Many people from all over the world would like to start their businesses by forming an LLC in the U.S., but the process of creating an LLC can be a bit more complicated if the business owner is not a U.S. citizen or resident.
While it is possible for your friend or relative in a foreign country to start an LLC, there are several restrictions and special requirements for foreign business owners who want to start a business in the U.S. (i.e., those who are not U.S. citizens or legal U.S. residents). For example:
Foreign Persons Can Own an LLC
It’s true that foreign persons can own an LLC (Limited Liability Company) in the U.S., even if they do not reside in the U.S. There are no requirements for owners of an LLC to be citizens or residents of the U.S. You can even be the owner of a single-member LLC as a foreign person.
LLCs can also be owned by other corporate entities. So if you are a foreign person who already owns a business, you can create an LLC in the U.S. that serves as part of your overall “family” of companies.
However, if you are a foreign national who does not reside in the U.S. and does not have legal status to work in the U.S., you don’t have to be the sole owner of your LLC. You might want to partner with a U.S. citizen or legal resident of the U.S. (or another LLC owned by a U.S. citizen/legal resident) in order to share legal ownership of your U.S.-based LLC. Luckily, the LLC gives great flexibility for ownership structure, even for foreign owners.
Foreign Persons Might Need Help Getting an EIN
There’s one major reason why your foreign friend or relative may need help registering an LLC: the LLC needs to apply for an Employer Identification Number (EIN) for tax purposes and to set up a business bank account. It is often easier to qualify for an EIN if your LLC has an owner (“member”) who is a U.S. citizen or legal U.S. resident with authorization to work in the U.S. (“resident alien”). This is why it is often a smart strategy to have multiple owners of the LLC, with at least one owner being a U.S. person (citizen or resident alien).
International applicants for an EIN also have to use a special process to apply. You’ll need to call (267) 941-1099 (not a toll-free number) between 6 a.m. and 11 p.m. Eastern Time Monday through Friday to obtain your EIN. Just like all U.S.-based applicants for an EIN, you also will need to fill out IRS Form SS-4 (Application for Employer Identification Number).
Foreign Persons Cannot Own an S Corporation
One popular strategy for owners of LLCs is to set up the business as an LLC and then file taxes as an S Corporation. Why? Because S Corporations often have favorable tax treatment. In some cases, filing taxes as an S Corporation can help you save money by reducing the amount of self-employment tax that you would owe if all of your business income were simply passed through to your personal tax return as “earned income” (which is subject to self-employment taxes).
However, this strategy does not apply to foreign business owners. That’s because S Corporations cannot be owned by foreign persons — all shareholders of an S Corporation must be U.S. citizens or U.S. legal residents.
Foreign-owned LLCs Have Specific Tax Reporting Requirements
At the end of 2016, the Treasury Department and IRS announced new regulations for “domestic disregarded entities with foreign owners” (this could include foreign-owned LLCs, which are typically treated as “disregarded entities” for tax purposes). The new regulations require these foreign-owned disregarded entities to file IRS Form 5472 to identify the companies’ foreign owners and report certain transactions. This is part of an attempt by U.S. authorities to “combat tax evasion and money laundering across borders and…make it harder for foreign nationals to use U.S. shell companies to hide assets from tax authorities back home.”
As described in the Wealth Management article linked above, these new requirements “significantly expand the class of reportable transactions that can trigger a Form 5472 filing obligation for a domestic disregarded entity.” These transactions now include:
- Property sales
- Remunerated services
- Amounts paid/received in connection with the formation, dissolution, acquisition, and disposition of the entity.
This means that even funding the LLC with a loan or initial contribution would trigger the Form 5472 filing obligation.
Make sure to talk to your accountant, tax attorney or another professional tax adviser for the latest updates and advice pertinent to your situation with running a business or starting an LLC as a foreign business owner. Being a foreign owner of a U.S. LLC can entail certain obligations and reporting requirements that might be different from the rules of your own home country, and it’s important to stay compliant with the latest U.S. regulations.
If you have a foreign friend or relative who wants to start a U.S. business, Incfile can help! We have several packages available, including premium services and value-added options like a free business tax consultation, assistance with obtaining an EIN, and more! Start today and learn more about how Incfile can help form an LLC.