Throughout my years of professional experience as a CPA, I’ve worked with countless foreign-owned single member LLCs. More often than not, they start out more than a little confused.
What tax information do they have to file? How do they file it? How do they get an Employer Identification Number (EIN, or federal tax number)?
To make things easier for everyone, I’ve compiled a list of some of the most important questions I hear.
Here are the answers:
1. Can a foreign person own a U.S. LLC?
Yes. Generally, there are no restrictions on foreign ownership of any company formed in the United States, except for S-Corporations. It is not necessary to be a U.S. citizen or to have a green card to own a limited liability company or corporation formed in the United States.
What’s more, the procedure for a foreign citizen to form a company in the U.S. is exactly the same as for a U.S. citizen.
2. Does a foreign-owned LLC have to pay taxes?
It depends! Any Single Member LLC—whether foreign-owned or not—that has not elected to be treated as a corporation is automatically a “disregarded entity.” Disregarded entities exist legally, but they don’t have to pay any income taxes unless the Foreign Owned SMLLCs are generating income that are FDAP or effectively connected to US Trade or Business.
So, while the paperwork might be a bit of a headache, foreign persons that own a U.S. SMLLC aren’t losing any money by filing the appropriate forms. (Though they may end up paying major fines if they don’t—more on that below.)
That’s part of why so many foreign citizens form SMLLCs instead of C corporations. All profits from a C corporation are subject to double-taxation under U.S. tax law. Double taxation in the sense that the profit is taxed at the corporate level , and dividend paid out to shareholders are also subject to taxes.
A foreign-owned SMLLC, on the other hand, sends pass-through profit distributions straight to the owner or owners(in cases of partnerships).
LLCs are clearly the better choice.
3. What does a foreign-owned LLC have to do to file the right forms?
All foreign-owned single member LLCs are required to:
- Get an Employer Identification Number (EIN, or federal tax number)
- File Form 5472 if there have been any “reportable transactions” during the previous tax year (Formation and dissolution filings are considered to be reportable transactions)
- File pro forma Form 1120
- Maintain books and records to support the claims you make on Form 5472
Note: the IRS treats each foreign-owned disregarded LLC as a separate entity. That means that if one foreign person owns more than one LLC, they must report each LLC separately. (And if they don’t, each LLC is fined separately.)
4. How does a foreign-owned LLC get an Employer Identification Number (EIN)?
Just like any other company, the owner of an SMLLC must apply for an EIN by preparing and filing a form called “SS4.” This EIN application form has to be signed by what the IRS calls a “Responsible Party.”
According to the IRS, a Responsible Party is “the individual who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.”
If this Responsible Party doesn’t have a SSN or ITIN, the SS4 has to be filed with a special IRS unit. That units will handle the request and issue an EIN for you within 30 days. They’ll send the official notice directly to the address stated at the SS4 form.
5. How much money does a foreign-owned LLC have to make before it files Form 5472?
As long as a SMLLC is at least 25% foreign owned, it must file Form 5472 for any and all “reportable” transactions. There’s no minimum amount before reporting. Even if the amounts are exceptionally small, you must report them to the IRS on Form 5472.
6. What happens if I don’t file what I need to?
Bad things happen.
If an SMLLC is owned at least 25% by foreign persons and doesn’t file Form 5472, the penalties aren’t light. The standard fine used to be $10,000, but has now been elevated to $25,000—and that’s for just one LLC.
The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.
If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.
If you have multiple, you’ll face an extra fine for each and every one.
Trust me, it can add up quick.
So, if you’re ever tempted to just skip the hassle of filing, don’t. Or at least, get someone to help take the hassle off your hands.
Speaking of which…
7. Can someone help me?
Yes. And if you are looking for a little help, you aren’t alone, either.
Every year, legions of foreign persons turn to CPAs for help with filing for their single-member LLCs. And it’s no wonder when you consider how harsh the penalties are for getting it wrong.
If you have any more questions, I’d be happy to answer them. I already have a number of clients with foreign-owned single member LLCs. Needless to say, I’ve learned a thing or two.
Click Here to get in touch. I’ll round up all documents and prepare the required forms. I’ll even fax or mail them in on your behalf.
Sound good? I thought it might.
New Compliance Alert!!: On January 1, 2024, the Financial Crimes Enforcement Network (FinCEN) announced the commencement of beneficial ownership information (BOI) reporting under the Corporate Transparency Act (CTA). This vital step forward ensures greater transparency and aids in the fight against illicit financial activities. Companies established or registered in the U.S. are required to comply with these reporting standards, contributing to a more accountable corporate environment.Learn more and seek guidance here.
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The mere formation of an LLC is a reportable transaction that must be reported by the foreign owner of U.S Single Member LLC.
This course provides you with the most comprehensive information needed for a successful filing of Initial or first year Proforma 1120 and 5472.
Please note that the coverage of this course is limited only to Initial or first year proforma 1120 and 5472, it is also limited and more suitable for foreign owners of U.S single member LLCs where the LLC:
- Had zero income and zero expenses.
- Did not have employees, agents, or exclusive contractors in the U.S.
- Did not have warehouses, offices, or any sort of physical presence in the US.
- Did not receive a 1099 form or any tax form from payment processor or e-commerce marketplace.