Every day, new LLCs are formed by foreign persons in the U.S.
As a CPA, I’ve worked with many of these foreign-owned single member LLCs. Time and again, I hear questions from clients confused by what tax information they need to file—or if they count as foreign-owned at all.
Here are some answers:
1. What Is a Foreign-Owned Disregarded Entity?
A “disregarded entity” is a business or organization that exists legally but doesn’t have to file for income taxes. Any Single member LLC that has not elected to be treated as a corporation is automatically a disregarded entity.
Now, what about a “foreign person?”
According to the IRS, “A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person.”
So, if you fit that description and you own an LLC, then congratulations! You have a foreign-owned disregarded entity.
2. What Forms Do Foreign-Owned Single-Member LLCs Have to File?
Before 2017, the question of what IRS forms a foreign-owned LLC had to file came with a very different answer. Previously, if a foreign-owned LLC was a “disregarded entity” and neither the owner nor the LLC had US sourced income or engaged in a US trade or business, there was no need to file anything at all.
Ah, the good old days.
Unfortunately, times have changed. Since 2017, foreign-owned single member LLCs have to get an employer identification number (EIN) if they don’t have one already.
In order to obtain an EIN, the disregarded entity must designate a “responsible person.” According to the IRS, that’s “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.”
Don’t worry, it really isn’t as complicated as it sounds.
The good news is that the new law doesn’t add any new tax obligation provided your income is not “US sourced”, FDAP or US Effectively Connected Income. The foreign-owned SMLLC still isn’t actually paying anything—they remain disregarded entities for income tax purposes.
So, the paperwork and hassle can be an added headache!
Here’s the rundown again:
All foreign-owned single member LLCs are required to:
- Obtain 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- See the Final regulation here for examples of transactions that are reportable.
- File form 1120
- Maintain adequate books and records to support your claims 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.
3. Why Did the IRS Change the Regulations for Foreign-Owned Single Member LLCs?
Under the “check-the-box” regulations, a business entity with a single owner can be disregarded as separate from its owner for various tax purposes and may not be required to file a U.S. tax return or obtain an EIN. As a result, the IRS may lack information about the disregarded entity potentially shielding foreign owners from U.S. and foreign tax liabilities. Many U.S. LLCs are viewed as tax havens by foreign jurisdictions.
4. How Do You File Forms 1120 & 5472?
Hopefully, now you know what to file. But how do you actually do it?
A. Pro forma Form 1120:
The IRS lets you file pro forma Form 1120 with reduced information. The only information they require on the Form 1120 is:
- Name & address of the foreign-owned disregarded entity
- Employer Identification Number (EIN)
- Checkboxes for initial returns, final returns, or name & address changes
Once you’ve entered that information in, write “Foreign-owned U.S. DE” across the top of the form.
B. Form 5472
Form 5472 is not straightforward as it looks .the instruction requires you to enter the information into the correct boxes, and you’re set.
After you’ve completed Form 5472, you’ll attach it to your pro forma Form 1120.
The pro forma Form 1120 and attached Form 5472 will have to be mailed to a special address. The standard Form 1120 mailing addresses won’t work. You can find the correct address in the filing instructions for Form 5472.
Note: Those addresses can change from time to time, so remember to check the instructions each year.
5. Is It Really Necessary to File? (Hint: Yes.)
You might be thinking, “Sure, that’s what the law says, but do I really have to? They won’t care if I forget, right?”
The penalties for not filing Form 5472 can be steep. If you fail to file for a foreign-owned single member LLC, the standard fine is $25,000. If you have more than one LLC, that’s an extra fine for each. It can add up quick.
Either way, trust me, you need to file.
6. Can I Get Some Help?
If this is all too confusing—or you just don’t have the time—trust me, you aren’t alone.
Every year, countless foreign persons turn to CPAs to help with filing for their single-member LLCs. And considering the penalties you could face for getting it wrong, it’s worth doing.
If you have any more questions, I’d be happy to answer them. I’m already helping several clients with foreign-owned single member LLCs, so I’ve learned a thing or two.
Click Here to contact me, I’ll gather all documents to prepare the required forms and fax or mail them on your behalf.
Can I help you? Let’s talk.
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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.
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