Who this is for: Foreign founders and partners who own a U.S. multi-member LLC (taxed as a partnership) and run online businesses (e.g., Shopify dropshipping) primarily from outside the U.S.
Why this matters: For federal Tax Purposes., the key question isn’t “Do you have U.S. customers?”-it’s whether your partnership has Effectively Connected Income (ECI) with a U.S. trade or business. That answer drives federal tax, withholding, and what you must file. This FAQ distills the essentials and reflects how our firm works with non-resident partners.
1) Do we owe U.S. federal income tax on dropshipping profits if we operate from abroad?
Often no, if your partnership does not have ECI. Simply having U.S. customers, a U.S. bank account, or a Wyoming registration does not by itself create ECI.
Typical “no-ECI” fact pattern: All substantive work (management, decision-making, ads, order handling, customer service) happens outside the U.S., and you have no U.S. office, employees, dependent agents, or U.S. warehouses.
Important: ECI is facts-and-circumstances. If your facts change (e.g., you add a U.S. warehouse or staff), your answer can change.
2) What federal return does a foreign-owned partnership file?
File Form 1065 (U.S. Return of Partnership Income) annually and issue Schedule K-1, K-2, and K-3 to each partner. The return discloses partners’ countries, whether income is Foreign, U.S.-source and/or ECI, and how results are allocated.
Deadline: March 15 (calendar-year partnerships). Extend to September 15 with Form 7004.
3) Do we file Form 5472 + pro forma 1120?
No—not for a partnership. Those are for foreign-owned disregarded entities (single-member LLCs) and certain corporations. A multi-member LLC taxed as a partnership files Form 1065 and attaches K-1, K-2 and K-3.
4) When does withholding under IRC §1446 apply?
If (and only if) the partnership has ECI, it must withhold on foreign partners’ distributive shares and file Forms 8804/8805. The nonresident individual default rate can reach the top individual bracket. Foreign partners then file Form 1040-NR to compute the actual tax and claim any refund.
If no ECI → no §1446 withholding.
5) Are our partnership distributions “dividends” under a treaty (e.g., Bulgaria–U.S.)?
No. Partnerships don’t pay “dividends.” They make distributions and pass income/loss on K-1s. Treaty dividend rates apply to corporate dividends. For partnerships, the central question is ECI. If there’s no ECI, the U.S. typically does not tax operating profits at the partner level (but your home country may).
6) What about FDAP income (interest, dividends, royalties)?
FDAP (passive) income follows separate U.S. withholding rules and may enjoy treaty reductions. Example: U.S. bank deposit interest to non-residents is generally exempt. FDAP rules are distinct from your operating business income via the partnership.
7) How do state income/franchise taxes fit in (beyond sales tax)?
Some states assert tax based on nexus (physical or economic). Even if you lack federal ECI, a state may still require a filing if you create nexus (e.g., inventory in a state, staff, or certain economic thresholds). We assess state-by-state if your facts evolve.
8) Do we have to deal with sales tax as Shopify sellers?
Likely yes once you cross a state’s economic nexus threshold (sales/transaction count).
- Monitor thresholds in customer states
- Register in nexus states (we can assist registrations)
- Collect & remit—consider Avalara or TaxJar to automate filings
Note: Shopify is generally not a marketplace facilitator that auto-collects like Amazon does; most merchants must handle their own registrations/filings.
9) We paid personal expenses from the business account—can this be fixed?
Yes. Classify such items as partner distributions/draws (not deductible expenses). Provide a spreadsheet (date, amount, description, which partner benefitted). We’ll book proper journal entries and reconcile partner capital accounts so your M-2 and K-1s are right.
10) What bookkeeping do we need for a clean Form 1065?
You’ll need financial statements: P&L, Balance Sheet, and often Trial Balance.
Tooling we recommend:
- QuickBooks Online (Plus) subscription
- Bank feeds / accountant access (e.g., Mercury “accountant access”)
- Shopify access for sales data
We close monthly and keep books ready so tax prep isn’t delayed.
11) What IDs and forms do foreign partners need?
- ITINs for individual nonresident partners who must file 1040-NR
- W-8BEN / W-8BEN-E to document foreign status
- K-1, K-2 and K-3s each year
- If §1446 applies: the partnership issues 8805 to each foreign partner
12) What are common red flags that can create ECI or extra filings?
- Doing any work while physically in the U.S. (even short trips)
- Using U.S. employees or dependent agents to solicit/fulfill orders
- Storing goods in U.S. warehouses/fulfillment (e.g., FBA)
- Leasing/using a U.S. office or fixed place of business
- A U.S. person who habitually concludes contracts on your behalf
- Holding U.S. real property inside the partnership
Annual Compliance Checklist (Foreign-Partner Partnerships)
- Form 1065 + K-1, K-2 and K-3s (due Mar 15; extend with Form 7004)
- Form 1040-NR for each foreign individual partner (if required)
- §1446 withholding (8804/8805) only if the partnership has ECI
- ITIN applications (as needed)
- W-8 series for documentation (as applicable)
- Sales tax registrations/returns when thresholds are crossed
- State income/franchise filings if you create state nexus
How We Work (Scope, Engagement Types & Service Levels)
What We Do
- Partnership tax prep: Form 1065 with K-1, K-2 and K-3s; clear presentation of ECI vs. non-ECI
- Monthly bookkeeping: QuickBooks setup, bank/Shopify integrations, monthly categorization, financial statements
- Sales-tax registrations: We handle the permit/registration step; we help you automate recurring filings (Avalara/TaxJar)
- On-call advisory: 15/30/60-minute consults for structuring, nexus, and treaty questions
- Deadline management: We keep your calendar clean
What We Don’t Do
- Open your bank/merchant accounts or provide a virtual office
- Serve as your U.S. employees/agents or create a permanent establishment
- Prepare your home-country tax returns
- In-house recurring sales-tax filings (we help you automate instead)
Service Levels (At a Glance)
- Monthly bookkeeping: tiered by volume; includes monthly financials
- Annual partnership return (1065): fixed-fee tiers by revenue/complexity
- Advisory calls: book time at posted rates
Current public pricing and scope are listed on our website; fees are subject to change.
Onboarding Basics
- Subscribe to QuickBooks Online (Plus)
- Grant accountant access (e.g., Mercury, Shopify, QuickBooks)
- Provide prior months’ statements/exports (CSV/PDF)
- Share any sales-tax threshold notices so we can register you promptly
For non-resident partners, the ECI determination is the center of gravity. If your real work stays outside the U.S. and you avoid U.S. offices, people, and warehouses, you often owe no U.S. federal income tax on operating profits—but you still must file Form 1065 and stay on top of state sales-tax rules. Keep clean books, avoid the red flags, and use your partnership return to tell a consistent story to the IRS.
