The subject of foreign ownership of American companies has been of great interest to international investors and companies. LLC foreign ownership is a popular vehicle for international investors due to its flexibility. An LLC allows an investor to buy a stake in a U.S. company without being an actual member of the company’s board of directors. This makes it easy for investors from outside the United States to invest in a U.S. company.
However, foreign investors can face some challenges when dealing with LLCs, including complicated LLC laws, limited liability, and limited partnerships. This article provides a general overview of the differences between single- and multi-member LLCs and company and multi-member LLCs.
Table of Contents
What Is Considered a Foreign-Owned LLC?
A foreign-owned LLC is an entity in which a foreign entity owns an interest, either directly or indirectly. This can be a single owner or a group of owners. The most common example of a foreign-owned LLC is a single-member LLC owned by a foreign investor. However, a group of owners can also form a foreign-owned LLC, commonly referred to as a multi-member LLC.
1. LLC Owned by a Foreign Corporation, Company, Or Partnership
If a foreign entity owns an interest in an LLC, it is considered a foreign-owned US LLC. This includes when a foreign person or group of foreign persons owns an interest in a US single-member LLC or US multi-member LLC. The foreign entity can be a corporation, company, or partnership. The foreign entity can hold an ownership interest in the LLC directly or indirectly through ownership of shares of stock or other property in the LLC.
2. LLC Owned by a Foreign Government or Foreign Person or Group of Foreign Persons
A similar situation occurs when a foreign government or a foreign person or group of foreign persons owns an interest in an LLC. The foreign entity can also be a party to a binding contract with the LLC in which the foreign entity agrees to hold an interest in the LLC for the benefit of the foreign government or foreign person or group of foreign persons.
3. LLC Owned by a Foreign Trust or Estate
If a foreign trust or foreign estate owns an interest in an LLC, it is considered a foreign-owned US LLC. This includes when a foreign trust or foreign estate owns an interest in a US single-member LLC or US multi-member LLC. It also includes when a foreign trust or foreign estate indirectly owns an interest in the LLC through shares of stock or other property in the LLC.
4. LLC Owned by a Non-Resident Alien Individual
A non-resident alien individual can form a foreign-owned US LLC if: (a) the foreign entity can manage the affairs of the LLC, and (b) the foreign entity is not a corporation, company, or partnership created or organized in the United States.
What Does It Mean to Have a Direct or Indirect Interest in an LLC?
A direct interest means that the foreign entity owns an interest in the LLC by holding shares in the LLC. An indirect interest implies that the foreign entity owns an interest in the LLC by holding a property interest in the LLC.
Are There Any Potential Risks Associated with a US LLC For Non-Resident Foreigners?
One significant risk for foreign investors investing in US LLCs is taxes. Foreign investors may be subject to income taxes on earnings from a US LLC. There are other, less common, risks associated with foreign ownership.
For instance, the foreign investor may not have equal access to the US LLC's assets and financial information. Additionally, there is a risk that foreign investors will not be able to take an equal part in the management of the business, which may result in parties asking the question, can LLC members sue each other?
Many foreign partners in LLCs go into these partnerships due to the tax benefits. Still, it’s worth noting that INCs have different tax implications than LLCs – meaning it's worth reviewing the difference between an LLC vs Inc.
When Are Foreign LLC Taxes Not Applicable?
Foreign LLC taxes are not applicable when the following situations apply:
The Foreign LLC Is a Member of An Affiliated Group That Includes At Least One US LLC
A foreign LLC is a member of an affiliated group if it's a US LLC or satisfies the requirements for a member of a related group.
A foreign LLC can be a member of an affiliated group if it satisfies the requirements for being a member of an affiliated group as a parent company. A foreign LLC that meets the requirements of a branch or division can be part of an affiliated group without being subjected to US LLC tax.
The Foreign LLC Is A US Branch of a Foreign Corporation
The foreign LLC is a US branch of a foreign corporation if it satisfies the requirements for being a US branch of a foreign corporation. Suppose a foreign LLC is a US branch or division of a foreign corporation. In that case, it is a US corporation treated as a foreign corporation for US federal taxation purposes. The foreign corporation isn't subject to US taxes, as all its earnings are distributed to shareholders.
The Foreign LLC Is a US Partnership That Is a Member of An Affiliated Group That Includes At Least One US LLC
This means that if a foreign-owned partnership is a member of an affiliated group that includes at least one US LLC, then it is not subject to US LLC taxes because it is treated as a domestic partnership for US federal tax purposes.
The Foreign LLC Is a US Branch, Or a US Partnership, Of a Foreign Corporation or Partnership
A foreign corporation or partnership can be a branch or a partnership if it satisfies the requirements for being a branch or a partnership. That means it is treated as a foreign corporation or partnership for US federal taxation purposes. This means the corporation or partnership is not subject to US taxes, as earnings are treated as distributed to the foreign shareholders.
When Are Foreign-Owned LLC Taxes Applicable?
If a foreign-owned LLC is a single-member LLC, it is subject to US LLC taxes if it does not meet the requirements for being a member of an affiliated group. In other words, if a single-member LLC is foreign-owned and is not part of an affiliated group, it is subject to US LLC taxes.
If a foreign-owned LLC is a multi-member LLC, it is subject to US LLC taxes if it does not meet the requirements for being a member of an affiliated group. In other words, if a multi-member LLC is foreign-owned and is not part of an affiliated group, it is also subject to US LLC taxes.
What Do I Have to Do to Open a Non-US Resident LLC?
If you’re considering opening a foreign-owned LLC, then you’ll need to take the following steps:
Choose the State in Which You’ll Be Establishing Your Foreign-Owned LLC
The first step in opening a foreign-owned LLC is choosing the state where you’ll be establishing it. You’ll also want to consider which state will offer the best tax advantages for your foreign-owned LLC. The LLC laws of each state are different, so it’s essential to choose the state in which you’ll be establishing your foreign-owned LLC with care.
For instance, many states do not have state taxation on foreign-owned LLCs, but others do. Florida, for example, classifies most (but not all) LLCs as partnerships or disregarded entities. As a result, these LLCs do not pay state income taxes, as they are not considered a corporation.
Establish Your Business Name/Identity
Once you’ve decided on the state in which you’ll be establishing your foreign-owned LLC, it’s time to choose a name for your business. This decision will be the most crucial step in opening a foreign-owned LLC, as it will serve as your business’s identity and the way customers will identify your business.
Obtain a Physical US Mailing Address
While your LLC is still in the process of being established, it’s essential to have a physical address in the state in which you’ll be opening your foreign-owned LLC. This address will be used by the LLC, by your bank, by anyone who wants to send you a bill or other correspondence, or by your tax attorney to register your LLC with the state.
Apply for an EIN
Once your LLC is established, you’ll need to apply for an Employer Identification Number (EIN). An EIN is a nine-digit number that will be used to register your LLC, and it must be reported on tax returns.
Consider Hiring a Registered Agent
A registered agent is a person who is responsible for administering the business operations of your LLC. Suppose your LLC will be conducting a large amount of business in a particular state. In that case, it’s worth exploring whether a registered agent will be able to help you with your business operations.
File Your LLC With Your Chosen State
Before you can begin conducting any business, you’ll need to file your operation articles with the state. This is the document that describes your LLC and what its business is. Filing is necessary to establish your LLC as a legal entity.
Create an LLC Operating Agreement
An LLC operating agreement is a formal document that sets forth the rules and procedures your LLC will follow. It is important to note that each state can vary in what is required as part of your LLC’s operating agreement.
For instance, a Florida operating agreement must set forth the procedure for how a majority of members will vote on specific issues. In contrast, an operating agreement for a New York LLC must state the purpose of the LLC.
Open a US Bank Account
Once your LLC has been filed, you’re ready to open a bank account. This is the first step in conducting business with your LLC, as it allows you to accept checks from customers and collect money.
What Are My Responsibilities Regarding Foreign-Owned LLC Taxation?
Your taxation responsibilities as a foreign-owned LLC can and will vary depending on the type of LLC you have:
Foreign-owned multi-member LLC
A foreign-owned multi-member LLC is taxed as a partnership. Depending on your state, you may also be required to file a corporate income tax return. In addition, you may be subject to self-employment taxes.
Foreign-owned single-member LLC filing requirements
A foreign-owned multi-member LLC organized as a partnership must file a Form 1065 (U.S. Return of Partnership Income) with the IRS and a state corporate income tax return. If your LLC is a C-Corporation, you are not required to file a Form 1065 or a state corporate income tax return. Instead, you must fill out a Form 1120 and potentially a 5472.
To find out more, contact your state’s tax agency.
Foreign-owned single-member LLC
A foreign-owned single-member LLC is taxed as a corporation. To find out more, contact your state’s tax agency.
Foreign-owned single-member LLC filing requirements
Since a foreign-owned single-member LLC is taxed as a corporation, it must file a Form 1120 (U.S. Corporation Income Tax Return) with the IRS and a state corporate income tax return. In addition, you may be required to file a Form 1120S with the IRS if your LLC has income from operations in a state that requires a state tax. You will also need to file a 5472 (Foreign Corporation Income Tax Return) with the IRS if you qualify.
LLC owned by Foreign Corporation
An LLC owned by a foreign corporation is taxed as a C-Corporation. The business is taxed as a separate entity and subject to double taxation.
Foreign corporation filing requirements
Foreign corporation filing requirements include filing an 1120-F (US Income tax return of a foreign corporation). The 1099-K (Foreign corporation income) is also filed.
LLC Foreign Ownership Guidance From Cueto Law Group
LLC foreign ownership can get quite overwhelming, especially regarding the taxation processes involved.
Contact Cueto Law Group today if you have questions or need help with LLC foreign ownership.
FAQs
Can a foreign person own an LLC in the US?
If a foreign person wants to own a US LLC, they can do so. However, they must take the time to fully educate themselves on the process involved and take responsibility for the necessary taxation responsibility and requirements in the state they choose to operate in.
Can a foreigner be a partner in an LLC?
Yes, a foreigner can be a general partner in an LLC. However, this requires that they abide by the same rules as a US citizen – meaning they will need to take on the necessary responsibilities of a general partner, including partaking in daily work activities and taxation responsibility.
Can a foreign company own a US LLC?
Yes, a foreigner can own a US LLC. However, they are required to take the time to understand all of the taxation processes, requirements, and responsibilities that are involved. If not, they can potentially run into significant tax problems and end up having significant legal troubles.
Does an LLC foreign owner need a Visa?
No, a US LLC foreign owner is not required to have a visa to operate their LLC. However, it is a good idea to have one since it can make things much easier when doing business in the future, such as making visits to the company, conducting banking transactions, etc.
Resources
- https://www.llcuniversity.com/irs/form-5472-foreign-owned-llc/
- https://onlinetaxman.com/us-llc-tax-haven-for-foreigners/
- https://www.irs.gov/publications/p515
- https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
- https://www.irs.gov/individuals/international-taxpayers/foreign-persons
- https://www.investopedia.com/articles/personal-finance/101315/taxes-florida-small-businesses-basics.asp#llcs-in-florida
- https://www.lawofficesofjasonknott.com/foreign-owned-multi-member-llc-do-we-file-form-5472/
- https://www.irs.gov/forms-pubs/about-form-1120-f
- https://drummondadvisors.com/en/2020/11/20/foreign-owned-single-member-llc-and-irs-form-5472/
