QUESTION: Belgian couple in Thailand: Can we own a US LLC for online courses & e-commerce without US work permits? Tax implications?
EXPERT’S RESPONSE: If you are a Belgian couple living in Thailand and want to sell online courses and e-commerce products through a U.S. LLC, you may wonder if you need a U.S. work permit and how you will be taxed in the U.S. In this article, we will answer these questions and explain the pros and cons of different types of U.S. business entities, such as single-member LLC, multi-member LLC, and C corporation. We will also provide some resources and tips to help you understand and comply with U.S. tax laws for foreign-owned LLCs. We will also introduce you to O&G Tax and Accounting, a firm that offers a comprehensive range of services for foreign-owned single-member LLCs in the U.S.
Do You Need a U.S. Work Permit?
The short answer is no. You do not need a U.S. work permit to operate an online business through a U.S. LLC if none of the work takes place in the U.S. The rules and regulations of your country of residence (Thailand) govern work and immigration aspects.
How Will You Be Taxed in the U.S.?
The U.S. tax treatment of your LLC depends on two factors: the number of members and the election made by the members.
A. Single-Member LLC or Disregarded Entity
A single-member LLC is an LLC that has only one owner. By default, a single-member LLC is treated as a disregarded entity for U.S. tax purposes. This means that the LLC is ignored as a separate entity, and its income and expenses are reported on the owner’s tax return. The owner can be a U.S. or a foreign person or corporation.
However, a single-member LLC can elect to be treated as a corporation for U.S. tax purposes. This means that the LLC is taxed as a separate entity, and its income and expenses are reported on a corporate tax return. The LLC can be a U.S. or a foreign corporation.
Tax Compliance for Single-Member LLC or Disregarded Entity:
A foreign-owned single-member LLC that is a disregarded entity is not subject to U.S. income tax, unless it is engaged in a trade or business in the U.S. A trade or business is a regular and continuous activity that generates income from sources within the U.S. Examples of activities that may constitute a trade or business include providing services physically in the U.S., owning or leasing property in the U.S., having employees, dependent or exclusive independent agents in the U.S., etc.
If a foreign-owned single-member LLC that is a disregarded entity is engaged in a trade or business in the U.S., its owner or member is subject to U.S. income tax on its income that is effectively connected to the U.S. trade or business. Effectively connected income (ECI) is income that is derived from sources within the U.S. and is attributable to the U.S. trade or business as stated earlier.
The Owner of a foreign-owned U.S single-member LLC that is a disregarded entity and has ECI must file a U.S. tax return, even if it has no tax liability. The owner must file Form 1040NR (U.S. Nonresident Alien Income Tax Return) if the owner is an individual, or Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) if the owner is a corporation.
The LLC must also file Proforma 1120 and 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) to report any transactions with its foreign owner or other related parties. The LLC must also obtain an employer identification number (EIN) from the IRS, which is a unique identification number for this information return purposes.
B. Multi-Member LLC
A multi-member LLC is an LLC that has more than one owner. By default, a multi-member LLC is treated as a partnership for U.S. tax purposes. This means that the LLC is not taxed as a separate entity, but its income and expenses are reported on a partnership tax return. The LLC then allocates its income and expenses to its members, who report them on their own tax returns. The members can be U.S. or foreign persons or corporations.
However, a multi-member LLC can elect to be treated as a corporation for U.S. tax purposes. This means that the LLC is taxed as a separate entity, and its income and expenses are reported on a corporate tax return. The LLC can be a U.S. or a foreign corporation.
Tax Compliance for Foreign-Owned Multiple Member LLC:
When a U.S. LLC owned by nonresident aliens is structured as a multiple-member entity, the tax implications and reporting requirements differ notably, especially in the context of effectively connected income (ECI) with a U.S. trade or business. Here’s a breakdown of key considerations and form requirements:
1. Effectively Connected Income (ECI):
- If the LLC generates ECI, it impacts the tax obligations for foreign members. ECI refers to income connected with the conduct of a trade or business within the U.S.
- The determination of ECI is based on the nature of the income and the LLC’s activities.
2. Tax Reporting Requirements for ECI:
- Form 8804 (Annual Return for Partnership Withholding Tax): This form is used by partnerships to report the total ECI and the total tax withheld on this income.
- Form 8805 (Foreign Partner’s Information Statement of Section 1446 Withholding Tax): This form provides details about the amount of ECI and tax withheld for each foreign partner.
- Form 8813 (Partnership Withholding Tax Payment Voucher): This form is used for making installment payments of withheld tax under section 1446.
These forms are applicable only if your LLC, as a multiple-member entity, has gross ECI. They are part of the IRS’s mechanism to ensure that foreign partners pay U.S. tax on income that is effectively connected with a U.S. trade or business.
Other Compliance Considerations for Foreign-Owned Multiple Member LLC:
- Form 1065 (U.S. Return of Partnership Income): This form reports the partnership’s income, deductions, and credits, and allocates each partner’s share of these items.
- Schedule K-1, K-2 and K-3: Issued to each partner, detailing their share of the partnership’s income, deductions, and credits.
- Foreign Source Income: If the LLC earns foreign source income and it is not effectively connected with a U.S. trade or business, it will generally not be taxable to its foreign members in the U.S.
Electing Corporate Tax Treatment: An LLC, whether single or multiple members, can elect to be taxed as a corporation by filing IRS Form 8832. This changes how the LLC is taxed, a C corporation pays corporate tax on its income and expenses, and its owners pay individual tax on the dividends they receive from the corporation. A C corporation can be owned by U.S. or foreign persons or corporations.
A foreign-owned single-member LLC that elects to be treated as a corporation or a foreign-owned multi-member LLC that elects to be treated as a corporation is subject to U.S. income tax on its worldwide income, regardless of whether it is engaged in a trade or business in the U.S. The LLC must file Form 1120 (U.S. Corporation Income Tax Return) – it is now a full-blown U.S. corporation by virtue of the affirmative election. The LLC must also attach Form 5472 to report any transactions with its foreign owner or other related parties.
A foreign-owned LLC that is treated as a corporation may also be subject to additional taxes, such as withholding taxes, or state and local taxes, depending on the nature and source of its income and the location of its activities.
The Corporate Transparency Act: Foreign-owned U.S LLCs or Corporations 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.
How Can O&G Tax and Accounting Help You?
O&G Tax and Accounting is a firm that specializes in serving foreign-owned single-member LLCs in the U.S. We offer a comprehensive range of services, including:
- Preparation of Forms 1120, 5472, and 1065, BOI, FBAR etc.
- Monthly bookkeeping and accounting
- Accounting software recommendations
- General accounting services
- Consultations and personalized advice
We have extensive experience working with foreign-owned single-member LLCs in the U.S. and can help you navigate the complexities of U.S. tax laws. We can also help you save time and money by providing efficient and affordable solutions for your tax needs.