I am a nonresident alien based in the U.K. and I own three Delaware LLCs that I formed in January 2023. Two of my LLCs are not active and have no income or expenses. The third LLC is active but only makes purchases and does not sell anything. I want to know what are the tax filing requirements for each of my LLCs and how much it would cost to hire a professional service to handle them. I also want to know if there are any tax benefits or drawbacks of having multiple LLCs in Delaware as a nonresident alien.
Understanding your tax filing requirements as a nonresident alien owning multiple Delaware LLCs is crucial for compliance with U.S. tax laws. Let’s break down the requirements and considerations for each of your LLCs, and discuss the potential costs of hiring a professional service, as well as the benefits and drawbacks of owning multiple LLCs in Delaware.
Tax Filing Requirements for Each of Your LLCs
Your tax filing requirements depend on whether your LLCs are engaged in U.S. trade or business or not, or whether your LLCs have fixed, determinable, annual, or periodic (FDAP) income for which proper withholding was not done. FDAP income includes interest, dividends, rents, royalties, and other types of passive income from U.S. sources.
Inactive LLCs with No Income or Expenses:
Based on the facts you provided, two of your LLCs are not active and have no income or expenses. That’s great, but bear in mind that even when a foreign-owned single-member LLC has no income, activity, or expenses, it still needs to review and determine whether there are any reportable or related party transactions. Related party transactions are transactions between your LLC and yourself or another entity that you control or have an interest in. For example, if you made an owner’s contribution, paid the registered agent’s fee, or paid the LLC renewal fee personally on behalf of your LLC, then you have a related party transaction and cannot go off the hook by the mere fact that you deem your LLC as inactive.
If a related party transaction exists, both of your inactive LLCs will file separate Proforma 1120 and Form 5472. Proforma 1120 is a dummy return or cover sheet that identifies the reporting entity, address, EIN etc, it essentially serves as a cover sheet for Form 5472. Form 5472 is an information return that reports the related party transactions and the identity and tax information of the foreign owner. The purpose of these forms is to provide the IRS with information about the activities and ownership of foreign-owned LLCs and to prevent tax evasion and money laundering.
Active LLC Making Purchases Only:
With regards to the active LLC that only makes purchases, foreign owners of U.S SMLLC generally do not pay U.S. federal taxes as long as the activities conducted are not considered to be U.S. trade or business (USTB) giving rise to effectively connected income (ECI). ECI is income that is derived from the conduct of a USTB and is subject to U.S. federal income tax at regular rates. Generally, if you do not have a physical presence in the U.S., no employees, dependent agents, or exclusive independent agents on the ground, do not travel physically into the U.S. to perform any work or conclude contracts, and have no offices or warehouses where meaningful business activity is conducted, then you are not engaged in a USTB and do not have ECI.
However, this is a complex and fact-specific determination that requires careful analysis of the nature, extent, and frequency of your U.S. activities and contacts. After analyzing the USTB and ECI issues, your LLC still needs to review and determine whether there is any FDAP income or related party transactions. If your LLC has FDAP income, it may be subject to a 30% withholding tax unless a lower treaty rate applies. If your LLC has related party transactions, it will have to file Proforma 1120 and Form 5472 as explained above.
Costs of Hiring a Professional Service to Handle Your Tax Filings
Professional services are not a one size fits all, prices may vary depending on many factors such as the reputation and the size of the firm you hire, the experience, exposure, skills, preparedness, competency, and thoroughness of the tax professional. Many CPA firms have transparent pricing on their website, however, before you set out to inquire about pricing, you first need to determine the specific tax and information forms you should be filing based on your level of understanding of your business activities. Approaching a CPA with just a vague question of how much it costs will be very challenging if you do not know the specific forms for which you need a CPA. Therefore, the best advice is to get a consultation about your tax situation, determine what forms you need to file from that consultation, and once you know those forms, you can then confidently approach a CPA or attorney with specifics.
At O&G Accounting, we offer transparent pricing and packages and we strive to avoid any hidden and unnecessary fees or unnecessary forms that you may not need. We also offer specialized services to cater to the needs of foreign-owned U.S. businesses and nonresident aliens. Here are some links to our pricing and packages for different types of services:
- For pricing on our accounting and bookkeeping packages, see pricing here.
- For Businesses owned by U.S. citizens, Green Card Holders, and U.S. Resident Aliens – click here.
- For Foreign-Owned U.S. Single Member LLC (U.S. Disregarded Entity) – click here.
- For Foreign-Owned Multiple Member LLC (Partnerships) – Click here.
- For Foreign-Owned U.S. Domestic C-Corporation or LLCs Taxed as C- Corporation – Click here.
- For Form 1040NR & 1 Schedule C – Self Employment Income – Click here.
- For Form 1040NR & 1 Schedule E – Real Estate And Rentals – Click here.
- For Form 1040NR & 1 Schedule B/D – FDAP, Investment Or Other Passive Income – Click here.
- For Corporate Transparency Act (CTA) Filing Services – Click here.
- For a Do it Yourself – Proforma 1120 and Form 5472 For Foreign-Owned U.S. Single Member LLC – Click here
Tax Benefits and Drawbacks of Having Multiple LLCs in Delaware as a Nonresident Alien
Having multiple LLCs in Delaware can be a strategic choice for various reasons. Here are some potential motivations and benefits for an individual or business entity to establish multiple LLCs:
- Liability Protection: You can separate your businesses and their risks by having an LLC for each. This way, if one of your businesses fails or faces lawsuits, your personal assets and your other businesses are protected from creditors and claimants. You can also use one LLC as a holding company for multiple subsidiary LLCs, further compartmentalizing risk and simplifying financial management.
- Tax Advantages: You can allocate income and expenses across different LLCs to optimize your tax brackets and potentially lower your overall tax burden. You can also choose the tax entity for each LLC, allowing for flexible profit and loss allocation among different ventures. Certain industries or activities might have specific tax benefits for LLCs, such as depreciation deductions for rental properties.
- Organizational and Operational Benefits: You can use separate LLCs for distinct brands or product lines, enhancing your marketing and customer targeting. You can also hold intellectual property for different ventures in separate LLCs, ensuring clearer ownership and licensing control. You can divide complex operations into separate LLCs, making it easier to manage, track finances, and raise capital for specific projects. You can also lay the groundwork for future expansion by structuring each new business venture as a separate LLC from the outset.
However, having multiple LLCs in Delaware as a nonresident alien also comes with several drawbacks and challenges that you should consider:
- Increased Costs and Complexity: Each LLC requires filing fees, annual reports, and potentially ongoing maintenance fees, multiplying your administrative expenses. Filing separate Proforma 1120 and 5472 returns for each LLC increases your tax filing complexity and time spent on taxes and information returns. Managing separate books and records for each LLC can be time-consuming and require additional accounting software or support.
- Management and Operational Challenges: Overseeing multiple LLCs can be overwhelming, especially if they operate in different industries or require significant involvement. Each LLC may have separate regulatory and compliance requirements, adding to your workload and potential legal risks. Managing multiple businesses can also lead to confusion and errors in record-keeping, financial reporting, and legal compliance.
- Other Potential Drawbacks: Lenders may find it riskier to finance a single person with multiple LLCs compared to a single, established business. Investors or partners might view holding multiple LLCs as a lack of focus or commitment to any specific venture. While LLCs offer limited liability protection, certain circumstances, such as commingling personal and business funds, can pierce the corporate veil and leave you personally liable.
Additional Considerations
- State Taxes and Compliance: Besides federal taxes, state-level obligations like sales tax and franchise taxes may apply. This varies based on the level of your business activities in each state.
- New Compliance Alert (Beneficial Ownership Reporting): Starting January 1, 2024, under the Corporate Transparency Act (CTA), all U.S. companies, including foreign-owned LLCs, must report beneficial ownership information to FinCEN. This new regulation is crucial for transparency and combating financial crimes.
Action Steps
- Review Transactions: Assess each LLC for reportable and related party transactions.
- Determine Filing Requirements: Based on the transaction review, identify the necessary forms for each LLC.
- Consult Professional Services: Engage with a tax service like O&G Accounting for specific guidance tailored to your situation.
