A Single-Member Limited Liability Company (“SMLLC”) is a Limited Liability Company (“LLC”) which only has one owner and is not classified as a corporation. A SMLLC is also known as a disregarded entity, because it is generally disregarded as separate from its owner. Disregarded entities do not have Internal Revenue Service (“IRS”) U.S. tax filing requirements, which means they do not need to obtain an employer identification number (“EIN”) unless they are filing an entity classification election.
Disregarded LLC’s treated as Domestic Corporations
In December 2016, the United States Treasury Department issued final regulations regarding new reporting requirements for specific domestic disregarded entities which are wholly owned by a foreign, non-resident person or entity. These disregarded entities will be treated as U.S. corporations for purposes of IRS reporting requirements, making these disregarded entities subject to the same reporting and record-keeping requirements, using Form 5472, that apply to 25% foreign-owned U.S. corporations. These final regulations apply to domestic SMLLC’s with tax years which begin on or after January 1, 2017 and end on December 13, 2017. This means these new reporting requirements will begin in early 2018.
New Reporting Requirements
These new reporting regulations come with notable reporting implications, such as each foreign-owned SMLLC will be treated as a separate corporation. For reporting purposes, if the foreign owner of domestic SMLLC has a U.S. tax return obligation to the IRS, the domestic SMLLC has the same tax year as its foreign owner. If the foreign owner does not have such filing obligations, the domestic SMLLC will have the default calendar year unless otherwise provided. Further, a foreign-owned domestic SMLLC is also required to report certain transactions with related parties. Related parties may include but are not limited to, any indirect or direct 25% foreign shareholder or any person who is related to the disregarded entity. These reportable transactions, which trigger a Form 5472 obligation, include but are not limited to:
- Sales and purchases of real property, including tangible and intangible property;
- Other transfers of any interest in or a right to use any property or money;
- Amounts borrowed, loaned, advanced, or interests paid and received;
- Assignments, licenses, and leases;
- Transactions in relation to the formation, dissolution, acquisition, and disposition of the SMLLC, including contributions and distributions; and/or
- Commissions paid and received.
New Compliance Requirements
The new final regulations also set forth additional compliance requirements for foreign-owned SMLLC’s, such as:
- Obtaining an Employer Identification Number (“EIN”) and designating a “responsible person”—an individual or entity who controls the LLC’s funds and assets;
- Filing Form 5472, if there have been any “reportable transactions” during the previous tax year—formation and dissolution filings are considered to be reportable transactions;
- Maintaining adequate books and records to support the filing of Form 5472, for as many years as necessary, and make them available to the IRS upon demand;
Therefore, if one foreign person or entity owns more than one SMLLC, each SMLLC is required to individually file with the IRS, on Form 5472, each reportable transactions with related parties during the tax year. Should the reporting SMLLC fail to file the required Form 5472, the SMLLC will be subject to an IRS penalty of $10,000, which is subject to an increase of an additional $10,000 for every 30 days after receiving notice from the IRS that Form 5472 is due. Should the failure to file Form 5472 continue for more than 90 days after receiving notice, the IRS will implement additional penalties.
To conclude, if your Single-Member LLC has not already done so, we advise that you obtain an EIN as soon as possible, and identify its responsible party, who will need to obtain its own U.S. identification number, such as a TIN or ITIN. Further, such disregarded entities should be on the lookout for new Form 5472 instructions. Lastly, the SMLLC and its foreign owner should make sure all 2017 reportable transactions are properly documented, and records have been sufficiently maintained to verify the information filed on the Form 5472.
If you are unsure if this new reporting requirement applies to you or your business, do not hesitate to contact us. You can reach us at firstname.lastname@example.org or call us today to schedule a consultation with one of our attorneys. (786) 837 – 6787.
*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.*