Tax Requirements to Open an LLC in The USA As a Foreigner
What’s the difference between tax reports between LLCs of 1 owner and LLCs with 2 or more partners?
For the IRS and for the courts in the USA there is a different treatment of LLC with 1 member and with 2 or more members, for the first case for the IRS the LLC with 1 member is a disregarded entity, it means that the company for the IRS does not exist therefore the owner of the company is the one responsible for the reporting of the profits and expenses of the company. For the foreigner it creates a problem because to report taxes at the personal level that the IRS requires the single member owner to apply for a tax ID and that is an individual tax identification number that whenever foreign individual is going to pay taxes for the profits of the LLC that he owns, he needs to apply for this number together with the filing of the tax return. There are 2 types of forms, whenever the owner of the company must file taxes he has to apply for a Individual tax identification number and in addition to that the owner of the LLC will need to file a tax return informing the income and expenses of the company into a personal scale and then paying taxes for that.
That is the main difference between and LLC with one member and an LLC with many members. For LLC with many members things are different, in this case the LLC needs to file a tax return by itself, in this case the IRS does require a tax return so its not a disregarded entity anymore, the LLC with 2 members must file a tax return but willl pay no tax, the LLC with 2 members will give to the members a document with the profits of the company according to the percentage that they own and with that paper the owners will go an apply and pay taxes, if they foreign citizens they will need to file for an individual tax identification number and with that repeat the process that we mentioned before for the single owner and file an application to request a tax ID and second file a tax return to pay the taxes informing only the profits of the company and not expenses.
But they still need to apply for a tax ID, this is in terms of the IRS treatment at the level of the court, legally an LLC with 1 member does not exist therefore there is no privilege of limited liability because this is the objective in case anything happens with the business and anyone bringing a lawsuit against the company only the investment in the company the owners will lose but because they only have 1 single member this privilege does not apply, so for the courts the LLC with one member is a disregarded entity meaning that it doesn’t exist, it is the owner that assumes the responsibility and that’s the problem because now the personal assets of the owner will be responsible for any lawsuit if the assets of the company does not cover the lawsuit that the other person is bringing. Things change when the LLC has 2 or more members, the IRS and the courts consider the LLCs as a company separated from the owner therefore anyone bringing a lawsuit against the company with 2 members the only risk that the owners will have is the investment in the company and only the assets of the company will be compromised and not the assets of the owners. That’s the main difference between an LLC with 1 members and an LLC with 2 or more members.
What requirements must be taken into account to file a tax return for LLC with foreign owners?
For an LLC with foreign owners there is an additional obligation related to the ones with US resident owners, an LLC with 2 or more owners will need to file a tax return at the end of the year with the IRS, this will include the income and expenses of the company and based on that will create one sheet that will be given to every owner according to the percentage that they own in the company and that percentage will distribute the profits of the company, so if there’s $300,000 and there are 2 owners, so 50/50 each one will receive a document which is a K1 with an amount to report in their individual tax return with any other income they have. But once that is completed there is another step for LLCs with foreign owners they are required to withhold every quarter 35% of the profits that correspond to that particular foreign owners, so if the company has 2 owners and through the year they make $20,000 one that is US and one is not US citizens they will have to withhold 35% and at the end of the year the foreign owners will file a tax return and if that is the only income he has he will have to file a return. If the foreign owners shows more income he will receive no refund in that case. Many times foreign owners are advised to open an LLC but there are tax consequences that are not informed since they are not in the US. So its very important that every foreign owner knows about this and its aware that there is this withholding of the profits of each of the foreign owners and the partnership is in obligation to send this money to the IRS otherwise it will be penalized by the IRS.
What is the best tax strategy to carry out international operations of an LLC located in the US?
What I’ve seen for many clients, in the US there is for example state like Delaware that do not charge income tax to companies, but that only works when the business is not located or there is no sources income that are within the US, so there is one company in Delaware that opens an LLC but the business is not in the US its international, if the owner of the company is one single individual and he is foreign there is no tax due because the sources of the income is foreign and the only way pays taxes is when the income is sourced in the US. Therefore, foreign individual coming to the US opening a company in Delaware and the income source is international they will pay no taxes. Things change when there are more individual members, even though the sources of the income are foreign they have to pay taxes in the US. That’s the main difference in terms of taxation, this only works when there are no assets in the US producing income, if they start selling in the US they have to start paying taxes. That is the benefit of having a company in states like Delaware that they do not tax profits of companies since there is no income sourced in the US.
Which states provides better tax benefits for an LLC in the US, what are the main differences?
As I said before, the states for individuals are Wyoming, Delaware and it is considered offshore because it keeps the confidentiality of the individuals that in the rest of the states the names of the owners are public, but if you want to open a company on the US in any of these states and the company is located in Florida or Texas you need to also register the company in Florida or Texas because companies are not on a federal level they are by states, each state is in charge of legislating the company law, and a company registered in Florida cannot do business in Delaware unless its registered in that state meaning a second register. Therefore, the state that give you the best tax treatment if there is foreign citizen is the one mentioned before Wyoming, Delaware and Nevada but if the individual wants to buy a property in Florida they will need to register the company also in Florida because the state of Florida will require a company in Florida. So it all depends in the structure of the business. Some states will charge income tax in addition to the state tax so be careful when doing tax planning because your position can be compromised.
What is the maximum retention paid by an LLC in the US?
This is related to the 35% withholding, the maximum retention for an LLC with 2 or more partners and one is a foreign owner is require to withhold 35% of the profits of the company that corresponds to that individual, not the sales. If all of the owners are foreign they must withhold 35% for each partners.
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In what scenarios does the IRS return their withholding and what is the percentage of the return?
In most scenarios the IRS will return the withholding minus the taxes that are owed, LLC do not pay taxes but the owners do pay taxes, on that they will be subject to. personal income tax rate vary from 10% to 35%, the larger the income the higher the tax rate, and the tax rate is divided by filing single or married, so any foreign citizen not living in the US will be classified as a single individual. Each of the trenches of income will be taxed at a different tax rate, that’s how taxes are calculated in the US. If the foreign owner has other income in the US in addition to the profits of that company the fund will be lower and if he has significant income probably the refund will be cero. That’s how taxes are calculated here, so again out of the $50,000 in a year there is taxes already paid to the IRS the LLC will need to withhold 35% of that money that is given to the foreign partners so if there is $35,000 divided into 2 people is $17,5000 to each partner paid to the IRS through the year, if I am the partner, the partnership will give me 2 papers one with $50,000 and another for $17,500 for taxes paid, so I take those 2 papers and file income tax return and file a request for a tax ID and the IRS has to give me back the money but that happens at the end of the year. If that’s my only income, the IRS is not going to give me the $17,500 the full amount because I have to pay some taxes, they are going to give me the amount withheld minus the taxes over the $50,000 calculated at 10% for the first $10,000, 15% for the second 20 to 40 so that would $3,000 more and then finally 25% over the portion between 40 and 50 and that will be $5000, as the LLC withheld $17,500 the IRS will give them $12,500 as a refund.
What advantage of an LLC when the partners receive earnings of more than $100K per year?
If they receive $150,000 or more in profits and there are 2 foreign partners, then it will not be $50,000 for each and the taxes paid will not be $5,000 and the withholding will be more, almost $8,000 more, so instead it will be $25,000 and the taxes will probably be $800 more. The more profits the company is giving to the owners, the higher tax rate and larger the taxes to be paid. The only advantage that the LLC will provide to the foreign partners is that tax rate is escalating meaning that you will only pay 10% over the $10,000 and 15% from 10 to 40 but it is beneficial because if we compare this to a corporation they pay 21% in taxes flat, which is a different tax rate and in addition the owners when they receive dividends they need to pay an additional 15% of tax so like 35% almost flat so the advantage for foreign citizens to do business in US is to open an LLC because of the graduated rates for each of the trenches of the income they will receive.
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.
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