Limited Liability Company (LLC) and Foreign Owners

Today, many businesses are forming as a Limited Liability Company (LLC) and are finding that an LLC offers the “best of both worlds” of corporate forms. LLCs have pass-through taxation while also affording the owners limited liability protection, typical of a corporation.

Why Incorporate as an LLC?

Today, many businesses are forming as a Limited Liability Company (LLC) and are finding that an LLC offers the “best of both worlds” of corporate forms. LLCs have pass-through taxation while also affording the owners limited liability protection, typical of a corporation. One advantage of an LLC is that the formation and ownership requirements are less stringent than a corporations. The LLC also offers and advantage in management flexibility. The LLC can be “member-managed,” meaning that it would be managed directly by the shareholders. Or the owners of the LLC can agree to have the business “manager-managed,” meaning that the management can be structured and delegated from the owners to the managers. Other requirements of a corporation, such as a mandatory annual board meeting, are relaxed for the LLC.

LLC Tax Advantages

An LLC allows for pass-through taxation, thereby avoiding the “double tax” of a Corporation. A corporation is a legal entity, a person in the eyes of the tax law – it has to file it’s own returns. An LLC is not, it is either a sole proprietorship or a partnership which is the reason why LLC’s are popular. An LLC operates in most ways as a corporation, yet the distributions to its “members” (shareholders) are not subject to taxation at the corporate level. Instead, the distributions are “passed through” the corporate level and are taxed only at the individual level. The LLC avoids “double taxation” that Corporations must endure. Still, an LLC gives their owners limited liability protection since LLCs are separate entities from their owners. Because the two are separate, the personal assets of the owners (such as their personal residences, and personal bank accounts) are not reachable by business creditors.

Can an LLC Have a Foreign Owner?

Yes, a US LLC can be owned entirely by foreign persons. The state of Florida is one of the most common states used to incorporate and in Florida the taxes, management costs and formations costs are usually less than in many other jurisdictions. Since Florida, and Miami in particular, attract foreigners to invest and live, there are advantages and disadvantages of incorporating an LLC with foreign members.

When there is a foreign partner in an LLC, that partner must have a US Taxpayer Identification Number (“ITIN”). This must be obtained if the LLC is engaged in a US trade or business (i.e., if it will make money). United States Tax laws require that foreigners pay taxes on any earnings made in the United States. Regardless of immigration status, the United States will allow foreigners to form a company as long as they have registered for a Taxpayer Identification Number. The process to register is not complex, but it can be lengthy. Once the application is submitted, it can take up to 18 weeks for your Taxpayer Identification Number to be assigned.

When do Foreign Owners need a Visa?

While foreigners can be owners of an LLC that operates in the United States without a visa, if they wish to work for the company within the country, they will need to acquire one. Foreign owners could work as a corporate officer for a US Company without a visa, but in this case, they must be outside of the United States. Otherwise, they cannot receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit issued by the United States. For a foreign citizen who simply wants to do business in the US, a B-1 visa is usually the right option to apply for, as it is meant for foreigners who wish to consult with business associates, attend professional or business conventions, or negotiate a contract. The B-1 visa is more for foreign persons looking to invest in the US rather than work in the US. Besides the B-1, you could also apply for an immigrant Visa like the E3 that will allow skilled workers or professionals to immigrate to and work in the US.

Foreign Owned LLC Reporting and Taxes

The foreign partner of an US LLC will be deemed to be engaged in a US trade or business and the LLC must withhold 35% of its profits for taxes, paid and filed on a quarterly basis to the IRS. Even though the partnership itself does not pay income taxes, it must file Form 1065 with the IRS even if there is no profit. This form is an informational return the IRS reviews to determine whether the partners are reporting their income correctly. The partnership must also provide a Schedule K-1 to the IRS and to each partner, which breaks down each partner’s share of the business’s profits and losses. In turn, each partner reports this profit and loss information on their individual tax return.

A significant issue to mention is that the LLC cannot chose to be taxed as an S- corp. since foreign citizens may not be partners or owners in an S-corporation in accordance with US law.  It may, however, choose to be taxed as a C-corporation (the standard, default, familiar corporation we all know about).

A positive point to make is that foreign owners may act as consultants to the LLC under a written Consultant’s agreement completing all consulting work within their home country and billing the LLC in the United States for this service. By doing so, it may be possible to eliminate profits thus avoiding some taxation, as well as U.S. situs (located) earnings, which would be subject to the U.S. tax regime, even for non-residents.

 


If you would like to discuss establishing an US LLC with foreign owners, please do not hesitate to contact one of our knowledgeable attorneys at EPGD Business Law. 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.*

Categories: Business Law | Foreign Reporting

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Jinlong Cheng

I would like to start a company here in the USA, the goal is to work with a foreign company to promote and sell products that are manufactured in the foreign company, or import into USA.

The foreign company wants to set up a Joint Venture with me by investing some fund to do so initially. I am a US Citizen by the way.

Question: How should I start, and what would be the best form of corporation? LLC or something else?

Thank you

Jinlong, an LLC would probably work for you from a legal perspective however we’d need to assess all your goals. A joint venture is a great vehicle to partner up with another firm or person without having to give equity in your company.

ibrahim haruna

I have a concern as I’m on the process on bringing in a foreign partner to my existing LLC. Do I need to maintain a certain minimum balance in my bank out or maybe some certain amount put down by the foreign partner to settle any taxes when the time comes. The reason for this is to make sure as a US citizen, I don’t get trap paying all taxes should the foreigner partner fail to pay. The greater liability is on my as a citizen and I’m trying to safeguard ahead of unforeseen situation where we engage in business… Read more »

Ibrahim, it is certainly advisable from a practical perspective to maintain a certain minimum balance in your bank to deal with any contingencies that may arise however there is no legal requirement to do so. Federal income taxes can be paid from any account although it is a good idea to pay them from the business account if you can.

Houssam Ajam

Hi, I am in the process of starting a Real Estate investment company with a couple of foreign friends and past associates. The purpose is to invest in residential properties for long term and rent them out. I will be one of the partners and the manager. I am also a certified realtor so I will be the agent for the company. I have been picked by them based on the trust and ethics I have. I want to explore the legal aspect and protect their investment by choosing the right formation. It is also possible that we may add… Read more »

Sir, selecting the correct corporate entity is a very important decision. We will contact your email address directly to coordinate a phone call with one of our attorneys.

Houssam, the answer to that question is dependent on other factors that we would need to discuss via phone consultation or in person. Picking the correct entity can have tax and legal consequences which we should talk through first.

Aldo Moro

Good afternoon, my intention is to start a company in the US, more precisely a foreign LLC as a single owner, non resident alien with the purpose of performing services outside of the US but billing to a US company. It is my understanding after digging and reading Publication 519, and considering the above paragraph,that being a non resident alien, that I will not have physical presence in the US and that I don’t perform these services within the US, I’m NOT subject to income tax withholdings and I DON’T have to file for taxes in the US. I would… Read more »

If you have a US entity but no activity is within the U.S and you do not make any profit in the U.S maybe you won’t have to pay any taxes, but you most probably will have some reporting to do as you have a U.S entity. Double check with an accountant to be sure about the tax obligations.

Christopher Clugston

Is it better to have foreign workers as consultants or as partners who do not live in the USA? And what are the taxes involved in each situation? This is a LLC that will operate in the USA I am the only US Citizen and the only one living in the USA

k,k

what percentage of taxes will i end up paying if i (Indian) be a share holder in American LLC

That is very fact specific and depends on various factors. If you would like a consultation to discuss, please email us at office@epgdlaw.com.

CAROL E SMITH, CPA

The above article was prior to the tax law change a year ago in regards to a Foreign-owned Single-Member LLC and IRS form 5472 requirement.

Yes, please notice the date this particular blog was written as there can be changes and updates in the necessary requirements.

Theresa

can i file an LLC tax return even if the foreign partner (foreign partner is a non resident) has no ITIN

Theresa,

We’d love to find out the particulars of your situation and discuss in further detail to confirm the correct course of action. Are you available for a phone call or meeting? Please email info@epgdlaw.com to schedule same.

Robert Bramel

A Canadian and I (US) have been revamping his 2002 publication and intend soon to have it printed by Amazon print-on-demand. My LLC, with me and the Canadian as equal partners in the Operating Plan, will be the Amazon contact. All of his work has been and will be done from his residence in Canada. As the book will need continuing monitoring I intend to sign a contract with him to “consult” with the intention of providing half to him. The remaining profit from the LLC will be distributed to me. Should this be workable?

Robert, generally speaking what you propose is workable, however, there would need to be specific language and terms in the operating agreement to address your arrangement. Please contact our office to set up a consultation so that we may discuss.

Amir IQBAL

Here is my concern ,
I am a non resident alien , my partner is a resident of USA, we have just formed an LLC, but this 35% tax on foreign partner profits sounds way too much. If there is way for both of us to form an agreement to cut my share of the profits but still be able to split the earnings equally ?

There is a way to do that. We can offer you some alternatives depending on the facts of your case. Please email us at office@epgdlaw.com to arrange for an In-person or phone consultation.

Romina

I am a non-US citizen and non resident living in EU. I am starting a US LLC with a US citizen who lives/works in the US. 50/50 partnership. Our business will be mostly virtual, consisting of online courses we sell through our website. Our products will be available for purchase by individuals and businesses worldwide. What is the most effective way to set up the business for tax purposes? Should I be hired under a consultant agreement? What are the advantages of that?

Romina, there are certainly benefits to setting up your structure through a consulting agreement, however, it is very fact dependent. We’d love to discuss your situation in depth. Please contact our office at office@epgdlaw.com to set up a consultation.

MyCastle

My brother who is not a US Citizen and resident abroad has recently opened a LLC in doing trade of watches to the foreign country. There is a FEIN obtained for the LLC on which he (foreign person) is the only member. Since the trade involves buying watches locally and shipping to foreign and there is no sale as such here within US, what kind of tax forms is one supposed to file. I was told that in this scenario, the LLC is considered a disregarded entity with just one member and they only have to report LLC name, EIN,… Read more »

We can certainly try to help you with your issues. To schedule an appointment with one of our attorneys, please email us at info@epgdlaw.com.

Mauricio

I started an LLC with four friends. One of them is a foreign partner. He is a non-resident alien, does not have physical presence, and does not perform any services within the US. He basically put money in, and me and my other two friends are the ones working on the business here in the US. He will receive dividends every month. Does he have to pay any taxes?

In addition, I dont know if this is relevant, the business is 100% online. We sell digital products.

Hello Mauricio,

We can definitely try to help you with your matter. Would you like to schedule an appointment with one of our attorneys?

Tessa Henderson

Hello, I have a question, I have an LLC in the USA but I have a foreign Company who has solely funded the startup of this LLC based here in the USA. Based on the above, I understand it is not advisable to make the foreign company a member of the LLC. My question is can I set up the funds received as loans to the business and repatriate funds back to the Foreign company without being hit with a tax rate on profits of 35%

Tessa,

We can certainly try to help you with your LLC. To schedule an appointment with one of our attorneys, please email us at info@epgdlaw.com. We look forward to hearing from you.

Rob Carmines

I am a CPA and have a client whose son is a US Citizen living abroad in Thailand. He is starting a foreign based company for website development and hosting and they are interested in using a US LLC for this purpose. Is there a benefit to having a US LLC, especially given that the business will mostly operate in Thailand? I have done 5472 filings and other such disclosures in the past and know that my client’s son will have to file one, but how does it work if the entity is a US LLC, but the income is… Read more »

Rob,

We can certainly try to help you with your issues. To schedule an appointment with one of our attorneys, please email us at info@epgdlaw.com. We look forward to hearing from you.

Mitch Bulajic

My principles are foreign UK based Ltd that is the single owner of an LLC formed in Wyoming. Now that the tax year is approaching, the accountant I talked to told me that we need to convert the LLC to a Corporation before we can file for federal taxes. However, I see from your articles on your website that the LLC can simply decide to be taxed like a Corporation or the IRS will treat the LLC as a disregarded entity – but you don’t mention anywhere that an LLC must convert into a Corporation. What would you suggest we… Read more »

Hi Mitch,

We would love to help you with this. Let’s set up a call to discuss this more in detail, when are you free?