Discussion:New LLC Formation - Foreign Member
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| {{ForumReplyPost|UserID=IntlTax|Date=21 August 2006|Text=Is it possible for there to be a reduced treaty rate under Sec. 1446?}} | {{ForumReplyPost|UserID=IntlTax|Date=21 August 2006|Text=Is it possible for there to be a reduced treaty rate under Sec. 1446?}} | ||
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| + | {{ForumReplyPost|UserID=TZ|Date=1 September 2006|Text=This is a very interesting discussion. I've got a similar situation like Wei, I have several partners from China (including four individuals and one Chinese corporation) what to form a LLC in NJ. When I tried to file the registration, I discovered that you have to list the "SS#" of all the partners. Since these partners are foreigners and they do not reside in the US, so there is no "SS#" or "EIN#" for the corporation. Anybody had similar experience, please let me know how did you handle this situation. Many thanks. TZ }} | ||
Revision as of 13:23, 1 September 2006
Discussion Forum Index --> Tax Questions --> New LLC Formation - Foreign Member
| 5 July 2006 | |
| I am helping to incorporate a new 4 person LLC. One of the members is a Canadian resident, who wants compensation to be paid to her Canadian corporation, and not her personally (for IRS and INS reasons).
By my own thinking, the only way to have the guaranteed payments and the distributive share of LLC income not attributed to her personal TIN and go to her Canadian Corporation is to have the corporation be a member of the LLC. Can this be done? Does that Corporation get a K-1? If not, are there any other creative ways to structure payments so they don't go to her directly? We could treat her corp. as a vendor, and not have her as an individual receive an guaranteed payments or share of income, but this doesn't seem right... Any thoughts would be greatly appreciated. | |
| 5 July 2006 | |
| Mike, you're flat freaking me out. You call this a corporation, then talk about guaranteed payments. Pick one. Is this a partnership or a corp? I don't believe you could have a foreign owner, corp. or otherwise, in an S corp. So you'll have to be a 1065 filer. And I don't see why her Canadian corp. couldn't be a member/partner...yes, that corp. would get a K1. But what number are you going to file it under? She'll need to have some sort of US tax number...And indeed, one of the common ways to handle a foreign player is to have them bill for services, which gets around the whole problem. | |
| 5 July 2006 | |
| Perhaps I should be more clear. She has a Canadian Corporation, but would be a potential partner in a CA LLC - filing as a partnership (1065).
I did not call the LLC a Corp...3 partners as individuals, the last as a Canadian Corporation. | |
| 5 July 2006 | |
| Ahem. Your sentence, not mine: I am helping to incorporate a new 4 person LLC. | |
| 5 July 2006 | |
| Ahh...I mispoke. To clarify - I am helping to form a 4 person LLC. Thanks for pointing that out | |
| 5 July 2006 | |
| *laughing* no problem, just trying to get the facts straight. We do need a term for LLC'ing an LLC...Anyway, I did have a similar situation with a foreign potential shareholder, who in my case, was providing merely managerial services but wanted a profit share. In the end, we decided to have him bill, via a foreign corp. that he owned, for services. That freed up the corp. to take on whatever status it wanted and not get saddled with foreign reporting. That's what I'd try to do here. Otherwise, your Canadian eh partner will have to get a TIN for her corp so that the K1 can even be issued. Now for thoughts from others more familiar with foreign issues...Sandy...oh, Sandy, where are you? | |
| 5 July 2006 | |
| Hmmm...LLC'ing an LLC. Man, we make our profession too complicated at times. And I am to flippant with my wording at times...good thing i'm not a lawyer. :)
I thought about your suggestion, and would actually much prefer to go that route. What about the ownership component? If she is treated simply as a vendor, and not a true LLC member, how could we go about protecting her rights and ownership in the LLC? Technically, in going the vendor route, she would not have any ownership in the LLC or its assets. Since she is going to be materially participating, and not merely managing, the ownership component does seem to become more important. | |
| 5 July 2006 | |
| You'd have to be careful, I'm sure, that whatever agreement that's struck doesn't give rise to the incidence of ownership or whatever they call that. I'd leave it between the partners. . .and her, the non-partner. Or she can get a US tax number for her corp...and be on a K1...Where is Sandy anyway? She's our foreign expert on Canada eh. Wait before you do anything. She'll be here soon enough. | |
| 7 July 2006 | |
| Ok...as far as I am reading, you have a Canadian citizen who is a partner in an LLC in California...you want the income from the LLC to go to the corporation in Canada which she owns. There WILL be foreign reporting requirements if she is a more than 25% owner in the LLC. She needs a TIN either individually or a TIN for the corporation doing business in the US. She has to report all income generated from doing business in the US or for guaranteed payments such as dividends and/or interest that the LLC receives.
She, as a foreigner has to report all income from US sources even if she is an individual; and she has to report it from a Corporate standpoint as well if the Corporation owns part of the LLC. In either case, she has to report income from US sources whether it be fixed income or earned income. If she provides services to the US LLC, then some of this as well will be taxed to her at an individual level as well as determining her days present in the US for resident purposes. No matter how you structure it, any income generated in the US (if not exempt from a treaty) will be taxable income to her in the US. As well, state taxes are not governed by a treaty.... | |
| 7 July 2006 | |
| Sandy - thanks for the response, I appreciate your input.
I am in the process of organizing the LLC right now - I have not started the process just yet until I determine the best structure for this Canadian member. It is a 4 person LLC...Is the 25% ownership a firm rule for foreign reporting requirements? I don't want to be too cute about it, but if we make her a 20% partner, would this avoid the reporting requirements? If I am understanding your post, even if we make her Canadian corporation an LLC member, she will still have to report any income the CA LLC pays to her corporation. Also - clarification on one point..."if she provides services to the US LLC, then this will be taxed to her at an individual level." If all payments for services are invoiced out of the Canadian corporation and not to her as an individual, what income is attributable to her personally. Looks like there is not too many creative ways around this...I will do a little more research myself in my RIA database. Again, I appreciate the feedback. | |
| 7 July 2006 | |
| A 20% partner in the LLC if it is still flowing to a Canadian corporation, this needs to be reported as foreign income to the Canadian government; and any income generated from US sources, if she meets a residency test in the US is also taxable to her on an individual basis if she gets a K-1.
Yes, if the Canadian corporation is an LLC member, then the income from the US will be taxed in the US and Canada as well, but the treaty exemption will apply on some of this income. If she personally provides services to the US LLC, then she is "working for" the US entity and if she meets the residency test, then she will be taxed on her income from US sources. If a Canadian wants to work and do business in the US, then their income from US sources is taxed in both the US and Canada except for the treaty exemptions. I don't know of any way around the reporting requirements. IF she is earning money in the US from sources in the US, either corporately or individually she will be required to report and/or pay tax on it... | |
| 13 July 2006 | |
| Sandy - again, thanks for the information. I have not faced this situation before with a Canadian Corporation as a member in an LLC. I have a couple other pieces of information that are relevant:
- She lives in the US under her Husband's status (H-1 visa). Both are Canadian citizens. - Although she can live here, she does not have a sponsoring employer currently, so she cannot legally work. - As such, whenever she does independent contracting work, she has those folks pay her Canadian corporation. (she has confirmed to me that those folks never followed the reporting requirements for foreign citizens. As such, she has never filed taxes in the US). Given the above, I want to structure her activity in the LLC as an agent of her Canadian corporation, and keep the Canadian LLC a limited partner (at least until she sorts this out in about a year). So, at the end of the year, does the LLC file a 1042-S for payments made to her Canadian corporation? What are her US filing requirements if all payments (and K-1 income) are going to a Canadian Corporation). Pardon my ignorance - this is all beyond my scope of knowledge. | |
| July 13, 2006 | |
| You'll have to wait. She's in the Bahamas brushing up on her British tax law, apparently.... | |
| 14 July 2006 | |
| JR1 - yes, I saw her post. Good for her! I just picked up a couple of clients in Maui - I may have to brush up on HI state tax law! :) | |
| July 14, 2006 | |
| Talk to Natalie...there are a couple others. In fact, check the General page, I think there's a HI user group here...they do have some oddities there. | |
| 14 July 2006 | |
| Here it is: Hawaii User Group. Let me know if you'd like me to create a similar user group for your state!
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| 15 July 2006 | |
| Hi Mike;
did She obviously has some issues due to her past involvement in the US that was not reported to Canada as world wide income I would assume and then also, the US did not get any benefits from her income earned here. But that will need to wait I am assuming... Setting up the LLC as a subsidiary of her Canadian corporation will be complicated at best. The LLC cannot be passive if she is actively involved in the business, so how can you set it up as a passive entity? The resident partner of this is a Canadian citizen, but a resident of the US for tax purposes (visa and substantial presence test). What you are trying to accomplish I think is: she consults and earns income from the consulting, but since she cannot legally work in the US, then it needs to be as an agent of the foreign corporation. If this is so, then why cannot her corporation in Canada file as a foreign corporation in the US and receive an EIN and report it's income on an 1120F for any US source income? Now, the downside of this is that she has created nexus and therefore will have state taxes on top of it all. Citizens of Canada are taxed on worldwide income, so some treaty benefits need to be addressed no matter what type of entity you decide upon. Nassau is fabulous by the way!! I have seen things which you can never see on vacation. I picked up a new Canadian client this week from here...lots of Canadians work on this island. I may not be back to the US until the 30th now...more work than was originally expected, but we shall see. You can email me if you like at sandy@sandyseacs.com Take care and let me know what you think about the above :) | |
| 11 August 2006 | |
| Hi Everyone,
I have searched two days for the answers of some tax issues for my new company, which is supposed to be LLC., and could not find any good one. I meant, I found some answers, but they are either uncertain or conflicting. And then, I suddenly ran into this page and found that most of question has been answered here!! You guys are amazing!! My situation is very similar to Mike's. ( Mike, I hope you already find the best solution for your partner:-) ) I also have a potential Taiwanese partner who is not US citizen. What different from Mike's case is that my partner is in China and he only want to invest money to get 5% of my company. The State governments told me that they do not know anything about income tax.. a Delaware agent told me that this partner will not be taxed anywhere.. my friend in Deloitte told me that he will need to have a tax ID and be taxed in the States...what a mess.. Now, thanks for Sandy, I know that since he will hold share less than 20% and he is definitely not US resident, he will "Not" need to pay US income tax in LLC. Here, would somebody please give me the answers for two follow-up questions?: 1. Is there any form I need to file for my 5% foreign member to IRS to waive the income tax? 2. I will have another Taiwanese company as our major partner, and they will get about 40% of our net income. Since the member of LLC can freely split the profit and lose according to the law, is that possible that I let this Taiwanese company hold 20% of the company but distribute 40% of the income to them to avoid the US income tax? Or the US income tax follows the % of distribution not % of ownership? My question might be a little "Rookie" for you guys.. but if you guys can help me on this one, it will be highly appreciated. Thank you thank you.. Wei in North Carolina :) | |
| 20 August 2006 | |
| I apologize; I was in Maine for 3 weeks working and did not get your message. Your client if he is not actively engaaged in a trade or business in the US will NOT pay US income taxes, however, he may be subject to US income tax if he is a non resident for tax purposes. ANY income earned in the US can be taxed in the US and indvidual states if there has been nesus in those states. Dividends (as you mentioned in your questions) are also taxed but at the teatt rate,,,,
Simple equation is: US source income derives taxes to the US; foreign sources to forein taxes.... Sorry; I just got back from a 25 hour drive; I am exhausted; perhaps email me in the morning and I can help further :) | |
| 20 August 2006 | |
| Mygod1979, your friend from Deloitte was correct. A nonresident alien's share of LLC income that is effectively connected with a U.S. trade or business is subject to withholding under Sec. 1446. He needs to obtain an ITIN. | |
| 21 August 2006 | |
| Just make sure to withhold at a reduced treaty rate (if applicable) that is. | |
| 21 August 2006 | |
| Is it possible for there to be a reduced treaty rate under Sec. 1446? | |
| 1 September 2006 | |
| This is a very interesting discussion. I've got a similar situation like Wei, I have several partners from China (including four individuals and one Chinese corporation) what to form a LLC in NJ. When I tried to file the registration, I discovered that you have to list the "SS#" of all the partners. Since these partners are foreigners and they do not reside in the US, so there is no "SS#" or "EIN#" for the corporation. Anybody had similar experience, please let me know how did you handle this situation. Many thanks. TZ | |
