Annual Compliance Requirements for a US LLC owned by Non-Residents

Annual Compliance Requirements for a US LLC owned by Non-Residents

December 2, 2021
5
 Min Read

If you are a non-US resident and have set up a US LLC the annual compliance requirements are pretty straightforward. Our definition of annual compliance covers your obligation to the IRS at the federal level as well as the state government level.

In this article, we will look at what needs to be filed with the IRS and your state.

Assumptions

Before we start, we just want to say that this article is not intended to be an exhaustive review of all the possible scenarios. It is intended to give the reader a summary of what is required within a specific context. The “context” assumes the following:

(1) you are a non-US resident and do not pass the Substantial Presence Test

(2) your US LLC is not ETBUS and has ECI (Read our article on this)

(3) you did not elect your LLC to be taxed as a C-Corporation via Form 8832

(4) you do not have any US citizens or US Residents as members of your LLC

If any of the above is false, stop reading this article and reach out to us at hello@startfleet.io

Federal Level

If you are reading this paragraph, well, congratulations, this article is for you.

At the federal level, your compliance obligation is to the Internal Revenue Service, which governs everything related to taxation. If you had read our US LLC for Non-Residents Guide, you know that if you are not ETBUS and have ECI; you do not need to pay taxes. However, this does not mean you are free from the claws of the IRS, you still have some minimum filing obligations to the IRS annually. Don’t worry, if you follow the steps in this guide, you will not get any nasty surprises.

We will differentiate most of the cases into two categories:

  • Single-Member LLC
  • Multi-Member LLC

If you are the only member of your LLC, your LLC is regarded as a Single-Member LLC, SMLLC for short. If you have more than one member in your LLC, your LLC is regarded as a Multi-Member LLC.

Single-Member LLC and the Form 5472/Pro-Forma 1120

A Single-Member LLC is a disregarded entity for US tax purposes. A foreign-owned SMLLC needs to file Form 5472 and Pro-Forma Form 1120 annually, to report Reportable Transactions with its non-US owner and other Related Parties to the Internal Revenue Service.

Reportable Transactions are movements of funds (or property) between an LLC and its foreign owners. Among the reportable transactions are, but not limited to:

  • The fees paid by a Related Party or foreign-owner to form, dissolve (close), or file an LLC with the State.
  • Money contributed or deposited into the LLC by a Related Party owner (“capital contribution”)
  • The LLC distributes funds to a Related Party (“capital distributions”)
  • Foreign-Owner’s loans to the LLC or loans from the LLC to Related Parties
  • Transactions involving the LLC and a Related Party such as a purchase, sale, assignment, lease, license, loan, advance, or contribution.

The definition of Related Party is defined in Section 1.6038A-1(d) of the Internal Revenue Code. The inclusiveness of the term “Related Party” are pretty broad and it covers:

  • You, the LLC Owner
  • The LLC owner’s parents, grandparents, brother, sister, spouse, etc.
  • And, other companies owned by the LLC’s owner, directly or indirectly

To determine who's a related party and who's not, we recommend that you contact us or your tax advisor in due course.

You need to complete Form 5472 along with your company’s Pro-Forma 1120 by the 15th of April. If you file an extension via Form 7004, you have another 6 months until the 15th of October.

Multi-Member LLC taxed as Partnership

Muti-Member LLC is regarded as a partnership for US tax purposes by default unless you elect to tax the LLC as a C-Corp via Form 8832.

The Multi-member LLC does not require filing Form 5472 and Pro-Forma 1120 but must file a Form 1065 annual tax return. In addition to that Form 1065, Schedules K-1, K-2 and K-3 need to be filed as well for each partner. Schedule K-2 and K-3 requirement is a new requirement by the IRS starting from 2021.

This assumes that your US LLC has no U.S. source income effectively connected with a U.S. trade or business, otherwise, Forms 8804 and 8805 would also be required.

Form 1065 returns are due by March 15 of each tax year; however, the entity can file an automatic extension request via Form 7004 to extend the due date to September 15.

The deadline for filing Form 1065 returns is the 15th of March of each tax year (assuming your LLC year-end is the 31st of December), however, entities may request an extension to the 15th of September by filing Form 7004 within the extension period. It is interesting to note that if you do not have an office in the United States and maintain your books and records outside the United States, the 15th of March is automatically extended to the 15th of June.

Minimum Filing Obligations at the Federal Level

Non-U.S. founders should be aware that the LLC will have at least some minimal filing obligation regardless of the situation. This can be either filing Form 5472 for foreign-owned Single-Member LLCs regarded as disregarded entities or filing Form 1065 for multiple-member LLCs taxed as partnerships. If you don’t file your tax return on time, you may be subject to large penalties by IRS.

Failure to timely file Form 5472 by a foreign-owned SMLLC is subject to a $25,000 penalty. Penalties for late filing of Form 1065 are $205 for each month the return isn’t timely filed multiplied by the number of partners in the partnership during the portion of the tax year in which the return is due.

State Level

Income Tax Nexus

Some states have state corporate income tax laws and some do not. California, Texas, and New York are examples of states with corporate income taxes, but Wyoming has no corporate income tax.

If your US LLC isn’t ETBUS and doesn’t have ECI connected to the US Trade or Business, thus not subject to federal corporate income tax, it’s generally safe to assume that you aren’t subject to federal corporate income tax either.

Corporations don’t automatically owe income tax to the state; they must first have what’s called a nexus, a connection between their activities and the state. The existence of an income tax nexus in many states is based on substantial economic activity.

In each state, certain rules determine what activities establish nexus for a business. These rules include, but aren’t limited to, earning income from the state or having the following in the state:

  • Employees;
  • An office; or
  • goods in warehouses

Annual Report and Franchise Taxes

With the State Corporate Income Tax out of the way, let’s focus on the rest of the annual filing requirements with your registered state.

Various states will require you to file an Annual Report with the Secretary of State’s office. Annual reports are simple forms where you state under penalty of perjury that your LLC complies with state statutes and that it has no overdue taxes or fees, to maintain your LLC good standing with the state

Some states will use names other than Annual Report, such as Biennial Occupational Tax Report (Nebraska), Annual List (Nevada), Statement of Information (California), and Franchise Tax (Delaware), but essentially these forms are all about the same.

Failure to file an annual report on time may cause being subject to penalties and the dissolution of your LLC from the state’s registry. Your LLC’s Registered Agent could assist you further in the filing of the Annual Report.

Conclusion

This article is essentially a long-winded way of saying that if you’re registering an LLC in the United States, you should be aware of all the different obligations to fulfill. Once you are familiar with the requirements, you’ll find that it’s generally pretty easy to maintain your LLC compliance as long as you play by the rules.

And please remember that this article serves only as a general guideline. It’s not legal advice. Please consult with your accountant, lawyer, or tax professional for further analysis.

If you haven’t checked out our other articles on the topic before, please start from our Ultimate Guide of US LLC for Non-US Residents article

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