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 corporation’s. 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.

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