Complete Guide to Opening an LLC in the USA for Foreigners

FAS CPA & Consultants

Opening a Limited Liability Company (LLC) in the United States can be a great opportunity for foreign entrepreneurs and investors looking to establish a presence in the American market. In this comprehensive guide, we will provide you with all the necessary information and step-by-step instructions to successfully open an LLC as a foreigner. Whether you are considering starting a new business or expanding your existing operations, this article will cover all the essential aspects you need to know.


Understanding the Basics of an LLC

Before diving into the process of opening an LLC, let’s start by understanding what an LLC is and why it is a popular choice for foreign investors. An LLC combines the limited liability protection of a corporation with the flexibility and tax advantages of a partnership. As a foreigner, establishing an LLC allows you to operate a business in the U.S. while protecting your personal assets.


Legal and Tax Considerations

When opening an LLC as a foreigner, it’s crucial to be aware of the legal and tax requirements involved. The Internal Revenue Service (IRS) has specific regulations for foreign-owned LLCs, and it’s essential to comply with all applicable laws. We will discuss the tax implications, including federal taxes, state taxes, and any reporting obligations.


Choosing the Right State

One of the first decisions you’ll need to make is selecting the state in which to form your LLC. Each state has its own set of laws and regulations governing LLCs, including fees, filing requirements, and tax structures. We will provide an overview of some popular states for LLC formation, considering factors such as business-friendly environments, tax advantages, and accessibility.


Steps to Form an LLC

The process of forming an LLC as a foreigner involves several steps. We will guide you through each of these steps in detail, including:


Name Reservation

Choosing a unique and available name for your LLC. b. Registered Agent: Appointing a registered agent to receive legal documents on behalf of your LLC. c. Articles of Organization: Preparing and filing the necessary formation documents with the state. d. Operating Agreement: Creating an operating agreement to outline the rights and responsibilities of LLC members. e. Employer Identification Number (EIN): Obtaining an EIN from the IRS for tax purposes. f. Compliance Requirements: Understanding ongoing compliance obligations, such as annual reports and taxes.


Opening a Business Bank Account

To effectively manage your LLC’s finances, it’s important to open a business bank account in the U.S. We will discuss the requirements and documentation needed to open an account, as well as the benefits of separating personal and business finances.


Additional Considerations for Foreign-Owned LLCs

As a foreigner, there are specific considerations to keep in mind when operating an LLC in the U.S. We will cover topics such as visa requirements, hiring employees, intellectual property protection, and potential tax treaties that may apply.

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New Regulations For Single-Member Foreign Owned LLCs

Before the new regulations, single-member foreign-owned LLCs that were disregarded for tax purposes was not required to file tax returns nor make informational filings with the IRS except for their interests in non-US financial accounts.  These LLCs were not even subject to federal record-keeping requirements, nor were they obligated to disclose their beneficial ownership to the IRS.  As a result, non-US persons used these LLCs for many investments, including for the acquisition of real estate and as holding vehicles for US and non-US investments.


The worldwide push for greater tax transparency and information exchange initiatives such as the Foreign Account Tax Compliance Act (FACTA) and Common Reporting Standards (CRS) eventually lead to new regulations that attempt to address deficiencies in the compliance of the United States with international standards of transparency that made it possible for foreign persons in states like Delaware to organize LLCs without ever disclosing to the government who the beneficial owners of the LLC were.  


Now the new regulations subject foreign-owned single-member LLCs that are disregarded for US tax purposes to Form 1120 and 5472 informational reporting requirements for every year since 2017, during which the LLC had a reportable transaction.


What Is A Reportable Transaction?

It is very broadly defined with the intent to include any activity between a direct or indirect foreign owner and the LLC, including:

⇒ Capital contributions.

⇒ Capital reductions.

⇒ The use of LLC property (real estate) by a direct or indirect foreign owner or related party.

⇒ Payments by an LLC to or for the benefit of a direct or indirect foreign owner or related party.

⇒ Payments by a direct or indirect foreign owner or related party for the benefit of the LLC.

⇒ Loans and payments of interest between an LLC and a direct or indirect foreign owner or related party.


The new regulations however, do not establish any minimum thresholds.  Even $1 contributed by a foreign owner to a single-member disregarded LLC would trigger the new reporting requirement.


What To Do?

Non-US owners of single-member disregarded LLCs should prepare for the new requirements by determining their new obligations and complying with it.


The New Requirements

Now, these LLCs fall under the informational reporting requirements established under IRC Section 6038A for 25-percent foreign-owned United States Corporations.  Hence these LLCs now require US employer identification numbers (EIN) and must annually file a pro forma Form 1120 corporate income tax return with a Form 5472 identifying each 25% or greater direct and ultimate indirect foreign owner.


The first filings were due by April 17gth 2018, for tax years starting in 2017. A penalty of $10,000 will be assessed by the IRS for each year these new requirements are not timely satisfied.


LLC With Foreign Owner Need Report To IRS

As far as the IRS is concerned, single member LLC’s with a foreign owner are a disregarded entity and still need to report to the IRS just like corporations do.  They will also be penalized and will be required to keep records like corporations- so that they can be held to the same standards as corporations and punished for non-compliance just like corporations. 


These are new regulations that are coming in response to foreign investors using LLC’s to purchase real estate and then parking cash in these LLC’s and using them as a front to escape paying taxes on assets owned to foreign governments.  They then create a Grantor Trust and use foreign accounts or trust companies to avoid probate and own the assets through fully owned LLC’s. 


Some of the new reporting requirements were listed by FAS CPA and Consultants and are as follows:

⇒ Filing is an obligation even if foreign owned.

⇒ File form 5472.

⇒ Keep detailed records of all transactions between parties.

⇒ Obtain and EIN or Tax ID.

⇒ Inform and report all reportable transactions like loans, licenses, property sales, leases, assignments, any amounts paid or received from the formation, dissolution, disposition, or acquisition of the entity.

⇒ Any funding for the LLC whether through contribution or loan.


Because of the unscrupulous nature of some foreign owned single member LLC’s, the IRS is cracking down and requiring that all single member LLC’s with foreign owners need to report to the IRS.  It’s better for all in the long run, but doesn’t feel easy at the moment when so many people have been able to shield assets for so long and not been held accountable for them. 


These are not the only changes that have happened however.  Anthony S. Bakale, CPA over at thetaxadviser.com did a fascinating write up back on Aug. 7th, 2018 that further lays out all of the withholding requirements and changes that come when the sale of a property, disposition of a partnership or other exchange happens and the seller happens to be foreign.  It was signed into law in December of 2017 that 10% of the sale must be withheld as a tax and reported to the IRS.  It’s interesting to note though that the foreign seller doesn’t do the withholding.  Instead that burden falls directly on the U.S. buyer. 

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These changes have created quite a bit of uncertainty in regards to calculating the withholding for both publically traded dispositions and non-publically traded dispositions.  Prior to the changes, a partnership was basically valued by an aggregation of assets for the purposes of trying to calculate ECI when partnership interests are exchanged or sold.  Basically a foreign partner was subject to tax on his or her share of the gains when the partnership interest is exchanged or sold.  A foreign persons gain on the sale as long as the partnership is conducting business in the United States is treated as ECI assuming their share of gain is made of up ECI property.


In 2017, the Tax court ruled that the capital gain from the sale of an interest in a partnership that was engaged in a U.S. business or trade was not ECI to the foreign partner (subject to exceptions of course). The tax court totally went against the IRS’s long-standing ruling about ECI and selling a partnership interest.  The court decided that the sale of a partnership interest is an indivisible capital asset and not ECI.   The IRS appealed this decision but as it remains, it’s been a very favorable ruling for foreign investors.  The TCJA changes however, have basically reversed the application of the 2017 ruling in respects to future transfers of U.S. partnerships.  The New Sec. 864(c)(8) says that a gain or loss to a non resident alien individual or a foreign corporation in the disposition of a partnership interest or sale or exchange will be considered ECI assuming that the gain would have been ECI if the partnership sold all of it’s assets at fair market value.


We mentioned that the withholding of the 10% tax at the time of sale is the responsibility of the buyer if the seller is a foreign person.  If the withholding is not withheld, then the partnership is supposed to deduct the amount plus interest from any distributions until the requirement is satisfied.   The IRS expects the tax due from the sale or disposition of a U.S. partnership by the foreign person.  Questions have arisen though on how to determine the tax status of the seller of a PTP when those sales or exchanges happen on an exchange.  Others wonder how to comply with the obligation to withhold tax when the buyer of a PTP doesn’t withhold the necessary amount like they were supposed to.


Because of these questions, on December 29, 2017 the Treasury and IRS released a notice that would grant a temporary suspension on the 10% withholding requirement until further regulations and guidance are given.   Even the IRS realizes that it’s nearly impossible to know if a seller is a foreign person when these transactions are done through clearing agents and held by brokers. 


On April 2, 2018, the IRS and Treasury again issued notices to provide some interim guidance on the withholding requirements on transfers of non-publically traded partnerships.  The notice again states that a transferee must report and remit the withholding within 20 days of the disposition of U.S. real property by a foreign seller.  There are certain exceptions that would exempt a transferee from the with holding requirements and they are:

⇒ Certification of non-foreign status: The withholding exception related to certifying non-foreign status can be satisfied by obtaining certifications and submitting a Form W-9, Request for Taxpayer Identification Number and Certification, to a transferee that includes certain information to satisfy this requirement, and a transferee may generally rely upon a Form W-9 previously received that includes the required information.

⇒ Certification of no realized gain: A transferee can be exempt from the withholding requirement if the transferee received a certification from the transferor stating that the transfer of its partnership interest will not result in realized gain.

⇒ Certification of less than 25% ECI in three prior tax years or less than 25% effectively connected gain: A transferee can be exempt from withholding if the transferee receives a certification that (1) the transferor was a partner in the partnership for the entirety of the partner’s prior tax year and the two tax years that precede it, and the transferor’s ECI is less than 25% of the transferor’s total distributive share of income from the partnership in each of those years, or (2) if the partnership was deemed to sell its assets at fair market value, the amount of gain that would be ECI would be less than 25% of the total gain on the deemed sale.

⇒ Non-recognition transaction: No withholding is required if the transferee receives a notice from the transferor that the transfer is a non-recognition transaction.


The fact remains though, we still need permanent rules and regulations on what needs to be done in regards to this 10% withholding rule and we need a lot of clarification on non-PTP withholdings.  It seems that the partners buying and selling PTP’s are exempt from this withholding tax, the same cannot be said for non-PTP sales.  There are still questions and uncertainty as to how these rules should be applied to different scenarios but until we have more concrete guidance, some of the above will have to suffice.

US Office Solution for Small Foreign Banks

Small foreign banks face high costs to enter the US banking market. One way to avoid the high cost of installing an office, especially if the bank is small, is to start by establishing a company in the USA. This company must be completely independent of the bank and not related in any way. Depending on the demographics, the company can be located in an area that Expats visit frequently. The proximity of a consulate or embassy is an ideal location.


The company will offer the accounts exclusively to the Expat community in the USA. This works best if the company contact people of the same Expat community who are very well connected. It can also work with the consulate or embassy to refer clients.


But this system has some requirements:

⇒ The company will not open accounts.

⇒ Account applications will be forwarded to and handled by the Bank in the country of origin (sent via email).


The Bank will need:

⇒ To open an account in a US bank.

⇒ The Bank can also use RIA to receive the funds from account openings.


The company and the bank will need to establish an agreement for a commission structure. Also, the Bank needs to design a fee structure to recover the cost of using RIA and small deposits.


Keep in mind that this is not a banking structure. This is not a banking office either. This is only a way to support and create awareness of a particular bank in a particular Expat community in the USA. 


Opening an LLC in the USA as a foreigner can be a rewarding venture, providing access to a vibrant market and numerous business opportunities. By following the steps outlined in this guide and ensuring compliance with legal and tax requirements, you can set a solid foundation for your business success. Remember to consult with experienced professionals to navigate the complexities and make informed decisions along the way.


Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Check The Video How to Open a LLC Company in USA for Foreigners

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