How are taxes paid on a foreign-owned LLC?

June 17, 2020

If you have formed a US limited liability company (LLC) but you are not a US resident, it's important to understand your unique tax responsibilities. Don't worry — it's not as complicated as it seems, and if you need extra help, we're ready and willing to assist you every step of the way. 

So, how are taxes paid on a foreign-owned LLC? Let's take a look.

Get an Employer Identification Number (EIN)

The first thing you'll need to pay taxes on a foreign-owned LLC located in the US is an Employer Identification Number. The LLC owner or principal controller can apply for this EIN here

Identify what tax you need to pay 

If you form a foreign-owned LLC and you're the sole owner, you have two choices. You can:

  • Opt for the IRS to tax you as a corporation. 
  • Let the IRS treat your company as a "disregarded entity."

A disregarded entity only pays federal income tax if it generates income effectively connected to US business or trade. In other words, if the company makes money in the US, it's subject to federal income tax. 

If it doesn't make money in the US, you, the owner, can declare its income and expenditure on your own tax return — contact us for more details regarding this. 

On the other hand, if you're taxed as a corporation, the company and shareholder dividends are subject to tax. 

Complete and file the correct paperwork 

There are two forms you should fill out: Form 1120 and Form 5472.

Complete Form 1120 first. It's a pro forma document and there's not much detail required. Meanwhile, your Form 5472 should include the details of your reportable transactions — these being transactions effectively connected to a US trade or business. Transactions include, but are not limited to:

  • Sales/Purchases
  • Lending/Borrowing
  • Commissions
  • Rent
  • Interest 

Bear in mind that if your LLC is at least 25% foreign-owned, you must complete Form 5472. 

Also, it doesn't matter how small the reportable income is — everything must be reported through a Form 5472. It's critical that you keep sufficient records to support the information on your form. 

You or your LLC may be subject to additional tax reporting requirements. Always seek expert advice. 

Understand the consequences of improper filing

Don't ignore your filing requirements. 

  • If you don't file your Form 5472, the IRS may fine you up to $25,000. 
  • If after 90 days you still haven't filed, the IRS will add on another $25,000.
  • Criminal charges may also apply.

While these fines are alarming, they're easily avoided by complying with filing requirements. If you're unclear on how taxes are paid on a foreign-owned LLC, don't take any chances — contact us for full and expert advice. 

Accountants Without Borders

Based in San Diego, Accountants Without Borders devises tax-efficient strategies to help companies expand their operations around the world. It doesn't matter where you're based, or where you hope to start your business — we have the tools, expertise, and experience to help you succeed. 

We don't believe in borders. The only limit is your ambition. To find out more about how taxes are paid on a foreign-owned LLC, and for any other tax queries, contact us now.