QUESTION: I am assisting my parents, who are non-U.S. citizens and residents of Chile, to form a limited liability company (LLC) in the United States. They want to use the LLC as a vehicle to hold their savings outside Chile, and to avoid the risks and uncertainties of the Chilean economy. What are the best practices and considerations for structuring a U.S. LLC for nonresident aliens from Chile? What are the tax implications and reporting requirements for the LLC and its owners? What are the advantages and disadvantages of choosing different tax elections for the LLC?
EXPERT’S RESPONSE: Best Practices for Structuring a U.S. LLC:
- Nonresident aliens should adhere to the same formation formalities as U.S. residents. This includes proper registration, creating an operating agreement, and ongoing compliance with state regulations.
- Foreign nationals, including those from Chile, can own a U.S. LLC, offering a flexible and viable option for international business and savings management.
Tax Implications and Reporting Requirements:
- LLC Classification: Single-member LLCs are considered disregarded entities for tax purposes, while multi-member LLCs are treated as partnerships, unless they elect corporate status.
- Taxation Criteria: Both single and multi-member LLCs are not taxed in the U.S. if the income is not Fixed, Determinable, Annual, or Periodical (FDAP) income, or in cases where the LLC does not have a physical presence, employees, or agents in the U.S., and does not engage in U.S. trade or business.
- Reporting Requirements:
- Single-member LLCs must file a proforma 1120 and 5472 for reportable or related party transactions, even without U.S. tax liability.
- Multi-member LLCs need to file an informational return form 1065, with Schedules K-1, K-2, and K-3 attached.
Advantages and Disadvantages of Different Tax Elections:
- Liability Protection: LLCs offer limited liability protection to their owners, safeguarding personal assets from business debts and legal judgments.
- Corporate Status Election:
- An LLC treated as a corporation is taxed on worldwide income, regardless of the ECI criteria.
- This option subjects the LLC to corporate taxation, with potential double taxation at the shareholder level on dividends.
- Corporate status does not allow dividends to reduce the LLC’s taxable income.
Professional Tax Assistance: Given the complexities of the U.S. tax system for foreign-owned LLCs, it’s advisable to seek guidance from a tax advisor experienced in U.S. taxation laws. At O&G Accounting, we offer specialized services to cater to such needs.
New Compliance Alert: Beneficial Ownership Reporting: Starting January 1, 2024, under the Corporate Transparency Act (CTA), U.S. companies must report beneficial ownership information to FinCEN. This new regulation enhances transparency and combats financial crimes. Understanding and compliance with this requirement are essential for all U.S. registered companies, including foreign-owned LLCs.
