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Taxes
US taxes are a complicated matter. The taxation of an LLC depends on its tax status.
Before proceeding further, we make the following assumptions about the LLC:
- The LLC is owned by a single member
- The LLC is owned by a non-resident
- The LLC receives default disregarded tax treatment and hasn't filed any election to be treated as a corporation
Tax treatment
By default, single-member LLCs are treated as disregarded entities by the IRS, which means that for federal tax purposes, the IRS ignores the LLC's separate existence. (The IRS can't see the LLC as a separate entity; just like you can't see John Cena!)
By default, an LLC is a pass-through entity, meaning its income or loss passes directly to the member, who must report it and pay personal income tax. The LLC itself doesn't file a separate federal income tax return.
An LLC has the option of filing an Entity Classification Election using Form 8832 with the IRS to be treated as a corporation for federal tax purposes (which is generally not advisable). If it does so, it loses its disregarded entity status, and federal corporate income taxes (currently 21%) will apply, so the LLC is no longer treated as a pass-through entity.
An LLC owned by a non-resident can't elect to be taxed as an S-corp under IRS rules.
Taxation
The taxation of income depends on a few factors:
- Income source
- Income classification
Income generated from non-US sources is not taxed regardless of classification. Taxation of income generated from US sources depends on its classification.
US-sourced income can be classified into two categories:
FDAP
Income from passive sources such as royalties, dividends, or interest from US sources is subject to a flat 30% tax.
This 30% tax may be reduced by an applicable tax treaty between the US and your country of tax residence. The US has tax treaties with dozens of countries that may reduce the tax rate.
For example, Indian taxpayers are subject to a 15% rate instead of 30% due to a tax treaty.
If your LLC has FDAP income, the payor must withhold and remit it to the US government. This is known as withholding tax. The withholding obligation for such income is unaffected by whether taxes are eventually owed in your home country.
For example, if someone in the US pays your LLC a $1,000 royalty, they must withhold $300 and remit it to the US government, paying you $700. However, as an Indian tax resident, you can rely on the US–India treaty to reduce the withholding to 15%, so you would receive $850 instead of $700.
Once withholding tax applies, there's no way around it.
ECI
The tax treatment of US-sourced income from an active business is different.
Whether you have ECI depends on if you are engaged in a trade or business in the United States (ETBUS for short).
US-sourced income will be subject to federal income tax on a net basis at graduated rates if a non-resident meets the criteria of ETBUS.
The key factors to determine ETBUS are:
- Having at least one "dependent agent" in the US who performs key business operations to further your business (rather than purely administrative tasks)
- Having a permanent establishment (a physical office, warehouse, or other fixed place of business)
- Conducting regular, significant, and consistent business activities in the US
A dependent agent is someone whose work for you is so entwined that their actions count as yours. This includes your employees, contractors who work almost exclusively for you, or firms devoted almost entirely to serving you. Whereas an independent agent runs their own business and simply provides services to you as a client.
For example, if you have an employee in the US who works for you, they are a dependent agent, whereas your registered agent—who probably serves hundreds of other LLCs—is running their own business and providing registered agent services to you as a client, making them an independent agent.
Thus, US-sourced income from an active business won't be taxed as long as you do not meet the ETBUS criteria, even if the income comes from rendering services from abroad or selling digital products to US customers.
If you have ECI, you must file IRS Form 1040-NR and pay US taxes, even if you live abroad.
While FDAP income is typically subject to withholding, if your income is classified as ECI, FDAP withholding does not apply; instead, you must file Form 1040-NR and pay US taxes on net income at graduated rates.
A nonresident would also need an ITIN (Individual Taxpayer Identification Number) to file Form 1040-NR.
If you do not have ECI, you don't pay any US income taxes.
Then who do you pay taxes to? Because in this world, nothing is certain except death and taxes!
In that case, you as the individual would generally pay income tax on that income in your country of tax residence.
Form 5472
Aside from potential taxes, a single-member disregarded LLC owned by a non-resident must file a special informational return called Form 5472, along with a "pro-forma" Form 1120, regardless of business activity, income, or expenses.
Form 5472 is an informational return required to report capital contributions, distributions, significant non-monetary transactions, and other transactions (including LLC formation costs) between a foreign-owned single-member LLC and its foreign owner. It is not a standalone form and must be filed together with Form 1120.
Usually, corporations file Form 1120 to report income, gains, losses, deductions, credits, and ultimately to calculate the annual tax due to the IRS.
In a tax context, "pro-forma" essentially means a form prepared solely for information-reporting purposes (as a placeholder), rather than as an actual federal income tax return that calculates a tax liability.
This pro-forma Form 1120 is used only to accompany Form 5472 and convey identifying information such as the name, address, and EIN; it must not include reporting on any gross income, deductions, credits, taxable income calculations, or taxes due. Thus, this form merely serves as a reporting vehicle for Form 5472.
The penalty for not filing or inaccurately filing Form 5472 is $25,000, and the penalty can increase by an additional $25,000 for each 30-day period of continued non-compliance after the IRS issues a notice.
Form 5472 is required for each related party. If your US single-member LLC has a reportable transaction with a company that you also own elsewhere, you must file a separate Form 5472 for that company.
Filing and payment for corporate taxes (Form 1120) are due on April 15 each year. Form 5472 is also due on April 15 for single-member US LLCs whose owner uses a calendar year or has no US tax filing requirement. A six-month extension for Form 1120 can be requested by filing Form 7004 before the deadline; doing so also extends the deadline for Form 5472.
Summary
This is a brief overview of US tax law in the context of a non-resident single-member LLC.
Homework: If your income isn't taxed by Uncle Sam and you don't take a distribution or salary from your LLC, then who do you pay taxes to on your LLC income?
Disclaimer: All content here is for general informational purposes only and not intended as legal, tax, or financial advice. Always consult a qualified professional before taking any action. Use at your own risk; the author assumes no liability.