When it comes to foreign-owned LLCs, the tax code can be kind of messy. There are different filing and reporting requirements depending on how your company is structured.
This guide will break down all the different requirements for each type of business so that you can stay compliant and avoid paying unnecessary fines.
Can a Foreign Entity Own a U.S. LLC?
Yes, a foreign person or corporation can own a U.S. LLC. However, a foreign person or corporation cannot own an S-corporation.
Does a Foreign-Owned LLC have to pay taxes?
It depends on what kind of income the LLC receives. All income that is effectively connected with trade or business in the United States must be reported on a tax return.
On which tax return do you report income? Well, it depends if your LLC is single-member, multi-member, or taxed as a corporation.
Foreign-Owned LLC Reporting Requirements
Single Member LLC - Disregarded Entity Rules
If you do not make the special election for your foreign-owned LLC to be taxed as a corporation, the IRS will treat your LLC as a disregarded entity. A disregarded entity means the income is taxed on the owner’s personal income tax return.
To add more complexity, it is important to note that single-member foreign-owned LLCs are treated as corporations for federal reporting requirements. However, this does not mean you are taxed like a corporation. Instead, you are simply reporting information like a corporation.
A single-member foreign-owned LLC not taxed as a corporation must do the following:
Single Member LLC - Taxed as a Corporation Rules
If you want to be taxed as a corporation, you must file Form 8832 in a timely manner. However, unlike a regular LLC, a foreign-owned U.S. corporation is taxed on all of its global profits. Not just on the income that was earned in the United States. Additionally, the corporation is taxed on the dividends distributed to the owners. This is known as double taxation.
A single-member foreign-owned LLC taxed as a corporation must do the following:
Multi-Member LLC - Disregarded Entity Rules
The rules for a foreign-owned multi-member LLC are slightly different than for a single-member LLC. Multi-Member LLCs are taxed as partnerships by the LLC, which means you do NOT need to file Forms 5472 and 1120.
Instead, a foreign-owned multi-member LLC taxed as a partnership must do the following:
Multi-Member LLC - Taxed as a Corporation Rules
Same as a single-member LLC, If you want to be taxed as a corporation, you must file Form 8832 in a timely manner. However, unlike a regular LLC, a foreign-owned U.S. corporation is taxed on all of its global profits. Not just on the income that was earned in the United States. Additionally, the corporation is taxed on the dividends distributed to the owners. This is known as double taxation.
If you choose to be taxed as a corporation and have at least one foreign member that owns 25% or more of the LLC, then you must do the following:
Conclusion
If you are a foreign person, it is best not to elect to have your LLC taxed as a C-corporation. A C-corporation has the downsides of double taxation and getting taxed on all global profits. A regular LLC is only taxed on income generated within the U.S. and does not suffer from double taxation.
At Windstone Financial, we have helped numerous foreign-owned businesses stay compliant with the U.S. tax code. If you need help with your taxes, click the button below to speak with a CPA today!
