Entering the American market opens a host of exciting opportunities for foreign-owned business. A US LLC is a popular choice among foreign business owners for good reason. Some of the most common reasons you’ll hear from foreign LLC owners are simplicity of formation and ease of management, as the U.S. has made it fairly simple for foreigners to own and operate a U.S. Limited Liability Company.
Still, it can feel daunting for a foreign business owner to understand what potential challenges can be involved and the US tax and compliance system can sometimes feel like a labyrinth specifically designed to confuse the unwitting.
The good news is that, even for foreign-owned LLC’s, the tax and reporting burdens are quite manageable. You just need to be sure you’re aware of the requirements and are on-time about filing them!
This Article discusses the reporting – or information returns – that foreign owned LLCs need to file with the Internal Revenue Service to remain in good standing and avoid potentially stiff penalties. We have written on LLC-related tax issues in a separate article here (Ukrainian). One thing to remember tax-wise however is that LLC’s themselves are actually not taxed – only the individual members are taxed on the individual income they withdraw from the LLC.
While taxes are more or less straightforward for LLCs that have not elected to be treated as Corporations (more on that at the end of the article), IRS reporting requirements for a foreign LLC will depend on how it is owned and how many members it has. Bear in mind that whatever category you fall under, your taxes will be the same – on the individual income of members.
Independent of the reporting forms we discuss below, which are reported to the federal government and are free of charge, each state also will require an annual LLC report form and charge a fee that varies from state to state, around $100 for most states.
An LLC with two or more members and at least one foreign member is a Multimember Foreign-Owned LLC, is treated as a “Partnership” by the US. This is true whether one member is a foreigner and all the rest are US citizens, or if all members are foreign nationals.
In this case you’ll need to file a Form 1065 "US Return of Partnership Income” (which is just an informational return so the IRS knows what each partner earned/paid) and each member will file a K-1.
These forms are used to provide information to the IRS, even if you’re not paying taxes in the US - which in most cases as a Ukrainian member of an American LLC you will not - on what each member’s share of income and expenses was.
If you do have a permanent establishment in the US or for other reasons do not qualify under the Tax Treaty between the United States and Ukraine, you will additionally have to file a form 1040NR and pay taxes on your US-source income.
You will use the form 1065 to declare profits, losses, gains, deductions, and credits of your LLC, and have each partner complete what is called a Schedule K – this basically lists each member’s share of income and expenses. There is no tax payment associated with the 1065 as each partner will pay their own personal income taxes.
If you are a Ukrainian member of a multi-member LLC, you in most cases will pay any taxes and claim any losses and deductions on your individual tax declarations in Ukraine, and so won’t file anything further with the United States. Be aware however that there are some cases where you will need to also file a Form 1040NR and pay taxes.
The deadline to file the form 1065 is March 15 of every year. Failure to file, if your LLC had any income or you have losses that you want to claim on your personal income taxes in Ukraine, can result in a penalty of $205 for every month you’re late on filing – so be sure to market your calendar!
It may seem counterintuitive, but you will have different reporting requirements if you, as a foreigner, or a foreign company, are the only member of your LLC. You will need to file, instead of 1065 and K-1, Forms 1121 and 5472.
Form 5472 is a form that Corporations (or LLC’s that have elected to be treated as corporation) have been filing for years. Since 2017, the IRS has also required Single Member Foreign LLCs to also file this report as a way to crack down on certain loopholes and tax evasion. Form 1120 is basic information on your company information – addresses, registered agent, etc.
Like with Form 1065 – there are no taxes associated with these forms. They are for information purposes. However, while these requirements don’t mean additional taxes, the minimum penalty for not filing the 5472 is quite stiff - $25,000!
First of all, if you are a single-member, foreign-owned LLC you will absolutely need an EIN – Employee Identification Number – to file. If you haven’t obtained one yet contact us!
Secondly, you need to file form 1120 (which only requires you to complete a few basic lines of information about your LLC).
Third, you’ll need to keep accurate records of expenses and income to be listed on Form 5472. You’ll need to mail or tax the form to the IRS’s address.
Finally, in some cases, where you have created a permanent establishment within the meaning of the US-Ukraine Tax Treaty – a situation which will apply to only a minority of Ukrainian LLC owners – you will need to file a 1040NR form and pay taxes accordingly on your US source income.
The deadline for Ukrainian-owned LLCs to file the 5427 and 1121, as long as you have no obligation to file US tax return, is April 15.
If you have a Multi-Member LLC that is taxed as a Corporation and has at least 1 Foreign owner that owns 25% or more you must file Form 5472 and Form 1120.
If you’re a single-member foreign owned LLC or multi-member LLC with 25% or more foreign ownership, you can elect at the time of formation to be treated and taxed as a C-corporation. In this case your single member foreign LLC will also have to file a Form 5427.
To recap, unless you have elected to have your LLC treated by the IRS as a C-Corporation at the time you formed it, your single member LLC will have to file a form 5472 to report income/expenses and a form 1120 with basic company information; your multi-member LLC with at least one member will have to file a 1065 to report income/expenses and a K-1.
This is a rather blanket overview, and there are situations where you may have to file additional forms. You may also not fall under the many provisions of the US-Ukraine tax treaty and owe and need to file and pay taxes in the United States – we recommend speaking with an accountant experienced in such matters.
If you have any questions, we recommend you get in touch with us! We’ll make sure you meet all your filing requirements in the US, and can also help you file, obtain an EIN, and pay your taxes!