Why form an LLC in the first place?
- Under certain circumstances, it could be more tax efficient than holding investments in your own name. Remember US situs assets may ordinarily be subject to income tax, capital gains tax, and estate tax (tax on the death of the owner). Read more here –
- Can be set up with just one natural person involved or, in some states, one owner which may be an entity itself.
- No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
- No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
- LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (e.g., see Virginia and Delaware LLC Acts).
- Characteristics –
- Ownership Rules – Unlimited number of members allowed
- Personal Liability of the Owners – Generally no personal liability of the members
- Tax Treatment – The entity is not taxed (unless it elects to be taxed as a corporation); profits and losses are passed through to the members
- Key Documents Needed for Formation – Articles of Organization / Certificate of Formation; Operating Agreement
- Management of the Business – The Operating Agreement sets forth how the business is to be managed; a Member (owner) or Manager can be designated to manage the business
- Capital Contributions – The members typically contribute money or services to the LLC and receive an interest in profits and losses
So in short, for most foreign investors in US business activity, an LLC is a smart move
Generally, there is no restriction in state LLC laws that limit who can form a limited liability company or who can own a membership interest in an LLC.
- A non-resident of the U.S. is free to form an LLC under the laws of any state he chooses.
- An entity based outside the U.S. may form and own a limited liability company in the United States.
- There is no requirement that the activities of the LLC be managed from within the United States or even that its activities be conducted within the United States.
- A foreign individual can form and operate his LLC from wherever he happens to be.
Although a non-resident of the U.S. can form and own an LLC generally, there are some restrictions on ownership of certain entities under various state laws that may restrict ownership for reasons other than citizenship or residency. For example, state law may require that all members of an LLC engaging in the practice of medicine be licensed physicians in that state or all members of an LLC engaging in the practice of law be licensed attorneys.
Now we can discuss the steps in forming an LLC
- The first step is to have a conversation with your preferred US qualified tax professional or US qualified financial adviser. They would help advise on the right state and LLC structure.
- The second step is to find a Resident Agent and/or a Resident Manager to take the legal steps needed to register an LLC on your behalf.
- The third step, is to get an ITIN or a US Tax ID. This is especially needed for those foreign investors who want to structure the LLC as a tax transparent entity. Failure to get a tax ID may mean that your LLC may be subject to extra Federal taxes on certain distributions (double taxation). Here’s more info on the ITIN – http://www.mooresrowland.tax/2016/02/so-you-need-itin.html
- Secure an EIN or a Tax ID for the LLC
- If necessary, consult an attorney to structure an operating agreement specific to your business activity
- Ensure that you have an adviser to ensure that annual compliance requirements are met at both the Federal and State level
Our firm assists Foreign Investors who wish to take advantage of great investment opportunities in the USA. Contact us today!