Liability Company (LLC)
50 states and the District of Columbia have authorized
the formation of LLCs. US tax law treats an LLC on a
'pass-through' basis - a single member LLC is simply
disregarded for tax purposes, while an LLC with two
or more members is treated as a partnership unless it
opts to be treated as a corporation. In both cases taxation
is applied to the members and not to the LLC.
the members of an LLC are foreign persons, then they
will be taxed on all income which is effectively connected
with their conduct of a trade or business in the US.
However, the receipt of 'passive' income on its own
does not normally amount to the conduct of a US business
- passive income includes most interest income, gains
from investment in any stock market, and gains from
investment in commodities.
owners of a domestic LLC do not pay income tax on the
LLCs foreign source export income except under
If the foreign persons LLC does not have a US
office or an agent in the US, it is unlikely that foreign
source income will be taxed as US income. If there is
a US office, then by and large the activities of the
US office will not be considered to be a material factor
in the realization of income, gain, or loss, unless
the US office provides a significant contribution to,
by being an essential economic element in, the realization
of the income, gain, or loss. An administrative office
in the US can pay expenses, deposit income and perform
accounting activities. These activities will not cause
export income to be taxed by the US taxing authorities.
An office is not considered to have materially participated
in a sale merely because one or more of the following
activities takes place: (a) the sale is made subject
to the final approval of such office, (b) the property
sold is held in, and distributed from such office, (c)
samples of the property sold are displayed (but not
otherwise promoted or sold) in such office, (d) such
office is used for purposes of having title to the property
pass outside the United States, or (e) such office merely
performs clerical functions incident to the sale.
Corporations (which are not available to non-residents)
are very popular for small businesses in the US. An
S corporation is a regular corporation (normally taxable
under subchapter C of the Internal Revenue Code, and
thus referred to as a C corporation), or a limited liability
company which has elected to be taxed like a corporation,
which files form 2553 with the Internal Revenue Service.
The result is that the corporation's net income (after
business expenses and other permissible deductions)
is required to be included in the individual returns
of the stockholders of the corporation, in the same
percentages as their percentages of ownership of the
The imposition of a maximum corporate tax bracket in
1988 that was higher than the maximum individual tax
bracket made S corporation status very attractive.
A corporation must meet the following qualifications
to be eligible for an S election:
must not have more than 35 shareholders;
All shareholders must be either individuals, estates
or certain types of trusts; a corporation or partnership
may not be a shareholder;
Nonresident aliens may not be shareholders;
corporation may have only one class of stock;
The corporation must be a domestic corporation.
shareholder's share of net operating loss of an S corporation
is limited to the sum of the shareholder's adjusted
basis in the stock of the corporation plus his adjusted
basis in any debt the corporation may owe him. Disallowed
losses and deductions may be carried forward to sebsequent
by an S corporation are treated as a tax-free return
of capital to the shareholder, provided the corporation
has no accumulated earnings and profits, to the extent
of the shareholder's basis in his stock. Such distributions
are treated as taxable gain to the extent of the shareholder's
basis in his stock. Such distributions are treated as
taxable gain to the extent they exceed the shareholder's
basis in his stock.
disadvantage of an S corporation election is that employee
status is denied to those shareholders with stock ownership
exceeding 2 percent. As a consequence, an S corporation
cannot deduct the cost of fringe benefits provided at
the corporation's expense (for example, accident and
health insurance) for the benefit of these shareholder-employees.
Thus, an S corporation cannot provide many fringe benefits
on a tax-free basis.
July, 2005, Internal Revenue Service officials announced
that the agency was to launch a comprehensive study
of tax reporting compliance amongst America's rising
number of S corporations, a form of corporate entity
that had grown enormously in popularity over the last
to the IRS, the study would examine 5,000 randomly selected
S corporation returns from tax years 2003 and 2004.
the mid-1980s, the number of S corporations had risen
rapidly, growing from 724,749 in 1985 to 3,154,377 in
2002. Among S corporations with more than $10 million
in assets, the growth rate has been even faster. From
1985 to 2002, the number of these larger S corporations
grew more than ten-fold, from 2,305 to 26,096.
use of S corporations has exploded,” observed IRS Commissioner
at the time, Mark W. Everson. “The
IRS needs a better understanding of what this means
for tax compliance. This research is critical for achieving
our strategic goal of ensuring that corporations and
high-income individuals are paying their fair share,"
corporations are now the most common corporate entity.
In 2009, the IRS reported that the number of S corporations
increased 5.1 percent to 3.9 million for tax year 2006,
so that S corporations represent nearly two-thirds of
all U.S. corporations. The number of shareholders in
S corporations also increased 5.1 percent to 6.7 million.
Total net income (less deficit) increased 7.0 percent
to $386.2 billion.
a Limited Partnership, one or more ‘general' partners
manage the business while 'limited' partners contribute
capital and share in the profits but take no part in
running the business. General partners remain personally
liable for partnership debts while limited partners
incur no liability with respect to partnership obligations
beyond their capital contributions.
Limited Partnership has been very widely used for investment
purposes. In the last 30 years, most major financial
companies have used the LP form to channel private capital
into real estate, oil and gas and mezzanine financing.
These LPs are normally structured to be long-term investments
(typically 10 to 15 years with extension rights at the
partnership's option) and do not make any liquidity
provision to cover the eventuality that the investor
decides to sell their partnership interest prior to
the termination of the LP.
death, disability, or withdrawal of a general partner
dissolves the partnership unless the partnership agreement
provides otherwise or all partners agree, in writing,
to substitute a general partner. Death or incompetence
of a Limited Partner has no effect on the partnership.
The Family Limited Partnership (FLP), which is simply
a Limited Partnership used by one family, has become
the leading form for asset protection and estate planning
in the US. But there are some legal dangers in many
states, where a creditor is permitted to foreclose
on a partnership or LLC interest. A 'foreclosure' is
a seizure of the debtors interest and that is
a very powerful weapon for the plaintiff. Thus, an asset
protection structure using an FLP must also protect
ownership interests with a trust.
May, 2005, the US Treasury and the Internal Revenue
Service finalized regulations on the tax withholding
obligations of US partnerships that include foreign
individuals were subject to US tax for income from doing
business in the US, in addition to income earned in
the US through a partnership. To ensure the tax gets
collected the IRS requires that partnerships withhold
tax on behalf of the foreign partner.
final rules, first proposed in September 2003, provided
guidance on how to determine a foreign partner's share
of partnership income and to calculate withholding tax
and payment dates. The matters of interest, penalties
and extra taxes for failure to comply with the regulations
were also addressed.
addition, the Treasury also issued related proposed
and temporary rules covering certain tax and non-tax
attributes of a foreign partner for purposes of determining
tax withholding obligations.