QUESTION: What are the tax and legal implications of forming a US LLC owned by an offshore company?
EXPERT’S RESPONSE: Running a business in the US can be incredibly rewarding, and forming a Limited Liability Company (LLC) is a popular choice for its flexibility and ease of setup. But what happens when you, a foreign business owner, want to establish an LLC in the US? This can introduce unique tax considerations you need to understand to avoid penalties and ensure compliance.
Taxation of US LLCs Owned by Offshore Companies:
The good news is, you can own a US LLC as an offshore company. However, the IRS classifies your LLC as a Foreign-Owned Disregarded Entity (FDE) – if owned by one person or a single foreign corporation. This means the LLC itself doesn’t pay taxes, but the income and expenses “pass through” to your personal tax return. Essentially, the IRS treats the LLC as an extension of yourself for tax purposes.
Tax Classification of Your LLC
An LLC is a type of business entity that provides limited liability protection to its owners, who are called members. An LLC can have one or more members, and can be owned by individuals, corporations, or other entities.
For US tax purposes, an LLC can be classified as either a disregarded entity, a partnership, or a corporation, depending on the number and type of its members. The default tax classification of an LLC is as follows:
- A single-member LLC is treated as a disregarded entity, unless it elects to be taxed as a corporation. A disregarded entity is not a separate tax entity from its owner. This means that the income and expenses of the LLC are reported on the owner’s personal tax return, as if the LLC did not exist.
- A multi-member LLC is treated as a partnership unless it elects to be taxed as a corporation.
A partnership is a separate tax entity from its owners, but it does not pay income tax itself. Instead, it files an information return and passes through its income and losses to its partners, who report them on their personal tax returns.
A corporation is a separate tax entity from its owners, and it pays income tax on its profits. The owners of a corporation report their share of dividends or distributions from the corporation on their personal tax returns.
If you are a non-US resident who owns a single-member LLC in the U.S, you are classified as a foreign-owned disregarded entity (FDE) for US tax purposes. This means that while your LLC is legally separate from you, it is not considered a separate entity for tax return purposes. The income and expenses of your LLC are passed through to your personal tax return, and you are subject to US tax on your effectively connected income (ECI) from your US business activities.
Filing Requirements for FDEs:
Owning an FDE comes with specific filing requirements:
- Proforma Form 1120: This form, while not requiring tax payment, identifies your LLC as an FDE and complies with information reporting requirements.
- Form 5472: This form reports transactions between your FDE and you (the foreign owner) and any related foreign parties.
- The Corporate Transparency Act: Foreign-owned LLCs must also be aware of the Corporate Transparency Act (CTA), which establishes uniform beneficial ownership information reporting requirements for certain corporations, limited liability companies, and other similar entities created or registered to do business in the U.S. The CTA is part of the Anti-Money Laundering Act of 2020 and aims to prevent criminals, terrorists, and corrupt individuals from hiding illicit money or property in the U.S.
For reporting companies created or registered before January 1, 2024, the initial beneficial ownership information report must be filed by January 1, 2025. If your company is created or registered on or after January 1, 2024, you have 90 days to file the initial report starting January 1, 2024.Learn more and seek guidance here.
If you fail to file any of these forms on time, or file them incorrectly or incompletely, you may face substantial penalties. Therefore, it is important to comply with these filing requirements and to keep accurate and complete records of your LLC’s income, expenses, and transactions.
Understanding Your Tax Obligations:
As an FDE owner, you’re subject to US taxes on any effectively connected income (ECI) generated by your LLC’s US business activities.
Seek Professional Help:
Understanding US tax laws as a foreign business owner can be complex. Partnering with a qualified CPA specializing in FDEs is crucial to ensure compliance and avoid costly mistakes. A CPA can:
- Guide you through the specific tax and filing requirements for your FDE
- Prepare and file the necessary forms accurately and on time
- Advise you on tax-efficient strategies to minimize your tax liability
- Help you maintain proper accounting records and financial reporting
- Assist with any tax audits or inquiries from the IRS
O&G Tax and Accounting: Your Trusted Partner:
O&G Tax and Accounting has extensive experience working with foreign-owned single-member LLCs in the US. We offer a comprehensive range of services to help you navigate the complexities of US tax laws, including:
- Preparation of proforma Form 1120, Form 5472, BOI, FBAR etc.
- Monthly bookkeeping and accounting
- Accounting software recommendations
- General accounting services
- Consultations and personalized advice
Owning a US LLC as an offshore company offers exciting opportunities, but understanding your tax obligations is crucial. By working with a qualified CPA like O&G Tax and Accounting, you can ensure compliance, minimize your tax burden, and focus on growing your successful business.