In today’s global business environment, entrepreneurs like Nikolay from Bulgaria are leveraging U.S. legal structures to expand their operations through limited liability companies (LLCs). While forming a U.S.-based LLC offers many benefits, such as enhanced credibility and market access, it also comes with specific tax and compliance obligations. This article explores the tax responsibilities of foreign-owned U.S. LLCs, focusing on Nikolay’s single-member LLC (SMLLC) and the steps necessary to ensure compliance with U.S. federal tax laws.
Introduction
Nikolay owns a digital marketing company registered as a Delaware-based SMLLC. His business operates internationally, with all clients located outside the U.S., and he and his team are based in Bulgaria. Like many foreign entrepreneurs, Nikolay wants to ensure that his U.S.-based LLC complies with federal tax regulations and avoid potential penalties.
This article outlines the essential tax forms, filing deadlines, and compliance steps for foreign-owned LLCs like Nikolay’s, helping to navigate the complexities of U.S. tax laws.
Key Tax Forms for Foreign-Owned SMLLCs
Foreign-owned single-member LLCs must be aware of three key tax-related obligations to ensure compliance:
- Form 5472: This form is used to report any reportable transactions between the LLC and its foreign owner or related parties.
- Pro Forma Form 1120: This form serves as a cover sheet for filing Form 5472.
- Delaware Franchise Tax: Nikolay’s must pay the annual Delaware franchise tax to maintain the LLC’s active status. The fee is currently $300, payable by June 1 each year.
Step-by-Step Compliance for Foreign-Owned SMLLCs
1. Filing Form 5472 and Pro Forma Form 1120
- Form 5472 is required to report related-party transactions between the foreign owner (Nikolay) and the LLC. Even though the LLC may not be generating U.S.-sourced income, the form tracks deposits into and withdrawals from the LLC.
- Pro Forma Form 1120 must be submitted alongside Form 5472.
- Filing Deadline: These forms are due by April 15 every year. If the forms are not filed on time or contain errors, the penalty could be as high as $25,000.
2. No U.S. Federal Tax Liability
- Since Nikolay’s digital marketing services are conducted entirely from Bulgaria and all his clients are located outside the U.S., he is not liable for U.S. federal income tax. U.S. tax law does not apply to an foreign persons – foreign-sourced income unless the income is effectively connected to U.S. business activities.
- However, Nikolay should consult with a Bulgarian tax expert to ensure proper reporting and payment of taxes in his home country.
3. Delaware Franchise Tax
- Nikolay must pay Delaware’s annual franchise tax to maintain the LLC’s legal standing. This fee, typically $300, is due every year on June 1.
- Failure to pay the franchise tax could result in penalties and potentially lead to the suspension or forfeiture of the LLC’s status in Delaware.
4. Registered Agent Requirement
- Since Nikolay resides in Bulgaria, his Delaware LLC requires a registered agent in Delaware to receive legal and official documents on behalf of the company. The registered agent must be paid annually to maintain this service.
Practical Recommendations for Compliance
- File Form 5472 and Pro Forma 1120 on Time: These forms are essential for compliance with U.S. federal tax regulations. Even though no taxes are due, filing them accurately and on time will help avoid penalties.
- Consult a Local Tax Expert: While there are no U.S. tax liabilities for an NRA’s foreign-sourced income in Nikolay’s case, it is crucial to consult a tax advisor in Bulgaria to understand the local tax implications.
- Stay on Top of Delaware Franchise Tax: Keep track of the June 1 deadline for the Delaware franchise tax payment to ensure the LLC remains in good standing.
- Engage Professional Services for Filing: Managing these filings can be complex, especially for foreign business owners. Consider working with a U.S. tax professional, such as O&G Tax and Accounting Services, to ensure all forms are filed correctly and on time.
- Maintain Detailed Financial Records: Even though U.S. taxes are not owed, it’s essential to maintain proper records, including contracts, bank statements, and receipts. These documents are necessary to complete the required forms and ensure accurate filings.
Additional Considerations
BOIR Compliance under the Corporate Transparency Act (CTA)
Starting in 2024, foreign-owned LLCs must comply with the Beneficial Ownership Information Reporting (BOIR) under the Corporate Transparency Act (CTA). This act mandates that certain companies report their beneficial ownership details to increase transparency and prevent money laundering.
Nikolay’s LLC must file a BOIR report, which includes details about the beneficial owners and their respective ownership stakes. Filing deadlines are as follows:
- Existing Companies: BOIR must be filed by January 1, 2025.
- New Companies: Entities formed after January 1, 2024, must file within 90 days of formation.
For foreign entrepreneurs like Nikolay, owning a U.S.-based LLC can offer numerous advantages, but it comes with important compliance requirements. While Nikolay’s company is not subject to U.S. federal taxes, he still needs to file Form 5472 and Pro Forma Form 1120, pay the Delaware franchise tax, and meet the BOIR requirements under the CTA.
If you need help navigating U.S. tax compliance for your foreign-owned LLC? Schedule a consultation with O&G Tax and Accounting Services today. Click here to book an appointment.
Additionally, we can assist you with BOIR compliance to ensure your LLC adheres to the Corporate Transparency Act’s requirements. Contact us to get started!
