that arrives on its own.

Can my E-2 business be an S corporation?

Not while you’re a nonresident alien. An S election is only open to a “small business corporation”, which IRC 1361(b)(1) defines as a domestic corporation that isn’t an ineligible corporation and has no “nonresident alien as a shareholder”, no more than 100 shareholders, no non-individual shareholder (some estates, trusts and organizations aside), and one class of stock. An election filed while the sole shareholder is neither a US citizen nor a US resident wasn’t valid when it was made, whatever the acceptance letter says.

The regulation says the same, and adds the trailing-spouse version.

“A corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify as a small business corporation. If a U.S. shareholder’s spouse is a nonresident alien who has a current ownership interest (as opposed, for example, to a survivorship interest) in the stock of the corporation by reason of any applicable law, such as a state community property law or a foreign country’s law, the corporation does not qualify as a small business corporation from the time the nonresident alien spouse acquires the interest in the stock.” Treas. Reg. 1.1361-1(g)(1)(i)

Read that condition closely, because it doesn’t catch every trailing spouse. It bites where an applicable law, a state community property regime or a foreign one, gives the spouse who stayed behind a current ownership interest in the stock, and the regulation names a survivorship interest as the counter-example. Where it does bite, the corporation stops qualifying from the moment that interest is acquired.

There’s a route back, and it isn’t yours as of right. IRC 1362(f) lets a corporation be treated as an S corporation anyway where “the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent”, steps were taken within a reasonable period after discovery, and every shareholder agrees to the adjustments the Secretary requires. The relief runs “during the period specified by the Secretary”, so it’s a request the IRS may grant on its own assessment rather than a box you tick.

How do an LLC, a C corporation and an S corporation compare for an E-2 owner?

On four axes, and the one that usually decides it is who’s allowed to own the thing. An LLC generally carries no federal owner restriction and hands you the mismatch with Canada. A C corporation has no subchapter S shareholder test to fail, and gives you two layers of US tax with a treaty ceiling on the second while you’re still Canadian-resident. An S corporation gives you one layer and can’t take you as a shareholder until your US residency has started. The running cost is the smallest of the four differences and usually the first thing people ask about.

Axis	US LLC, single member, no election	US C corporation	US S corporation
Who can own it	”Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities” (IRS)	The subchapter S shareholder tests don’t apply, because those are conditions of making that election	Domestic corporation, no nonresident alien shareholder, no more than 100 shareholders, one class of stock (IRC 1361(b)(1))
US treatment	”An entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation” (IRS), so the profit lands on your own return	21 percent at the entity under IRC 11(b), then dividend income to you when profit is distributed, under IRC 301(c)(1)	“An S corporation shall not be subject to the taxes imposed by this chapter” (IRC 1363(a)), except as that subchapter provides, and the IRS names built-in gains and passive income as entity-level exceptions
Canadian treatment while you’re still a Canadian resident	A corporation, so Canada can tax the payout again	A corporation on both sides, so the dividend it pays you is taxable in your hands in Canada in the year it’s paid	Not reachable at all while you’re a nonresident alien; if you’re a US citizen resident in Canada, a corporation too, because the CRA’s classification list names “US LLCs, S Corporations” together (ITTN 38)
What it costs to run	A pro forma Form 1120 plus Form 5472 where one foreign person is the sole owner	Form 1120 every year, plus payroll filings once you put yourself on salary	Form 1120-S every year, Form 2553 to elect, plus payroll filings

What changes once I become a US tax resident?

Two answers move, and they move on different triggers. S corporation eligibility turns on whether you’re still a nonresident alien, which IRC 7701(b)(1)(B) defines as someone who is “neither a citizen of the United States nor a resident of the United States”, with the residence limb keying to the tests in subparagraph (b)(1)(A). The Article X ceiling turns on something else: whether the beneficial owner of the dividend is a resident of Canada when it’s paid. Those two dates usually sit close together and they aren’t the same test.

• S corporation eligibility keys to the day you stop being a nonresident alien.
• The Article X ceiling keys to whether you’re a resident of Canada when the dividend is paid.

Two consequences follow that people rarely price in before the move. Once you’re a US resident the treaty ceiling stops doing anything for you, because Article X(2) limits what the United States may charge a resident of Canada; your dividend is taxed under domestic US rules instead, and the IRS notes that “qualified dividends are those dividends that qualify to be taxed at lower capital gain rates” (Topic no. 404). And the self-employment carve-out goes. Self-employment income means net earnings “derived by an individual (other than a nonresident alien individual, except as provided by an agreement under section 233 of the Social Security Act)” under IRC 1402(b), and the taxes it feeds are 12.4 percent, up to the annually indexed Social Security wage base, and 2.9 percent, under IRC 1401. While you’re a nonresident alien that definition doesn’t reach you, subject to that Social Security agreement clause. Once you’re a US resident the carve-out no longer covers you, and whether the tax then applies to your business income is a question about your own facts.

If your Canadian corporation is coming with you rather than being replaced, that’s a separate set of consequences on a separate date, and what happens to a Canadian corporation when you move carries them.

So which one is cheaper on the numbers?

It depends on the owner’s own rates and on how much profit stays inside the business, so the arithmetic below is worth reading for its shape rather than its total. The two-layer structure isn’t automatically the loser, because the second layer runs at dividend rates and bites only on what actually gets paid out. Leave profit inside the corporation, or price the payroll the one-layer structure forces, and the gap narrows or reverses.

If I picked wrong, what does converting later cost?

More than nothing, and the direction matters. The US default is that “the entire amount of the gain or loss … on the sale or exchange of property shall be recognized” under IRC 1001(c), unless something else in the subtitle says otherwise. IRC 351(a) is the usual something else, and it holds only where property goes to the corporation “solely in exchange for stock” and the transferors are in control of it immediately after.

“No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.” (IRC 351(a))

The Canadian side doesn’t mirror that. The section 85 rollover is written for a taxpayer who has “disposed of any of the taxpayer’s property that was eligible property to a taxable Canadian corporation” (ITA 85(1)), so it isn’t the route into a US company. What any particular conversion costs turns on what’s inside the entity, what it’s worth against your basis, and which country still has you as a resident on the day it happens. This page won’t guess at a number for it, and neither should a page that hasn’t seen your balance sheet.

What do I have to file while the entity exists?

Returns on both sides, and one of them catches owners who assume a disregarded entity files nothing. A disregarded entity “is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A” where it’s a domestic entity and “one foreign person has direct or indirect sole ownership” of it (Treas. Reg. 301.7701-2(c)(2)(vi)), which puts a Form 5472 and a pro forma Form 1120 on the calendar. A C corporation files Form 1120 on its own account and an S corporation files Form 1120-S.

That pro forma return isn’t a normal Form 1120. “The only information required to be completed on Form 1120 is the name and address of the foreign-owned U.S. DE and items B and E on the first page” (Instructions for Form 5472), so it exists to give the Form 5472 something to attach to.

Missing the 5472 is expensive enough to have its own page: what the Form 5472 penalty is, and what can be done about it. The rest of the year-one filing stack for an E-2 move, on both sides of the border, is in the E-2 first-year guide.

What should I do next about my E-2 entity?

Get two dates written down before anything gets formed or elected: the day your US residency starts under the substantial presence test, and the day your spouse’s does. Then ask your immigration lawyer which structures clear the visa, and price only those. If a company already exists, the useful question isn’t which entity is best in the abstract but whether the one you have is sitting on the wrong side of a date that’s already passed. If a Canadian corporation is part of the picture, whether to wind it up before you move is the other half of the same decision.

Not ready to move on it? The monthly note covers what changes on this side of the border.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.