FAQ ARTICLE

By Alex Oware, CPA and Tax Attorney

Federal partnership filing • Foreign-partner withholding • State compliance

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Quick Summary

• A U.S.-formed LLC with two or more members is generally taxed as a partnership unless it elects corporate treatment.
• The partnership ordinarily files Form 1065 and issues Schedule K-1 to every person who was a partner during the year—even when all partners live abroad.
• Remote digital or consulting services performed entirely outside the United States may generate foreign-source service income and no effectively connected income, depending on the full facts.
• If effectively connected taxable income is allocable to foreign partners, section 1446 withholding can apply even when the partnership distributes no cash.
• Schedules K-2 and K-3 may be required to report source, character, and withholding information relevant to foreign partners.
• Adding a U.S. member changes ownership reporting from the admission date and can alter the business-activity analysis if that person performs substantive work in the United States.
• Federal income tax, New Mexico pass-through reporting, gross receipts tax, and multistate Amazon obligations must be analyzed separately.

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Three-Fact-Pattern Decision Framework

Fact pattern Primary federal question Typical compliance direction

Remote services performed abroad Where were the services physically performed? Form 1065 and partner reporting; often no ECI if there are no material U.S. operations.

U.S. member performs core functions What work, authority, and management occur in the United States? Reassess U.S. trade-or-business status from the admission and activity dates.

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Who This Applies To

• Two or more non-U.S. individuals own a New Mexico or other U.S.-formed LLC.
• The LLC has not elected to be taxed as a corporation.
• The partners live outside the United States and may have ITINs or only foreign tax identification numbers.
• The business provides digital marketing, newswire, consulting, or similar services from outside the United States.
• The business also—or instead—sells physical products through Amazon FBA and stores inventory in U.S. fulfillment centers.
• Customer receipts arrive through Stripe, bank transfers, cryptocurrency, or a partner’s personal account.
• A U.S. citizen, green-card holder, or other U.S. tax resident joins the partnership in a later year.
• The partnership must determine whether Form 1065, Schedules K-2/K-3, section 1446 withholding, Form 1040-NR, or state filings apply.

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Core Tax Rule in One Paragraph

A domestic multi-member LLC is generally classified as a partnership unless it elects corporate treatment. The partnership reports its operations on Form 1065 and passes tax items to its partners through Schedule K-1. A foreign partner is treated as engaged in a U.S. trade or business when the partnership is engaged in one. Therefore, the controlling question is what the partnership actually does: where services are performed, where inventory is sold and stored, who performs management and contracting functions, and whether U.S. activities generate effectively connected taxable income. If ECTI is allocable to foreign partners, the partnership—not merely the partners—can have section 1446 withholding and reporting obligations.

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Main FAQ

1. Is a two-member U.S. LLC automatically taxed as a partnership?

Generally, yes. A domestic LLC with at least two members is classified as a partnership by default unless it files a valid election to be taxed as a corporation.

The partnership generally must:

• Maintain books that include all payment channels and partner activity.
• File Form 1065.
• Issue Schedule K-1 to each person who was a partner during the year.
• Complete relevant international reporting, including Schedules K-2 and K-3 when required.
• Evaluate federal and state withholding for foreign or nonresident owners.

The partnership return is primarily an information return, but the partnership can still owe withholding tax, penalties, or state-level amounts.

2. Must the partnership file Form 1065 if every partner lives abroad?

Generally, yes. Foreign residence of the partners does not eliminate the filing obligation of a U.S.-formed partnership. Form 1065 reports the partnership’s revenue, deductions, assets, liabilities, ownership, allocations, and partner information.

A filing may still be required when the partnership had no taxable profit, retained all cash, or concluded that its foreign partners had no U.S. income-tax liability.

For a calendar-year partnership, the return is generally due on the 15th day of the third month after year-end.

3. Do foreign partners automatically owe U.S. income tax because the LLC was formed in the United States?

No. Entity formation and partner-level income taxation are separate questions. The analysis should proceed in this order:

1. Identify each income category: services, inventory sales, interest, royalties, or another item.

2. Determine the source of each category under the applicable source rules.

3. Determine whether the partnership conducted a U.S. trade or business.

4. Determine which income is effectively connected with that business.

5. Apply section 1446 withholding and partner-level filing rules.

6. Review state filing and withholding separately.

A U.S. bank account, Stripe account, or domestic LLC address does not by itself convert foreign-source service income into U.S.-source income.

4. How are digital marketing or consulting fees treated when all work is performed abroad?

Compensation for services is generally sourced where the services are physically performed. If the foreign partners perform all substantive work outside the United States and the partnership has no U.S. office, employees, dependent agents, or U.S.-performed services, the service income may be foreign-source and non-ECI.

The file should document:

• Where each partner and contractor worked.
• Who negotiated and signed contracts.
• Whether anyone had authority to bind the partnership in the United States.
• Whether the business used any U.S. office, coworking space, or dedicated facility.
• Whether any client work or management was performed during U.S. travel.

The payer’s location and the place of payment are not the primary source rules for service income.

5. Is Amazon FBA treated the same as remote digital services?

No. Amazon FBA involves physical inventory and merchandise sales, not merely services performed abroad

An FBA analysis should examine:

• Where inventory is stored throughout the year.
• Where ownership and risk of loss pass to customers.
• Whether the partnership imports, prices, and controls the inventory.
• The volume and continuity of U.S. sales.
• Returns, customer service, and product-related functions performed in the United States.
• Whether Amazon, a 3PL, contractors, or a member performs core U.S. functions.

The conclusion is fact-specific, but a foreign-owned partnership should not treat U.S. FBA inventory as irrelevant or assume there is no U.S. tax merely because the partners live abroad.

6. Does it matter that Amazon—not the partnership—owns the fulfillment center?

It matters, but it is not a complete safe harbor.

The analysis should focuses on full commercial arrangement: inventory location, sales functions, title passage, dependent and exclusive independent agents, customer market, and the partnership’s continuing U.S. activity. Warehouse ownership is only one fact.

For state purposes, Amazon inventory can also create income-tax, franchise-tax, registration, or filing exposure even when Amazon collects marketplace sales tax.

7. When is a foreign partner treated as engaged in a U.S. trade or business?

A foreign partner is generally treated as engaged in a U.S. trade or business whenever the partnership is engaged in one during the tax year. The foreign partner does not need to be physically present in the United States for this attribution rule to apply.

Facts that can support a partnership-level U.S. trade or business include:

• Services physically performed in the United States.
• A U.S. office or fixed place of business.
• U.S. employees or contractors performing essential operational functions.
• A U.S. member or agent with meaningful management, pricing, negotiation, or contracting authority.

Once the partnership is engaged in a U.S. trade or business, the next step is to identify the partnership’s ECTI and each foreign partner’s allocable share.

8. When must foreign individual partners file Form 1040-NR?

A foreign individual partner generally files Form 1040-NR when the partner has effectively connected income, other taxable U.S.-source income, a refund claim, or another filing trigger.

The return may include:

• The partner’s distributive share of partnership ECI.
• Deductions properly connected with that income.
• Section 1446 withholding shown on Form 8805.
• Other U.S.-source income or treaty disclosures, when applicable.

Ownership of a U.S. partnership does not automatically require Form 1040-NR when the partnership has only foreign-source non-ECI service income and no other filing trigger. The conclusion must be supported by the partnership’s K-2/K-3 and activity analysis.

9. What is section 1446 withholding?

Section 1446 generally requires a partnership to pay withholding tax on ECTI allocable to foreign partners. It is a partnership-level prepayment of the foreign partner’s U.S. tax—not a tax based solely on cash distributions.

For current filings, the general applicable percentage is 37% for noncorporate foreign partners and 21% for corporate foreign partners, subject to rules that may permit preferential rates for certain categories of income.

The partnership should calculate the obligation during the year rather than waiting until Form 1065 is prepared.

10. Does section 1446 withholding apply when the partnership distributes no cash?

Yes. Withholding is generally computed from ECTI allocated to foreign partners. A partnership may therefore owe withholding while retaining the cash to buy inventory, fund advertising, or pay operating expenses.

The operating agreement and cash-flow process should address how the partnership will fund withholding on behalf of foreign partners. A later Form 1040-NR generally claims the Form 8805 amount as a tax credit.

Failure to plan for withholding can create a cash shortage even when the partnership is profitable on paper.

11. Which forms report section 1446 withholding?

Form 8804: Reports the partnership’s annual section 1446 liability and transmits Forms 8805.

Form 8805: Reports each foreign partner’s ECTI and withholding credit.

Form 8813: Transmits installment payments during the partnership year.

Form 8804-W: Helps estimate installment payments.

Form 8804-C: May allow a foreign partner to certify specified partner-level deductions or losses for withholding calculations.

Form 7004 can extend the filing deadline for Form 8804, but it does not extend the deadline for paying section 1446 tax.

12. What are Schedules K-1, K-2, and K-3?

Schedule K-1 reports each partner’s distributive share of income, deductions, credits, liabilities, and capital activity. Schedule K-2 reports international information at the partnership level, and Schedule K-3 gives relevant partner-level international information.

For a partnership with foreign partners, Part X of Schedules K-2 and K-3 is commonly central because it reports source and character information used for Form 1040-NR, Form 1120-F, and withholding analysis.

A domestic partnership without ECI may qualify for a limited Part X exception when the stated requirements are met, but the partnership should document why the exception applies rather than omitting the schedules by default.

13. Do foreign partners need ITINs, and what documentation should the partnership collect?

The partnership should collect a valid Form W-8BEN from each foreign individual partner and Form W-9 from each U.S. partner. The documentation supports foreign-status, U.S.-person, and section 1446 determinations.

An ITIN is generally needed when a foreign individual must file Form 1040-NR or claim a section 1446 credit. A foreign taxpayer identification number may be sufficient for some partnership information reporting when no U.S. return or credit claim is required.

Maintain the partner’s:

• Legal name and foreign address.
• Country of citizenship and tax residence.
• Foreign TIN and ITIN, if any.
• Admission and withdrawal dates.
• Profit, loss, and capital percentages.
• Capital contributions, distributions, and partner loans.

Update the file whenever a partner’s residence, immigration status, or ownership changes.

14. What changes when a U.S. citizen or green-card holder joins the partnership?

The new member is generally a U.S. person and ordinarily provides Form W-9. The admission affects ownership percentages, capital accounts, Schedule K-1 reporting, and the allocation of income for the admission year.

The tax effect depends heavily on the new member’s functions. Limited bank-signing authority is different from:

• Managing daily operations from the United States.
• Negotiating or signing customer contracts.
• Controlling pricing or marketing.
• Performing client services.
• Managing U.S. inventory or workers.
• Having authority to bind the partnership.

A member admitted in 2026 generally does not appear as a partner on the 2025 return. For the admission year, allocations must follow the actual admission date and a permissible varying-interest method.

Adding a U.S. partner does not mechanically make all foreign-source income ECI, but substantive U.S. activities can materially change the partnership’s U.S. trade-or-business analysis.

15. Must revenue paid into a partner’s personal bank or crypto account be included in the partnership books?

Yes, when the payment was earned from the partnership’s business. The destination account does not change who earned the revenue.

The books should capture:

• Customer and invoice.
• Payment date and currency or digital asset received.
• U.S.-dollar fair market value when received.
• Processor, exchange, and network fees.
• Which partner controlled the account or wallet.
• Any later transfer to the partnership account.
• Any amount retained by the partner as a distribution, advance, or receivable.

Do not count the same receipt twice when it moves from a personal wallet to a business account. If the partnership retains cryptocurrency after receipt, later value changes may create separate gain or loss.

16. What financial records are needed to prepare Form 1065?

At minimum, a partnership should provide:

• Year-end profit-and-loss statement and balance sheet.
• General ledger and trial balance.
• Bank, Stripe, Amazon, and crypto transaction reports.
• Accounts receivable and payable.
• Inventory and cost-of-goods-sold schedules for product businesses.
• Fixed-asset and depreciation schedules.
• Partner contribution, distribution, and loan ledgers.
• Ownership changes and signed operating-agreement amendments.
• Prior-year Form 1065, K-1s, K-2/K-3, and state returns.
• Forms W-8BEN and W-9.

For Amazon FBA, reconcile Amazon gross sales, refunds, marketplace fees, fulfillment charges, advertising, inventory purchases, inventory on hand, and cash deposits. For service businesses, reconcile invoices to every payment channel and document where the work was performed.

17. Does a New Mexico LLC have separate New Mexico obligations?

Possibly, and the state analysis is separate from federal ECI. A New Mexico-organized or registered pass-through entity should review the current New Mexico PTE return, nonresident-owner withholding, entity-level tax election, and account status.

New Mexico gross receipts tax is a different system. It depends on taxable New Mexico receipts, sourcing, registration, and available deductions or exemptions. A federal conclusion that remote services are foreign-source does not automatically close a New Mexico account or eliminate required state filings.

For Amazon sellers, marketplace collection does not resolve state income tax, franchise tax, inventory nexus, direct sales, use tax, or registration requirements in other states.

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Common Mistakes

Mistake 1: Treating every foreign-owned partnership as tax-free.

Fix: Separate foreign status from the partnership’s actual U.S. activities and income categories.

Mistake 2: Treating Amazon FBA like remote consulting.

Fix: Analyze U.S. inventory, merchandise sales, fulfillment, and state nexus separately from service sourcing.

Mistake 3: Filing Form 1065 but ignoring section 1446.

Fix: Estimate ECTI and foreign-partner withholding during the year, even when no cash is distributed.

Mistake 4: Omitting personal-account or crypto receipts.

Fix: Reconcile all customer invoices to every account and wallet, then classify partner withdrawals separately.

Mistake 6: Assuming Amazon’s marketplace tax collection ends the state analysis.

Fix: Review income tax, franchise tax, inventory nexus, PTE filings, and nonresident withholding state by state.

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Deadlines and Penalty Exposure

2026 Calendar-Year Form 1065

The 2026 Form 1065 deadline will fall on March 15, 2027. A timely Form 7004 generally extended the filing deadline to September 15, 2027.

For 2026 returns, the late-filing penalty is generally $255 for each month or part of a month, up to 12 months, multiplied by the number of persons who were partners during any part of the tax year. A separate $340 penalty can apply to each late, incomplete, or incorrect Schedule K-1 or K-3. These amounts are indexed; use the instructions for the specific tax year.

An extension extends filing time, not the deadline for section 1446 payments or other tax due.

Section 1446 Installments

Form 8813 payments are generally due on the 15th day of the fourth, sixth, ninth, and twelfth months of the partnership’s tax year. A calendar-year partnership normally evaluates payments for April, June, September, and December, subject to weekend and holiday rules.

Forms 8804 and 8805 report the annual withholding. Special filing timing may apply to a partnership whose partners are all nonresident alien individuals, so the year-specific instructions should be checked before relying on a June deadline.

Form 1040-NR

A nonresident alien with wages subject to U.S. withholding or a U.S. office generally files by April 15. Other calendar-year nonresidents commonly have a June 15 deadline. The precise deadline depends on the partner’s facts, and an extension does not postpone payment.

A timely return is especially important when the partner must claim deductions connected with ECI or a section 1446 withholding credit.

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Practical Examples

Example 1: Two Foreign Partners Provide Services Entirely From Abroad

Two nonresident individuals own a New Mexico LLC taxed as a partnership. They perform all digital marketing services abroad. The partnership has no U.S. office, employees, inventory, or agent with authority to conclude contracts.

The likely federal path is to file Form 1065, issue K-1s, complete required international reporting, and document the foreign work location. If there is no ECI and no other personal filing trigger, section 1446 withholding and Form 1040-NR may not apply. New Mexico filing and account status still require separate review.

Example 2: A Texas Green-Card Holder Joins and Manages the Business

A two-foreign-partner service LLC admits a Texas green-card holder on January 15, 2026. The new member controls pricing, negotiates contracts, and manages operations from Texas.

The 2025 return remains a two-partner return. For 2026, the partnership obtains Form W-9, updates the operating agreement and capital records, allocates income using the actual admission date, and reassesses U.S. trade-or-business and ECI exposure based on the new U.S. functions.

Example 4: Customer Payments Enter a Personal Crypto Wallet

The partnership receives $400,000 through Stripe and $60,000 in cryptocurrency through one partner’s personal wallet. The full $460,000 is partnership gross revenue before refunds and adjustments if all payments arose from partnership invoices.

The crypto is recorded at U.S.-dollar fair market value on receipt. A later transfer to the partnership bank account is not new revenue. Any amount retained by the partner is separately classified as a distribution, advance, or receivable.

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Closing

A foreign-owned multi-member LLC cannot determine its U.S. tax obligations solely from the partners’ addresses. The correct result depends on what the partnership sells, where the work occurs, where inventory is located and sold, and who performs substantive functions in the United States.

A remote service partnership may file Form 1065 without producing ECI for its foreign partners. An Amazon FBA partnership with U.S. inventory presents a materially different federal and state analysis. Adding a U.S. member also requires more than changing ownership percentages: the partnership must document the admission date, capital, authority, and actual duties.

Central principle

Form 1065 reports the partnership. Schedules K-1 and K-3 report each partner’s tax information. Section 1446 governs withholding on ECTI allocated to foreign partners. The partnership’s substantive activities—not merely the LLC’s state of formation—determine whether foreign partners owe U.S. tax.

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IRS-Grounded Source Notes

These source notes identify the principal authorities used to tighten the federal analysis. They are intended as research anchors; the year-specific form instructions and the taxpayer’s complete facts control the filing position.

1. IRS — Instructions for Form 1065 (2025)

Default partnership filing, due dates, Form 7004 extension procedure, and 2025 late-filing and Schedule K-1/K-3 penalties. Open official source

2. IRS — Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

International reporting, foreign-partner Part X requirements, source and character reporting, and the limited no-ECI exception. Open official source

3. IRS — Effectively Connected Income (ECI)

U.S. trade-or-business principles, foreign partner attribution, and the IRS example addressing profit from U.S. inventory sales. Open official source

4. IRS — Source of Income: Personal Service Income

General rule that service income is sourced where the services are physically performed, including allocation for mixed U.S. and foreign workdays. Open official source

5. IRS — Nonresident Aliens: Sourcing of Income

Summary source rules for services, purchased inventory, produced inventory, interest, rents, royalties, and other categories. Open official source

6. IRS — Instructions for Forms 8804, 8805, and 8813 (Rev. January 2026)

Section 1446 withholding, foreign-partner documentation, installment timing, Forms 8804/8805/8813, and applicable percentages. Open official source

7. IRS — Instructions for Form 1040-NR (2025)

Nonresident return framework, partner reporting, ECI, withholding credits, and transfers of partnership interests. Open official source

8. IRS — About Form W-8BEN and Publication 515

Foreign individual partner documentation and section 1446 status certification. Open official source

9. IRS — About Form W-9

U.S.-person taxpayer identification certification used when a U.S. member joins the partnership. Open official source

10. IRS — Instructions for Form 7004 (Rev. December 2025)

Automatic extension procedure for Form 1065 and other eligible business returns; extension does not extend payment deadlines. Open official source

11. New Mexico Taxation and Revenue Department — Pass-Through Entity

New Mexico PTE return, nonresident-owner withholding, and entity-level tax election. Open official source

12. New Mexico Taxation and Revenue Department — Who Must File Gross Receipts Tax

New Mexico gross receipts tax filing and nexus framework. Open official source

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Professional-Use Disclaimer

This article is provided for educational purposes and presents a simplified overview of federal partnership, international tax, foreign-partner withholding, information-reporting, and state compliance rules. The correct treatment depends on the LLC’s classification, ownership history, partner tax residency, income sources, locations where services are performed, Amazon inventory and fulfillment arrangements, U.S. personnel and management activities, partnership allocations, state nexus, and the applicable tax year.

Form 1065, Schedules K-1, K-2 and K-3, Forms 8804, 8805 and 8813, Form 1040-NR, and state returns serve different purposes and should be analyzed separately. A partnership may have filing or withholding obligations even when it makes no cash distributions, and Amazon’s marketplace tax collection does not necessarily eliminate income-tax, franchise-tax, registration, or other state filing requirements.

For a fact-specific review of your foreign-owned multi-member LLC, partnership return, foreign-partner withholding, Amazon FBA activities, Form 1040-NR exposure, ownership changes, and state filing obligations, book a paid consultation with our firm.