Limited liability companies (LLCs) are a relatively new type of business entity in the United States, with Wyoming enacting the first formal LLC statutes in 1977. However, they have grown in popularity in recent years. An LLC is a business entity that combines the features of both a corporation and a partnership. Its members have limited liability protection, similar to a corporation, and it is a flexible entity tax-wise. By default, LLCs are treated under pass-through taxation, similar to a partnership, which means that profits are reported and taxed on the members’ tax returns.
US citizenship or residency is not required to form an LLC. Individuals, corporations, other LLCs, and foreign individuals can all be members of an LLC. In most states, there is no restriction on the maximum number of members an LLC may have. LLCs can also choose from a range of tax treatment alternatives. States may have different laws governing LLCs.
Foreign-Owned LLC: Key Takeaways
- LLC members can benefit from liability protection against some creditors, lowering business risks.
- LLCs can have one or more members, with no upper limit.
- For federal tax purposes, a single-member LLC is not considered separate from the owner for tax purposes.
- A single-member LLC wholly owned by a foreign person is a foreign-owned “disregarded entity” (FODE).
- LLCs under default tax treatment are exempt from federal income tax at the entity level due to their status as passed-through entities.
- FODEs must file Form 5472 and Proforma Form 1120 with the IRS each year that they have reportable transactions with any related party (domestic or foreign), although they have no income tax return requirement.
- Instead of being taxed as a pass-through entity, LLCs have the option to be taxed as corporations. However, LLCs with nonresident alien members cannot elect to be taxed as S-corporations.
What is a Limited Liability Company (LLC)?
The Internal Revenue Service defines a limited liability company as a type of business entity established under state law. It is a distinct legal entity that offers its owners limited liability protection. To establish an LLC, you must file articles of organization with the appropriate state authorities. It should be noted that the specific rules governing LLC formation and operation may differ from state to state. Depending on the number of members and election-making decisions, the IRS may treat a limited liability company (LLC) as a corporation, partnership, or disregarded entity.
Definition of a Disregarded Entity
A disregarded entity is a legal entity that is not treated as distinct from its owner for income tax purposes. Because an LLC is disregarded for tax purposes, this also means that a single-member LLC cannot sign Form W-9 to receive payments, and the underlying beneficial owner must complete the W-9 form.
Can a Foreign Person Own an LLC?
Yes, a foreign person can own an LLC in the US. While each state’s laws differ, typically, there are no restrictions on who can own and form an LLC in the U.S. You do not have to be a US citizen or a resident alien to form an LLC, because citizenship and residency are not required. However, an LLC with nonresident owners cannot elect to be taxed as an S-corporation, but it can elect to be taxed as a C-corporation.
The IRS defines a foreign person as “any nonresident alien, foreign corporation, foreign partnership, foreign trust, foreign state, or other non-US person.” This definition also includes qualified foreign branches of US financial institutions. Foreign corporations and partnerships with branches in the United States are typically classified as foreign persons.
What is a Foreign-Owned Limited Liability Corporation?
A foreign-owned LLC is one that is directly or indirectly owned (in whole or in part) by foreign persons. A foreign national with shares in the LLC is considered to have a direct interest in the enterprise. A foreign individual acquires an indirect ownership stake in the LLC by possessing a property interest. An LLC has a default tax classification, which depends on its members’ number. In contrast, a foreign-owned limited liability company (LLC) may elect to have its tax status regarded as that of a corporation by filing Form 8832. However, note that LLCs with foreign owners cannot elect to be taxed as S-corporations.
Ownership by a foreign investor in a single-member LLC is the most prevalent form of foreign-owned LLC. A group of proprietors may establish a foreign-owned LLC (a multi-member LLC). For federal tax purposes, the IRS, by default, classifies an LLC with a single foreign owner as a foreign-owned “disregarded entity” (FODE). The entity is essentially ignored for tax purposes, and its activities are treated as if the owner directly conducted them.
However, an informational tax return is still due at the company level, even though no tax is due. A single-member LLC wholly owned by a foreign person cannot elect to be taxed as an S-corporation, which is only available to US persons. However, it can elect to be treated as a C-corporation to be taxed at the company level. A limited liability company with multiple members or owners is known as a multi-member LLC (MMLLC). The IRS treats a multi-member LLC as a partnership by default, unless it chooses to be taxed as a corporation.
How Does a Foreign Person Establish a US LLC?
- Choose your state of formation: Consider which state offers the best tax advantages when choosing where to form your LLC.
- Assign a registered agent: Hire a registered agent who will be in charge of the business operations.
- Choose a name for your entity: Make certain that it is in accordance with the naming regulations of the state you have selected, which typically require the letter “LLC” or “Limited Liability Company” to be included in the name.
- Get a mailing address in the United States: Ensure that your foreign-owned LLC’s physical location is where you intend to form it. Your bank, the LLC, your tax attorney registering your LLC with the state, and any other third party wishing to send you a bill or other correspondence will all use this address.
- File articles of organization: An LLC is formed by filing formal legal documents called articles of organization containing important information about your LLC. It also specifies members’ obligations, liabilities, responsibilities, and other rights and powers. Depending on your state, the articles may include additional information, such as the names of the LLC’s owners (members) or managers, as well as the purpose of the LLC. The LLC does not have legal existence until the articles of organization are filed with the state and approved.
- Draft an operating agreement: A company’s financial and operational policies are outlined in an operating agreement. It discusses the structure, management, decision-making process, and operating procedures of an LLC. Although an operating agreement is required in some states when forming an LLC, it is not required in all states. If an LLC does not have an operating agreement, the default rules established by the state where it was formed will apply.
- Secure an Employer Identification Number (EIN): A business entity is identified by its Federal Tax Identification Number, or EIN, which is a nine-digit number. There are several to to obtain an EIN. You may also apply for an EIN online.
- Open a business bank account.
Are Foreign-Owned LLCs Subject to Federal Income Tax?
LLCs are pass-through entities and are exempt from federal income tax at the entity level unless they elect to be taxed as corporations.
- Foreign-owned SMLLC or Foreign-owned Disregarded Entity (FODE)
An FODE is a pass-through entity not subject to federal income tax. The business’s income, losses, credits, and deductions are “passed through” to the owner’s income tax return, which is taxed using standard individual marginal income tax brackets. This means that this income may be taxed up to 37%. If the LLC generates income from sources other than the U.S., the LLC owner pays no income tax because the US does not levy federal income tax on foreign-sourced income. Visit our blog, An All-Inclusive Guide to Filing Foreign-Owned U.S. Disregarded Entities Taxes in 2024, to learn more about FODEs.
- Foreign-owned Multi-Member LLC (MMLLC)
By default, the IRS treats foreign-owned MMLLC as a partnership. As a pass-through entity, it is not subject to federal income tax at the entity level. Instead, the LLC’s income, gains, losses, deductions, and other credits pass directly to the members, who then report the appropriate amounts of the entity’s tax items on their tax returns.
- Tax Elections for an LLC (C-Corp or S-Corp)
LLCs can also file Form 8832 and/or Form 2553 to be treated as corporations for tax purposes. As a C-corporation, the LLC will pay tax at the entity level and distribute income to shareholders in the form of dividends. As an S corporation, income and deductions pass back to the shareholders, but we have distinct rules for the treatment of many tax items that differ from those of a partnership. Note that LLCs with nonresident shareholders cannot choose this tax classification.
State Income Tax
Tax laws, rates, procedures, and forms differ greatly from state to state. Like the federal government, most states treat LLCs as pass-through entities by default and do not require them to file state tax returns. In these cases, LLC members pay taxes on the profits of the business based on the state’s individual income tax rates. Some states levy a flat tax, while others use a progressive system, with higher tax rates applied to higher income levels, similar to the federal income tax. LLC’s state income tax rates can range from 0% to 12.3%. If the LLC elects to be taxed as a C-Corp, the company must file and pay taxes at the state’s corporate rate. To know more about LLC taxes, visit our blog, Filing LLC Taxes in 2024: A Comprehensive Guide.
Payroll Tax
If the foreign-owned LLC employs US citizens or residents, payroll taxes must be paid for each employee. An employee pays 6.2% for Social Security and 1.45% for Medicare, totaling 7.65%, whereas the LLC or employer pays the same 7.65% tax. The entire amount (15.30%) is then remitted to the federal government.
Sales Tax
The state and locality in which you conduct business determine which goods and services are subject to taxes. You must collect sales tax from your customers and remit it to the relevant state or local tax authority if the products or services your limited liability company (LLC) sells are taxable. State-level sales tax rates vary by state, ranging from 0% to 7.25% (as of July 1, 2023).
The average local sales tax rate is between 0% and 5.237%, while the average combined state and local sales tax rates vary from 0% to 9.548%. Sales tax changes may occur at state and local levels for tax year 2024, so it is prudent to check with the specific states where you do business to ensure compliance. State tax changes typically go into effect on January 1st of the calendar year or July 1st of the fiscal year (for most states).
Withholding Obligations of MMLLC
Under IRC Section 1446, a multi-member limited liability company (LLC) that has taxable income connected with the conduct of a trade or business in the United States is required to withhold tax on the portion of effectively connected taxable income allocable to its foreign partners. This is the case regardless of the amount of the foreign partners’ ultimate tax liability in the United States and regardless of whether the partnership makes any distributions during its tax year. The amount withheld from foreign members must be remitted to the IRS.
The withholding tax rate varies depending on whether the foreign partner is a corporation or an individual. If the foreign partner is a corporation, the applicable rate is 21%, which is the maximum rate allowed under IRC 11(b). The rate for non-corporate foreign partners is 37%, the highest tax rate outlined in IRC 11. The amount withheld is based on its foreign partners’ effectively connected taxable income for the relevant tax year. The foreign partner’s gross effectively connected income is reduced by:
- The partner’s share of partnership deductions connected to that income for the year and
- The partner’s tax treaty benefits relate to that income.
The partnership is not required to withhold if a nonresident alien partner’s investment in the partnership is the only activity producing effectively connected income and the IRC section 1446 tax is less than $1,000. You may also be required to withhold 30% of a foreign partner’s gross distributive share of FDAP that is not effectively connected with a U.S. trade or business, as well as any other FDAP income paid to a foreign person, whether or not he is a partner. The tax withheld must be paid and filed with the IRS quarterly.
Filing Requirements for Foreign-Owned Disregarded Entities
The following are some of the forms that FODEs may be required to file:
| Tax Form | Deadline and Penalties |
| Form 5472 (Information Return of a Foreign Corporation Involved in a U.S. Trade or Business or a Foreign Corporation Owned by 25% Foreign) and Proforma Form 1120 (U.S. Corporation Income Tax Return) | Deadline: April 15, after the end of the calendar year, or the 15th day of the fourth month that follows the fiscal year ends. Penalties: – $25,000 penalty per related party – If a failure to file continues for more than 90 days after receiving notification from the IRS, each related party will face an additional penalty of $25,000 for each 30-day period (or part of a 30-day period) that follows, with no maximum penalty. – Filing a Form 5472 that is substantially incomplete constitutes a failure to file Form 5472. Notes: – A pro forma Form 1120 only requires the FODE’s name, address, and items B and E on the first page with “Foreign-Owned U.S. DE” across the top. Submit only Form 1120’s first page. – For every domestic or foreign-related party that the reporting corporation had a reportable transaction with during the tax year, a separate Form 5472 needs to be filed. – Form 5472 is attached to Proforma Form 1120 and cannot be filed electronically by FODEs. For more information, see the Form 5472 Instructions. |
| Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns) | Deadline: By the due date of Form 1120. Notes: – FODEs must fax or mail their extension request to the IRS’s fax or mailing address (see Instructions for Form 5472). – Form 7004, Part I, line 1 should be filled out with the form code of Form 1120 to indicate the type of return for which you request an extension. –“Foreign-owned U.S. DE” should be written across the top of the form. |
| Form 1040-NR (U.S. Nonresident Alien Income Tax Return ) | Deadline: April 15 Penalties: – 5% of the total amount owed for each month, or portion of a month, that your return is late; the maximum penalty is 25% of the tax that is owed. – If the failure to file is fraudulent, there is a penalty of 15% per month, up to a maximum of 75%. – If your return is more than 60 days late, the minimum penalty will be $485 or the amount of any tax you owe, whichever is lower. Notes: – The LLC’s income is considered and reported in your tax returns. Your effectively connected income from the FODE is taxed using standard individual marginal income tax brackets (applicable to U.S. citizens and resident aliens). |
| Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) | Deadline: – By 15th day of the 4th month after the end of its tax year (for those with an office or place of business in the US). – By the 15th day of the 6th month after the end of its tax year (for those with no office or place of business in the US). Penalties: – 5% of the unpaid tax for each month or portion of a month that the return is filed after the deadline, with a maximum of 25% of the unpaid tax more than 60 days late is the smaller tax due, or $450. |
| FinCEN Form 114, Report of Foreign Bank Account Report (FBAR) | Deadline: Annual FBARs are due on April 15, following the calendar year reported. Without requesting an extension, FBAR filers who miss the annual due date receive a 6-month extension (up to October 15). Penalties: – Failure to file an FBAR on time may result in civil monetary penalties, criminal penalties, or both. ($10,000 per form if the failure to file is non-willful and $100,000 per year or 50% of the value of the financial account at the time of valuation, whichever is higher, if the failure to file is willful). Notes: – If a FODE owns one or more foreign financial accounts and their combined value is $10,000 or more at any point during the tax year, the FODE must file FinCEN Form 114. – FBAR must be electronically filed using FinCEN’s BSA E-Filing System. – Those who wish to file FBAR on paper must contact FinCEN’s Resource Center to request an exemption from e-filing. |
| Beneficial Ownership Information (BOI) | Deadline: – Companies that were established or registered to conduct business in the United States prior to January 1, 2024, are required to file by January 1, 2025. – The reporting period for companies registered to conduct business in the United States on or after January 1, 2024, is 30 calendar days from the date of notice of the company’s creation or registration. Penalties: – The consequences of willfully failing to provide FinCEN with a complete or updated BOI, providing a false or fraudulent BOI, or attempting to do so may include penalties of up to $500 for each day the violation persists, as well as criminal penalties of up to $10,000 in fines and/or up to two years in jail. |
Other Requirements for FODEs
- FODEs must obtain an Employer Identification Number (EIN) from the IRS using Form SS-4, which requires the designation of a “responsible party” for the entity in the application. To file Form 5472, FODE must have an EIN. To apply for an EIN, you must first obtain a US Individual Tax Identification Number (ITIN), which is required to complete Form SS-4.
- FODEs are also required to maintain relevant records to support the correct tax treatment of transactions with related parties on Form 5472. (See IRC Sec. 6038A and Regs. Secs. 1.6038A-1 and 1.6038A-2).
Filing Requirements for Foreign-Owned Multi-Member LLCs
Here is a list of some of the forms to be filed by foreign-owned multi-member LLCs that have not elected to be taxed as corporations.
| Tax Form | Deadline and Penalties |
| Form 1065 (U.S. Return of Partnership Income) | Deadline: – Unless an extension is filed, the fifteenth day of the third month after the end of the tax year. Penalties: – $220 per month or fraction thereof (up to a maximum of 12 months) that the return is late or incomplete, multiplied by the total number of persons who were partners at any time during the partnership’s tax year for which the return is due. – You do not need to file Form 1065 if the company has no income, gains, expenses, deductions, or credits during its tax year. |
| Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) | Deadline: Partners must receive their K-1 by March 15. Penalties: – For each Schedule K-1 that the partnership failed to submit on time or lacked all necessary information, there would be a $290 fine; the maximum penalty for all such failures would be $3,352,500. – Willful disregard of the K-1 reporting requirement increases penalties from $290 to $580, or 10% of the total number of items that must be reported, whichever is higher. When there is willful disregard, the penalty has no upper limit. – If a partnership with more than 100 partners is required to file their return electronically and fails to do so, a penalty of $260 will be assessed for each Schedule K-1 over 100. |
| Schedule K-2 (Partner’s Distributive Share Items–International) | Deadline: Attach Schedules K-2 and K-3 to the partnership’s Form 1065 and file both by the due date (including extensions) of Form 1065. Penalties: Schedule K-2 is subject to the same penalties as Form 1065. |
| Schedule K-3 (Partner’s Share of Income, Deductions, Credits, etc.–International) | Deadline: By the due date (including extensions) of Form 1065. Penalties: Schedule K-3 is subject to the same penalties as Schedule K-1. |
| Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns). | Deadline: By the due date of Form 1065. Note: The members are not granted an extension to pay taxes on the LLC’s distributive items; the extension only applies to filing the LLC’s tax return. |
| Form 8804, Yearly Partnership Withholding Tax Return | Deadline: Usually on or before the third month’s 15th day after the LLC’s tax year ends. Penalties: – 5% of the outstanding tax for each month or fraction of a month the return is filed after the deadline, up to 25% of the outstanding tax. – If filed more than 60 days late, the minimum penalty will be $450, or the amount of any tax owed, whichever is smaller. |
| Form 8805, Information Statement of Foreign Partner with Regard to Section 1446 Withholding Tax | Deadline: Generally, on or before the 15th day of the 3rd month following the close of the LLC’s tax year. Penalties: – $290 for each failure to file a correct Form 8805, with a maximum penalty of $3,532,500. – The penalty under Section 6721 is reduced or eliminated if the partnership: a. Has average annual gross receipts of not more than $5 million during a specified period of time, b. Corrects the failure to file within a specified period or c. Has a de minimis number of failures to file correct Form 8805. Penalties for Failure to Furnish Correct Form 8805 to Recipient: – The same penalty (late filing penalty) applies for each failure to (a) furnish Form 8805 to the recipient when due, (b) give the recipient all required information on each Form 8805, or (c) furnish incorrect information. – There can also be a higher penalty imposed when the failure is due to wilful disregard of the requirement to file or furnish timely correct information returns. |
| Form 8813, Partnership Withholding Tax Payment Voucher | Deadline: File on or before the 15th day of the 4th, 6th, 9th, and 12th months of the partnership’s tax year. Penalties for filing taxes beyond the due date: – For every month, or portion of a month, that tax is not paid, there is a penalty of ½ of 1%, with a maximum penalty of 25 percent of the unpaid tax. The partnership may be liable for paying the tax, penalties, and interest. – The penalty won’t apply if the partnership can show reasonable cause for paying late. |
| Form 1040-NR, U.S. Nonresident Alien Income Tax Return | Deadline: April 15 Penalties: – For each month, or part of a month, that your return is late, you will be penalized 5% of the total amount owed, with a maximum penalty of 25% of the tax liability. – If the failure to file is fraudulent, there is a penalty of 15% per month, up to a maximum of 75%. – The minimum penalty for filing a return after the 60-day period is $485, or the total amount of any unpaid taxes, whichever is smaller. Notes: -The LLC’s income is considered and reported in your tax returns. Your effectively connected income from the FODE is taxed using standard individual marginal income tax brackets (applicable to U.S. citizens and resident aliens). |
| Form 1120-F, U.S. Income Tax Return of a Foreign Corporation | Deadline: – By 15th day of the 4th month after the end of its tax year (for those with an office or place of business in the U.S.). – By the 15th day of the 6th month following the conclusion of its fiscal year. Penalties: – 5% of the unpaid tax for each month or portion of a month that the return is late, with a maximum of 25% of the unpaid tax. – The minimum penalty for filing a return after 60 days is the smaller of the tax due, or $450. |
| FinCen 114, Report of Foreign Bank and Financial Accounts (FBAR) | Deadline: – April 15, following the calendar year reported. Without requesting an extension, FBAR filers who miss the annual due date receive a 6-month extension (up to October 15). Penalties: – $10,000 per form if the failure to file is non-willful and $100,000 per year or 50% of the value of the financial account at the time of valuation, whichever is higher, if the failure to file is willful. Note: – FinCEN Form 114 must be filed if the MMLLC owns one or more foreign financial accounts with an aggregate value of those accounts of more than $10,000 at any time during the tax year. |
| Beneficial Ownership Information (BOI) | Deadline: – Businesses that were established or registered to conduct business in the United States prior to January 1, 2024 must file by January 1, 2025. – For companies created or registered to do business in the U.S. on or after January 1, 2024, reports are due within 30 calendar days after receiving notice of the company’s creation or registration. Penalties for willful failure to provide a complete or updated BOI: – $500 for each day the violation persists or criminal penalties, which include up to two years in prison and/or a fine of up to $10,000. |
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