Forming an LLC in the US as a foreigner is a flexible and tax-efficient way to do business, both inside and outside the US. And, when two or more foreigners form an LLC or when a US citizen forms a partnership with foreign partner, the established business entity is treated as a foreign-owned multi-member LLC. This entity has specific tax reporting and filing obligations that differ from regular ones.
In this article, we’re gonna talk about what tax forms a foreigner owner of a US LLC has to file in order to keep their business operating smoothly and to avoid costly penalties. We’ll share with you under what circumstances a foreign-owned multi-member LLC has to report and pay US taxes. We’ll talk about the filing requirements for both the LLC and its members/owners. And, we’ll tell you what forms to file and when to do so. But, before we dive in, let’s quickly review some basics.
What is a Foreign-Owned Multi-Member LLC?
A foreign-owned multi-member LLC is a type of business entity with more than a single owner (two or more), in which at least one of the owners is a non-US citizen or entity. Multi-member LLCs are considered pass-through entities for tax purposes, and just like single-member LLCs, they do not pay taxes. Instead, the profits or losses of the business “pass through” the owners, who then have to report and pay taxes on their individual tax returns, 1040 or 1040NR.
The form owners will have to file will depend on their residence status for tax purposes. 1040 is for US residents, and 1040NR is for nonresidents. Note here that you can be considered a resident solely for tax purposes, without being an actual resident, i.e., someone who lives in the US. If you travel to the US regularly and spend a lot of time there, and pass the Substantial Presence Test, you could end up paying taxes like a US citizen.
Are you a foreigner and the owner of a US LLC? Do you need help figuring out your US or cross-border taxes? Get in touch with NRI. In our team, we have a CPA with 30 years of experience helping nonresidents deal with US tax obligations. Book a call to learn more.
When Does a Foreign-Owned Multi-Member LLC Have to Pay US Taxes?
Multi-member LLCs are pass-through entities, and as such, they don’t have a tax obligation in the US. It’s the members or owners of said type of LLC that are required to pay taxes, but only if they meet specific requirements, like:
1. Generating US-Source or Effectively Connected Income
If a foreigner is the owner of a US LLC that generates US-source or Effectively Connected Income (ECI), then he has a US tax obligation. Typically, these taxes are based on income level and can range between 10% and 37% for individuals. Some examples of ECI include:
- Rental income from real estate properties. This type of income is always US-source and taxable because the property is physically located in the US.
- Some types of business income are taxable under US laws. For example, profits from selling goods or performing services on US soil are always ECI and taxable.
- Interest income earned from lending funds to US-based businesses is always taxable.
- Income from dividends paid out by US corporations.
2. Generating FDAP Income
Fixed or Determinable Annual or Periodical income (FDAP) is always considered US-sourced and is taxable under US laws at a 30% withholding rate. Some examples of FDAP are:
- Interest income from loans, savings accounts, or bonds that come from the US.
- Rental income can be either FDAP or ECI. For real estate investors, it’s better to have ECI as the tax rate, for it is typically lower.
- Pension or annuities are occasionally considered FDAP and taxable.
- Payments for intellectual property made by US businesses (i.e., royalties) are FDAP and taxable.
3. Passing the Substantial Presence Test
If a foreigner is a member in US LLC and passes the Substantial Presence Test (SPT), he or she will be considered a resident for tax purposes and will be taxed on their worldwide income. This means that all the income from their US LLC and all the income they make from business in their own country will be subject to US taxes.
To pass the SPT test and become a resident for tax purposes, you must:
- Spend 183 in the US during the current year
- Spent 183 in the US during the previous 3 years
When calculating your SPT score, know that the days for each year are counted differently:
- For the current year, 1 day equals 1 day
- For the previous year, 1 day equals ⅓ day
- For two years prior, 1 day equals ⅙ day
If you travel to the US a lot, it’s important to keep a close eye on your SPT score. If you want to avoid getting taxed on your worldwide income, checking your US travel history can help you manage how many days you’ve spent in the US to avoid paying additional taxes.
Foreign-Owned Multi-Member LLC: Filing Requirements
If a foreigner is the owner of US LLC with multiple members, then they have to file tax returns on two levels:
- They have to file taxes for their LLC
- They have to file personal tax forms
Foreign-owned multi-member LLCs are not considered corporations and are instead taxed as partnerships. Forms that these types of business entities have to file include:
1065 for Nonresidents
The 1065 form with a Schedule K-1 is a tax return that all foreign-owned multi-member LLCs have to file each year. The deadline for filing is March 15th of each calendar year, and it must be filed regardless of the type of income an LLC generates. If the date falls on a weekend, the deadline will move to the next working day.
Failing to file this form on time will lead to a monthly penalty of $210 per member, owner, or partner. Meaning that if a foreign-owned partnership has two owners, the monthly penalty will be $420. If it has 3, the penalty will be $630, and so on.
The 1065 foreign owners form gives the IRS full insight into the contributions and distributions of a foreign-owned partnership. It’s widely looked at as an information form because owners pay taxes separately from filing a 1065. They do that through the 1040 or 1040NR forms.
1040 or 1040NR
After filing the 1065 for foreigners, and in the case that a multi-member LLC has a US tax obligation, the next step is for each of the owners to file their own individual tax return, 1040 or 1040NR.
These two forms are reserved for owners of US partnerships with foreign partner or those that are fully-owned by nonresidents. The exact form to file will depend on the residency status of a filing partner. If a person with a filing obligation is a nonresident, then they’ll have to file the 1040NR form. Otherwise, they’ll have to file the 1040.
These forms are mandatory and must be filed each year, but only in the case that a foreign-owned multi-member LLC is generating US-source, FDAP, or ECI income. The deadline for filing either of these two forms is April 15th.
Additional Filing Requirements
When forming an LLC in the US, you have an obligation to file the Beneficial Ownership Information report, or BOI for short. This report is filed with the Financial Crimes Enforcement Network (FinCEN), and it only has to be done when the company is first formed or when there is a change in ownership.
Another thing that you need to get when forming an LLC in the US, in order for it to be fully operational, is an EIN number. You need an EIN to file the 1065 form and to fulfill other US tax reporting obligations. The usual process of obtaining an EIN is to first file the W-7 to get an ITIN.
If you’re a foreign owner of a US LLC and need help getting an EIN or dealing with US taxes, NRI is the perfect place for you. Our team has a veteran CPA with decades of experience dealing with 1065 for nonresidents and other US tax forms. Book a call today to learn how we can help.
US Partnership With Foreign Partner: Tax Filing Cheat Sheet
| Filing Obligation | Type of Income | Forms to file | Due Date | Deadline Extension form | Extended Due Date |
| Foreign-Owned Multi-Member LLC | Foreign-sourced | 1065 with K-1 schdule | March 15th | Form 7004 | September 15th |
| Foreign-Owned Multi-Member LLC | US-sourced, ECI, or FDAP | 1065 with K-1 schdule | March 15th | Form 7004 | September 15th |
| Foreign owners of US partnerships | Foreign-sourced | / | / | / | / |
| Foreign owners of US partnerships | US-sourced, ECI, or FDAP | 1040 or 1040 NR | April 15th | 4868 | October 15th |
Foreign-Owned Partnership Taxation: Reporting and Tax Examples
Understanding how taxation of foreign-owned multi-member LLCs works and when to file 1065 for foreigners can be complicated. To make it easier to understand, here are some real-life examples of when a foreign owner of a US LLC has to file US taxes:
Example 1
Mike and Ashley are from Canada, and together they own a US multi-member LLC. Through their LLC, they invest in US rental property. The income they generate from their real estate portfolio is US-sourced, which means they have to pay taxes on. Each of them has to file the 1040NR form. However, before they can do that, they first need to file the 1065 for foreigners, along with the K-1 schedule.
Example 2
Lydia and Simon, owners of a multi-member LLC from China, invested in short-term rentals in the US. Because all rental income is US-sourced, they both need to file an individual tax return, 1040NR, with the IRS. But, before they do that, they need to file the 1065 for nonresidents, in order to sort out their distributions and contributions.