I am a US national but non-resident as I live in the UK and have done for the past 40 years.
I want to set up a US LLC and US bank account as I will be setting up an online business which will predominantly sell to customers in the US.
I want to get clarity on the tax implications if I do this.
Hello and thank you for allowing me to assist you.
Yes, the USA company would be subject to US tax reporting through you as a US citizen.
You would report the income on your US return and as a resident of the UK you would be subject to tax on the salary in the UK but you can claim a relief from double taxation per the tax treaty or you can claim tax exclusion on US return by filing form 2555.
You cannot elect to only be taxed in the UK but you can use the provision above for exclusion of tax on your salary. A single member LLC in the US does not count payments to you as salary. It is as sole proprietor.
As to 5 in your questions. Partners are taxed on their portion of the profits so the part of profits flows to you and you would be taxed.
Your partner is taxed on their portion too and if they are not a US person then tax is withheld for US purposes.
1. 'A single member LLC in the US does not count payments to you as salary. It is as sole proprietor.'
-Does this mean we effectively would be running as a Partnership rather than a Corporation so we would withdraw funds from the business account as and when we choose to our personal accounts. Overall tax would then be calculated at the end of the year on a personal basis through a personal tax return rather than a corporation return?
Does the LLC need to produce separate accounts (as a Corporation would) or not? The confusion I have is from your statement:
'Yes, the USA company would be subject to US tax reporting through you as a US citizen.'
2. 'As to 5 in your questions. Partners are taxed on their portion of the profits so the part of profits flows to you and you would be taxed.
So if we share profits equally, we both are taxed through US tax on 50% of the profit each?
3.'Your partner is taxed on their portion too and if they are not a US person then tax is withheld for US purposes.'
-Does this mean my partner would pay US tax?
-How is the tax withheld?
-How would my partner pay the tax to the IRS if he does not have a Social Security Number and is not a US citizen?
An LLC with more than one member is a Partnership.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.
You started out by asking about an LLC and the important part is how many members. One is a sole proprietor while 2 or more is a partnership.
This would be a US partnership so yes, all partners are subject to US tax and reporting on their share.
The tax is withheld by the partnership (whoever does the accounting). He has to get a tax number (an ITIN).
It does not matter that he is not a US citizen. An ITIN is for those that have a US tax reporting obligation but cannot be issued an SSN.
So my business partner would need to submit annual US tax returns using an ITIN for as long as the business is trading, is this correct?
My understanding of an LLC seems to be incorrect. I thought an LLC could have more than one member so that we could be equal partners in an LLC?
My understanding of a Partnership is that it does not have a separate legal identity from its owners. Is this correct?
We want to set up a business with personal asset protection similar to a corporation so the business has a legal existence separate from its owners. If an LLC cannot have more than one member, would the only alternative be a Corporation?
Or would another option be to set up 2 LLCs individually?
The non US partner would need to report and is required to have an ITIN.
An LLC can have more than one member. A Limited Liability Company (LLC) is a business structure allowed by state statute. Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner
An LLC with at least two members is classified as a partnership for federal income tax purposes.
A partnership is separate to an extent. The partnership must file a 1065 form but all the tax is on the partners.
So if we set up an LLC with 2 members, we are treated under tax as a partnership.
Will the LLC give the business a legal existence separate from the owners so that we have personal asset protection? This is a key factor in how we want the business to be established.
That is correct, an LLC with more than one member is a partnership.
An LLC does provide Limited Liability Protection. The fact that the federal government treats it for taxes as a partnership does not change it's structure.
A positive rating is appreciated so I get credit for the response.
So although called Partnership, it is still an LLC Partnership?
It is an LLC but for TAX it is a partnership.
Just to clarify one more point you made earlier (sorry but Just Answer do not allow me to ask further questions later on the same subject as I have an unlimited subscription)...
-I would pay UK tax
-My business partner has to pay US tax?
He is a UK citizen so I don't understand why he pays US tax when I am a US citizen and can pay UK tax, not US tax. Why can't he pay UK tax and claim relief from double taxation per the tax treaty claim tax exclusion on the US return?
Thank you, ***** ***** the final question!
He can claim relief on his UK filing. A non resident alien that has business income form US source requires tax withheld.
Their situation is different from your situation.
Hi, I have discussed with my UK accountant about what you advised on the US tax position.
My UK accountant advised that I should be able to complete a W-8EN as an alien to the USA and can have reduced/exempt tax as an individual.
I have been advised that I have to pay UK tax as I am a UK national and resident so should not be paying US tax.
What is your advice on the W-8EN form and is this an option to me?
Would it make a difference if I set up as a Corporation instead of an LLC, would that allow me to complete the W-8EN form?
US citizens do not complete a W8 BEN of any kind. That is reserved for non US persons and or entities.
Your US LLC is not a non US enitity.
Sorry I meant for my UK partner... this is taken from a discussion about my UK partner.
Your UK partner would be receiving profits from a US partnership that is doing business in the US. If this UK accountant believes there is a treaty article that covers the payments to the UK partner then they can file a W8 BEN.
What if we set up as a Corporation, not an LLC.
Would the corporation pay business tax on profits and any money we draw is treated as a salary from the business? Would we be employees of the business? (That's how it works in the UK - we would Directors of a company and take a salary from the company).
If you wish to discuss this new subject then you would need to start a new question.
The discussion of a C corp is a separate discussion.
I can do this but will call it question about C corp as last time I dealt with you and started a new question, Just Answer shut down my account as they said I need to continue any questions on the same thread rather than start a new discussion as any relating question should be answered in the one question.
That is true for follow ups about the same subject.
I know you may think this is still related to how an LLC is treated but a C corp tax is different and I am not compensated for the new discussion in this thread.
Would the corporation pay business tax on profits and any money we draw is treated as a salary from the business?
You could be an employee or a shareholder or both. The UK person would not be taxed in the US even as an employee of the US C Corp as long as they have no presence in the US.
Dividends paid to a non US person from a US corp is taxable but the treaty allows a lower rate.
I appreciate that you need to be compensated, it seems that Just Answer do not appreciate different topics!
I will set up a new question for you, however when I click on your profile to ask a new question it is showing that you are offline. I want to start a new discussion on the C corp but if I ask it on your profile will you receive the question?
You need to know that a C corp first pays tax on all profits. When those are passed to shareholders those shareholders are taxed again.
There is a double taxation in a C corp situation.
A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income.
The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.