foreign nations and US LLCs and tax law

Foreign Owner – US Limited Companies

Can United States Limited Liability Companies be Owned by Foreign Members?

Yes. The United States allows citizens of foreign countries to own a US Limited Liability Company (LLC). A foreign owner can own an equity ownership interest of one hundred percent or a fractional interest.

Is it Advantageous for a Citizen of Foreign Nation to Own a US LLC?

Yes. Ownership of a US Limited Liability Company (LLC) allows a foreign citizen to participate in the largest single economy on earth.

For the purposes of this post, what is referred to as a US LLC is, in fact, a LLC created under the laws of one of the Fifty States or the District of Columbia. Some States allow the formation of a Professional Limited Liability Company (PLLC). A PLLC is a specific type of LLC.

Taxation of US LLCs

Business Patent Law, PLLC does not provide specific tax counsel for its clients. However, we can offer some general principles regarding foreign ownership of US LLCs:

  • Most nations tax the income of their citizens, regardless of jurisdiction where the income was generated.
  • Under US federal tax law, LLCs are considered “pass-through entities” for tax purposes.  This means that profits and losses are passed through to the owners of the LLC.
  • As a general rule, most LLCs are required to pay some type of taxes and/or fees in the State of the LLC’s organization and any other State in which the LLC does business.
  • State law taxes and fees vary from state to state and are usually less than US federal taxes.

Does the US Participate in Tax Treaties with Other Nations?

  • Yes.
  • Before purchasing ownership in a US LLC, a potential foreign owner should seek legal and tax counsel in both the owner’s home nation and the United States.
  • The United States has enacted tax treaties with different nations.
  • Different tax treaties produce different tax consequences for the foreign owner of a US LLC.
  • Among other things, the tax treaties can control what is taxed or is not taxed and payment of taxes in the United States and the foreign owner’s home nation.

Does a Foreign Owner of a US LLC need to register with the IRS?

It depends on the Tax Treaty between the foreign owner’s home Nation and the United States.

As a general rule, a foreign owner owning 25% or more of the US LLC will need to register with the US Internal Revenue Service (IRS). When the foreign owner is required to register with the IRS, the foreign owner must secure a Foreign Taxpayer Identification Number (FTIN). It can take several months for the IRS to issue the FTIN.

Under some tax treaties, an owner of less than a 25% equity interest in the US LLC may not be required to register with the US IRS.

Under some tax treaties, an owner of less than a 25% equity interest in the US LLC may not be taxed on the owner’s profits from the US LLC. However, the foreign owner will likely be taxed on the LLC’s profits in the foreign owner’s home Nation.

If the US LLC should file certain documents related to foreign ownership and does not file the documents with the IRS, the IRS will financially penalize the US LLC.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.

If you have questions about equity ownership of a US LLC, please contact Business Patent Law, PLLC and we will discuss possibilities for your business.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Business Taxes in 2019

Your Business Income Taxes

In the United States, businesses pay income taxes

For millennia, governments have taxed businesses and individuals. Payment of taxes on income generated by business is a quarterly/annual requirement in the United States. For as long as the business remains active, it will pay taxes. The filing of returns and the payment of income taxes can sometimes overwhelm small businesses owners.

As a small business owner, it may be possible to minimize taxes, by using a different business structure.

Select the way your company will be taxed

Some options for your business include:

  • C-Corporation (Inc.)
  • C-Corporation – Subchapter S
  • Limited Liability Company
  • Sole Proprietorship
  • Partnership

Selecting your company’s jurisdiction

Where you choose to incorporate or organize your company will impact your taxes.

If your company does business in several States, they will usually require you to pay taxes on income generated in each State.

Companies can, however, “shop” for States that do not have an income tax. In 2019, South Dakota and Wyoming do not impose State corporate income taxes or State individual income taxes.

Some jurisdictions give more favorable tax treatment to businesses incorporated/organized in that state which also have their principal office in the State, as compared to those formed in another State.

But, beware, in some States, lower State business income taxes may increase the total amount of Federal business income taxes.

Product logistics, the availability of qualified employees, energy costs and natural resources can sometimes dictate which State you select to incorporate or organize your business.

Federal Income Taxes for C-Corporations

C-Corporations are taxed on profits.  A shareholder receiving a C-Corporation’s profit distribution will also pay income tax on the profits received.

The Tax Cuts and Jobs Act of 2017 capped the maximum tax rate for income generated by a C-Corporation at 21%.

Federal Income Taxes for Pass-Through Legal Entities

Subchapter S Corporations, Limited Liability Companies and Partnerships are known commonly as “pass through” entities.  Profits and losses generally pass through to the owners of the legal entity, so this income will be declared on the owners’ individual income tax returns.

With some exceptions, the Tax Cuts and Jobs Act of 2017 allows a Qualified Business Income Deduction of up to 20% of Qualified Business Income for sole proprietors and pass-through entities.

What is Qualified Business Income?

Qualified Business Income is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only those items included in taxable income are counted and these items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends, and interest income are excluded from Qualified Business Income.

Most growing companies eventually reach annual revenues where the combination of business counsel and tax counsel can improve the bottom line for your company.

Business Patent Law, PLLC does not provide tax counsel for specific matters, but does provide business counsel for businesses.

If you have questions about your company’s business structure, please contact Business Patent Law, PLLC, and we will discuss possibilities for your business.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

LLC friendly states

Organizing Your LLC Intellectual Property Startup

Limited Liability Company – IP Startup

One or more Limited Liability Companies, can be be beneficial for Intellectual Property startups. As indicated in a prior blog, it is prudent for companies owning Intellectual Property rights to hold the Intellectual Property in a holding company and to have the goods/services associated with the Intellectual Property owned by a separate manufacturing/distribution company.

LLC Organization and Tax Law

Should organizers of a Limited Liability Company seek the advice of a tax professional prior to organization the LLC?  Yes.

Business Patent Law, PLLC does not provide tax counsel. However, with the ever-changing tax codes, organizers should consult with a tax professional. If an inappropriate jurisdiction is initially selected for the organization of the LLC, it may not be cost-efficient to redo the LLC’s organization in another jurisdiction.

Limited Liability Companies are Legal Entities

Limited Liability Companies are legal entities of the state (or District of Columbia) in which the LLC is organized.

For a Limited Liability Company with all members domiciled in the same jurisdiction, some states offer more owner friendly in-state taxation and fees to the citizen-members than other states.

You should review a state’s securities laws (and jurisdictional fees associated with the capitalization of the LLC) to determine if a state other than your home state may be better for the organization of the LLC.

As a general rule, a Limited Liability Company is treated as a pass through entity for federal income taxation purposes.

Where Should I Organize my LLC?

Where Should the Organizers Organize a Limited Liability Company? It depends

  • The nature of the LLC’s business can affect which jurisdiction is more favorable, e.g., some jurisdictions provide favorable state and local tax preferences for certain businesses
  • Some jurisdictions are more organizational, fee and tax-friendly than other jurisdictions
  • Management of an LLC can find it advantageous to organize in a first jurisdiction and locate the LLC’s principal office in a second jurisdiction
  • Some jurisdictions require out-of-state members to pay jurisdictional taxes in the jurisdiction where the LLC is organized or conducts business while other jurisdictions do not tax out-of-state members

Business Patent Law, PLLC has a history of working with tax professionals to optimize the organizational structures of LLCs. Because of our experience with different jurisdictions, Business Patent Law, PLLC (in conjunction with a trusted tax professional) can create a workable organizational structure for LLCs.

If you have questions about the organization of a Limited Liability Company or  Intellectual Property matters, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.