Limited Liability Company (LLC) and Foreign Owners: Part II Tax Considerations


Limited liability companies (LLCs) have become popular as a legal entity to help investors and businesspeople alike. In Florida an LLC can be formed by filing Articles of Organization with the Division of Corporations under the Department of State. LLCs are a creature of state law and can be either a Manager-managed or a Member-managed; each has different benefits as well as costs associated with its management, particularly, when a foreign owner is involved. 

Federal Income Tax Considerations

As stated above, an LLC is created under state law. The federal government, as well as the Internal Revenue Service (IRS), do not automatically recognize the entity. For federal income tax purposes, a single member LLC (SMLLC) is by default disregarded as an entity separate from its owner; and a multimember LLC is classified as a partnership for federal income tax purposes.

The IRS does, however, allow an LLC to “check-the-box” and choose its entity classification in some instances. For example, a foreign-owned LLC may elect to be classified as a corporation for federal income tax purposes. This entity election may be effected in order to prevent the owners of the LLC from being engaged in a U.S. trade or business (USTB) if the LLC is so engaged. Even if the LLC has no income, if the LLC is engaged in a USTB and does not choose its entity classification, then its owners will be treated as being engaged in a USTB and should file a Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Therefore, although the corporate structure is subject to two levels of taxation, it is sometimes beneficial in terms of reducing the amount of disclosure of its owners.

A SMLLC typically does not have a U.S. federal income filing requirements; however, when owned by a foreign individual, the SMLLC must file an information return as if it is classified as a domestic corporation. A multi member LLC must file a partnership income tax return and an LLC must file a corporate income tax return if it has elected to be treated as such.

Should You Use an LLC or Direct Investment?

An LLC is a good way to protect an individual or several individuals from legal liability associated with the world of doing business while providing pass-through taxation benefits. Alternatively, the LLC can elect the corporate structure in order to provide the privacy often necessary to attract foreign investment.

 It may seem counterproductive to go through the effort of establishing an LLC or working with one as a foreign investor, however, the benefits are far greater than the costs. Rather than investing directly in a given market in the United States, using an LLC allows for protection against regulations and taxation requirements established by the U.S. government. The increase in use of the LLC entity in Florida, heavily so in Miami, is a sign that foreign investors have far more to gain from the use of an LLC than from doing business directly with individuals or companies in the U.S. An LLC is a flexible tool that can be used in a variety of ways, providing greater opportunities for investments, protection from unwanted disclosures, and ways to lower costs of operation. 

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.

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