What is a Limited Liability Company?
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What is a Limited Liability Company (LLC)?
The LLC is a popular choice of entity for conducting business or holding real estate in the United States for U.S. residents and non-U.S. residents alike. It is a business structure you can form in any one of the fifty states. An LLC is designed to protect the personal assets of its owners, similar to a corporation, but you have flexibility in how your business or rental activities are reported for tax purposes. It can also be used to hold personal use assets, such as a vacation residence.
For information on the best states for forming an LLC, and specifically how to form an LLC in each state, see LLC University. Additionally, here are some great tips on starting an LLC from the Chamber of Commerce: How to Start an LLC.
Types of LLCs
Single-Member LLC
A single-member LLC is treated as a disregarded entity for U.S. tax purposes unless a corporate election is made. That means there is no separate form to file for the LLC to report taxable income. This is done with the owner's tax return. So, if you are a nonresident alien completing taxes for your LLC, you are only required to report the business or rental activity of the LLC on Form 1040NR (U.S. Nonresident Alien Income Tax Return). If your LLC owns only personal-use property that does not generate revenue, you are not required to file Form 1040NR.
Form 5472 Filing
However, whether or not you have a Form 1040NR filing requirement, under special reporting requirements beginning in 2017, you are required to file Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade of Business) with a pro forma Form 1120 (U.S. Corporation Income Tax Return). See Form 5472: Special Reporting Requirements for a Single-Member LLC Owned by a Nonresident Alien.
Corporate Election
As a single owner, you can elect to treat your LLC as a corporation for tax purposes. If you do, the LLC must file Form 1120 to report and pay tax on corporate income and, as a nonresident alien, Form 5472 to report your ownership interest. This requires Form 8832 to be filed with the IRS. Here is some information on Form 8832: About Form 8832.
When corporate income is distributed to you as a dividend, you are required to file Form 1040NR to report the dividend income and pay tax again at the individual level. So there are two levels of taxation when a corporate election is made.
As a nonresident alien, you are not allowed to make an S election for your corporation, which is the way a resident owner turns a corporation into a pass-through entity. We won't go into the pros and cons of different entity options here, but a corporate election might not be your best choice to minimize your U.S. tax obligation.
Multi-Member LLC
If your LLC is owned by you and one or more partners, the default classification for U.S. tax purposes is a partnership. A partnership under U.S. tax law is treated as an entity separate from its partners, but it is a pass-through entity and it generally does not pay tax at the partnership level.
The partnership must file Form 1065 (see the rules for Form 1065) showing the income and deductions allocable to the partners. You, as a partner, must file a personal tax return (Form 1040NR for a nonresident partner) reporting the partnership income allocable to you, shown on Form K-1 issued to you by the partnership. The partnership return is due March 15. Form 1040NR is due June 15.
Special Forms for Nonresident Alien Multi-Member LLC Owners
Although the partnership is not a tax-paying entity, it is generally required to withhold federal income tax when it has a nonresident alien partner and the LLC partnership has received US-source income. Three forms are required for reporting and paying over tax withheld on effectively connected income allocable to foreign partners:
- Form 8804 (Annual Return for Partnership Withholding Tax): Used to report the withholding tax liability of the partnership
- Form 8805 (Foreign Partner's Information Statement of Section 1446 Withholding Tax): Used to show the amount of effectively connected taxable income and any withholding tax payments allocable to each foreign partner. This form must be sent to each foreign partner whether or not any withholding tax is paid. A copy of Form 8805 for each foreign partner must also be attached to Form 8804 when it is filed. A copy of Form 8805 must be attached to the foreign partner's U.S. income tax return to take a credit on Form 1040NR.
- Form 8813 (Partnership Withholding Tax Payment Voucher): Used to make payments of estimated tax to the United States treasury. Payments are required to be made on or before the 15th day of the fourth, sixth, ninth, and 12th months of the partnership's tax year
Corporate Election
A multi-member LLC also has the option to be treated as a corporation for tax purposes, which would require it to file a corporate tax return on Form 1120 rather than a partnership return and pay tax at the corporate level. The process of making the election is the same as for a single-member LLC.