This Q&A provides insights for a foreign client looking to establish a U.S. Limited Liability Partnership (LLP) to open a brokerage account, focusing on the LLP structure, its tax implications, and compliance requirements in the U.S. This guide covers important considerations for foreign investors exploring LLPs as a vehicle for managing U.S.-based investments.
Frequently Asked Questions (FAQ)
Q: Key Considerations for Forming a U.S. LLP for Foreign Investment
Client: I’m considering setting up a U.S. entity to open a brokerage account, and I’m leaning toward forming an LLP instead of an LLC. My understanding is that using an LLP for receiving dividends might avoid certain corporate taxes in Germany. Do you see any disadvantages to forming an LLP instead of an LLC?
Alex, CPA: From a U.S. tax perspective, you may be correct in observing that some European countries, including Germany, do not universally recognize U.S. LLCs as pass-through entities. Often, LLCs might be treated as corporations for tax purposes abroad. An LLP, however, may be more likely be recognized as a partnership.
In the U.S., LLPs, like LLCs, are pass-through entities, allowing income to flow directly to the partners without corporate tax at the entity level. Any potential tax benefits on the German side should be confirmed with a local tax advisor familiar with German tax law.
Distinguishing Between LLPs and Disregarded Entities
Client: Just to confirm, would an LLP be disregarded for tax purposes, like a single-member LLC?
Alex, CPA: No, an LLP cannot be a disregarded entity. Disregarded entity status is limited to single-member LLCs. U.S. law requires LLPs to have at least two partners, so an LLP will be treated as a partnership and taxed as such. This means the LLP must file Form 1065 to report income and expenses each year.
Structuring an LLP with Foreign Partners
Client: Could my German company hold a 50% interest, with me as an individual holding the other 50%? This would satisfy the two-partner requirement, but I’d still be the beneficial owner of both.
Alex, CPA: Yes, that’s an acceptable structure. For U.S. tax purposes, your German company and you as an individual are treated as separate entities, meeting the LLP’s requirement for at least two partners.
Understanding Tax Obligations for U.S. Partnerships with Foreign Partners
Client: Since an LLP is a Domestic Entity, it would be treated as a U.S. person for tax purposes, correct? So instead of LLP submitting a W-8BEN-E, LLP file a W-9 with the brokerage, and they wouldn’t withhold tax.
Alex, CPA: Correct. The LLP would be recognized as a U.S. Person, so the brokerage (whether fidelity, robinhood, vanguard etc) would not act as a withholding agent. Instead, the LLP would assume the responsibility for withholding on behalf of its foreign partners.
Client: How does the LLP handle this withholding responsibility?
Alex, CPA: As the withholding agent, the LLP must calculate the appropriate FDAP withholding rate and remit the tax to the IRS. Each foreign partner must provide the appropriate W-8 form—W-8BEN for individuals and W-8BEN-E for corporate entities. The LLP must file Forms 1042 and 1042-S annually to report withholding on U.S. source income for foreign partners, such as dividends or other FDAP income.
Tax IDs, EFTPS, and Annual Filing Requirements
Client: What other steps are involved in setting up the LLP and managing tax compliance?
Alex, CPA: Here’s a breakdown of key steps:
- Obtain EIN: Start by obtaining an EIN for the LLP.
- ITIN and EIN for Partners:
- Register with EFTPS: The LLP must register with the Electronic Federal Tax Payment System (EFTPS) to deposit withholding taxes on behalf of its foreign partners.
- Annual Filings: Each year, the LLP will file Form 1065 (the partnership return) and issue Schedules K-1, K-2, and K-3 to each partner, detailing each partner’s share of income, deductions, and taxes.
- Withholding and Reporting: The LLP must file Forms 1042 and 1042-S annually to report and document withholding on U.S. source income for foreign partners.
Filing and Reporting Requirements
Client: Besides Form 1065 and withholding obligations, are there other filing requirements we need to consider?
Alex, CPA: Yes, in addition to Form 1065 and the associated Schedules K-1, K-2, and K-3, the LLP must file Forms 1042 and 1042-S annually. These filings report withholding on U.S. source income for foreign partners, such as dividends, ensuring compliance with IRS requirements and documenting the LLP’s financial activity and taxes withheld for each foreign partner.
Applying Treaty Benefits and Withholding Tax Rates
Client: Germany’s tax treaty with the U.S. reduces dividend withholding to 15%. I’ve also heard that if my German company holds at least 80% of the LLP, there might be no withholding on dividends. Is that correct?
Alex, CPA: Not exactly. The U.S.-Germany tax treaty provides a 15% withholding rate on dividends paid to foreign entities. For corporate entities that directly hold 10% or more of voting stock in a U.S. corporation, there may be an additional reduction to 5%. However, since your German company holds partnership interest within the LLP, not direct corporate stock, the 5% rate for direct dividend ownership may not apply. As such, the default 15% withholding rate may apply for both the individual and corporate partners.
Choosing a State for Forming the LLP
Client: I’m considering Wyoming for privacy reasons, but I’m open to other options. Do you have any recommendations?
Alex, CPA: Wyoming is a popular choice for its privacy protections and reasonable fees. Colorado and Delaware are also options, though Delaware can be more crowded and sometimes more expensive. The most important factor for foreign investors is often the cost of maintaining the entity. Wyoming and Colorado both have relatively low annual fees and good privacy protections.
Bookkeeping and Accounting Standards for the LLP
Client: What level of bookkeeping and accounting will the LLP require? Are GAAP-compliant statements necessary?
Alex, CPA: For U.S. tax purposes, GAAP-compliant financial statements aren’t required unless specifically requested. Basic bookkeeping that captures includable income and necessary expenses will be sufficient. Our firm provides tax-compliant bookkeeping services, including income and expense categorization, which meets IRS requirements.
Forming an LLP to manage U.S.-based investments can offer a streamlined approach for foreign investors. While LLPs have distinct tax and compliance obligations—such as withholding on distributions to foreign partners, and filing partnership returns to flow directly to partners. Working with an experienced CPA can help ensure compliance and minimize tax implications.
For help setting up your LLP, or managing tax compliance, contact O&G Tax and Accounting Services. We provide full support to help foreign LLP owners remain compliant and fully leverage the advantages of U.S. investment opportunities.
