One of the main concerns of every business owner is taxation. Every founder seeks to have the best company structure with the best taxation system from the starting point. Choosing the wrong taxation type may be the reason for depriving the business of a certain percentage of profit to tax authorities’ benefit.
In this article, we will focus on the taxation system of US-LLCs owned by foreigners.
To start, there is a specific misconception when it comes to taxable entities that we should shed some light on to ease our work.
Many people tend to confuse and mix legal business types and taxable business types. We mean that some legal entities are not taxable, such as LLCs, because the International Revenue Services (IRS) doesn’t perceive it as a taxable entity. There is no form to file in its regard. Instead, LLCs are perceived either as disregarded entity or partnership when it comes to taxation.
The criterion taken into consideration to determine whether an LLC is taxed as a disregarded entity or a partnership is the number of shareholders. Therefore, if a sole shareholder owns an LLC, it will be taxed as a disregarded entity. If multiple shareholders own, it will be taxed as a partnership.
This is why an LLC is considered a pass-through entity. Whether it is owned by one or multiple shareholders, taxes will be imposed on the personal level, on the shareholder, and not on a corporate one.
Now, let’s dig into a topic that has been the concern of many:
Taxation of US-LLCs owned by foreigners.
US-LLC owned by a sole foreign shareholder
Many people hear rumors like I don’t pay taxes on my US-LLC (LLC) and stuff like that, and the truth is: it’s not a rumor but a complete fact!
In certain cases, if the LLC meets several criteria, it will be able not to pay any taxes, and the scenario should go as the following:
The sole shareholder should be a foreigner, not living in the States. The company should not have any physical presence there. This means that the company cannot have employees working in the US or any office or any operations there in any form whatsoever.
This way, all the income made by the company will not be connected to the US. We won’t have what we call “effectively connected income.” Consequently, the company will not have to pay any taxes in the US.
If the company has any form of presence in the States, whether employee or office or any operation there, it will be subject to taxation as a disregarded entity.
US-LLC owned by multi-shareholders
There are two scenarios here:
The first one is where foreigners entirely own the LLC. In this case, just like an LLC owned by a sole foreign shareholder, the company won’t have to pay taxes if it doesn’t have any “effectively connected income.” The company will have to file a form 1065 and annex a statement stating that the company does not have any presence in the US in any form and will be therefore exempted from paying taxes.
In the 2nd scenario, where foreigners and US residents own the company, things change. The company will have to pay taxes and file form 1065.
Talking about taxes can sometimes be tricky and blurry. However, in our upcoming articles, we will try to ease things up and provide more clarity.
Meanwhile, if you have any questions or concerns regarding the aforementioned, do not hesitate to visit Lexyom.com and book an online consultation.