US Company With a Foreign Co-Owner: LLC or Corporation?

Can a US resident and someone abroad own the same company?

Yes. A US resident and a person abroad can generally own the same US LLC or C corporation. Most states permit foreign individuals and entities to be LLC members, but formation rules vary by state (IRS: LLC). Foreign ownership is also contemplated by the IRS rules for US corporations.

Where someone lives does not settle their US tax status. A US citizen abroad is a US person, so their address alone does not make them a foreign partner or trigger foreign-partner withholding. A foreign citizen living in the US may be a resident or nonresident alien under the tax rules. Determine each individual's status before choosing a structure (IRS: foreign persons; IRS: Publication 519). State income taxes, registration and annual fees need a separate check in the states where the business forms and operates.

Can we elect S corporation status with a nonresident owner?

No, if the proposed shareholder is a nonresident alien or a corporation. An S corporation may have only eligible shareholders; the IRS excludes nonresident aliens, partnerships and corporations. An LLC electing S corporation tax treatment faces the same shareholder test (IRS: S corporations).

Citizenship and tax residence matter more than the shareholder's address. A US citizen abroad is not barred by the nonresident-alien rule, while a foreign citizen who is a US tax resident may be eligible. A nonresident married to a US citizen or resident may make a section 6013(g) election with their spouse to be treated as a US resident for income tax, making S ownership possible but subjecting both spouses to US tax on worldwide income. Both sign a statement with their first joint return; a later amended election generally must be filed within three years after the original return or two years after tax payment, whichever is later (eCFR: S shareholder rules; IRS: Publication 519).

Other S corporation conditions still apply, including its stock rules. If eligible, the company files Form 2553, signed by an officer and all shareholders, generally within two months and 15 days after the intended tax year's start. An existing S election ends when a shareholder becomes ineligible. Holding shares through a foreign corporation blocks S status; if the holder is disregarded for US tax, its owner must satisfy the shareholder test (IRS: Form 2553 instructions; US Code: section 1362; IRS: Form 1120-S instructions).

How do an LLC taxed as a partnership and a C corporation differ?

A domestic LLC with two owners is a partnership for federal income tax unless it elects corporate treatment on Form 8832. A C corporation pays federal tax on its own taxable income; shareholders generally face tax when it distributes earnings as dividends (IRS: LLC; IRS: Form 1120 instructions). The federal corporate income tax rate is 21% (IRS: Form 1120 instructions).

With a foreign partner, the partnership generally also files Schedules K-2 and K-3, Part X, unless an exception applies (IRS: K-2 and K-3 instructions).

These are federal income tax results. State taxes and the owners' tax in their countries of residence can change the total cost. Compare expected US activity, profits and cash available for owner payments before signing the ownership documents.

Will the LLC withhold if it pays the foreign partner no cash?

Usually, if the foreign partner is allocated taxable income connected with the LLC's US trade or business, or income treated that way. The IRS calls this effectively connected taxable income. Section 1446 withholding can apply even without a cash distribution, but documented reductions or exceptions can lower or eliminate it (IRS: partnership withholding; IRS: who must withhold). If there is no such allocable income, this rule does not apply merely because a partner lives abroad.

The foreign partner can give the LLC Form 8804-C before it files Form 8804 to certify qualifying deductions or losses. A nonresident individual whose partnership interest is their only source of effectively connected items can also use it to claim the exemption when the section 1446 tax would be less than $1,000; the LLC decides whether to rely on the certificate. The LLC pays installments by the 15th day of the 4th, 6th, 9th and 12th months of its tax year and generally files Forms 8804 and 8805 by the 15th day of the 3rd month after year-end (IRS: who must withhold; IRS: Forms 8804 and 8805 instructions). See foreign partner withholding for calculations and payments.

The LLC owes unpaid section 1446 tax. An owner, manager or officer responsible for paying it over who willfully fails can personally owe a section 6672 penalty equal to the unpaid withholding; ownership alone is insufficient. The IRS generally has three years from the later of the following April 15 or the return's filing date to assess it; missing or fraudulent returns and some extensions change that limit (IRS: Forms 8804 and 8805 instructions; IRS: trust fund penalty manual).

What does each owner report from a Schedule K-1?

Each partner uses Schedule K-1 to report their share of partnership items on their own return, subject to rules that may limit losses and deductions. The partnership's Form 1065 does not replace either owner's return (IRS: Form 1065 instructions; IRS: K-1 instructions).

The K-1 shows the partner's share of income, deductions and credits. When required, Form 8805 separately shows a foreign partner's share of effectively connected taxable income and the section 1446 tax credit allocated to them (IRS: Form 1065 instructions; IRS: Forms 8804 and 8805 instructions).

An electing nonresident spouse instead files a joint Form 1040 for the election year. That election alone does not settle the LLC's foreign-partner withholding obligation (IRS: Publication 519; IRS: section 1446 regulations).

The foreign owner's tax residence may also require a return abroad. US citizenship, dual residence, treaty claims and the character of each K-1 item can alter the owner's filing. For a nonresident individual's own return, see US returns for nonresident business income.

What happens when a C corporation pays a foreign shareholder?

The US C corporation files Form 1120 and pays tax on its taxable income. A distribution to a shareholder from earnings and profits is generally a dividend; retained profit alone does not produce a partnership Schedule K-1 (IRS: Publication 542).

When a shareholder is a nonresident alien or foreign entity for US tax purposes, a US-source dividend generally faces 30% withholding and Forms 1042 and 1042-S reporting, subject to an available treaty or other reduction (IRS: NRA withholding). That shareholder generally provides the appropriate Form W-8; a US citizen abroad uses Form W-9. A section 6013(g) election alone does not remove nonresident withholding on dividends (IRS: claiming tax treaty benefits; IRS: Publication 54; IRS: Form W-8BEN instructions).

Forms 1042 and 1042-S are generally due March 15 after the payment year (IRS: Form 1042 instructions; IRS: Form 1042-S instructions).

The corporation is liable under section 1461 for dividend tax it fails to withhold. A person controlling the payment can also be a withholding agent and personally liable; a separate section 6672 penalty requires a responsible person's willful failure. The IRS generally has three years from the later of Form 1042's filing date or the following April 15 to assess it, with exceptions and extensions (US Code: section 1461; IRS: withholding agent; IRS: trust fund penalty manual; IRS: Form 1042 processing manual).

A US citizen or resident individual reports taxable dividends on Form 1040. A nonresident alien without a resident-treatment election whose only US income is a dividend generally need not file Form 1040-NR if the full tax was withheld; a return may be needed if tax was underwithheld or to claim a refund. A foreign corporation with no US trade or business generally need not file Form 1120-F if its full US tax was withheld (IRS: Form 1040-NR instructions; IRS: Form 1120-F instructions).

A C corporation may also need Form 5472 when it has at least one direct or indirect 25% foreign shareholder and a reportable related-party transaction. Foreign ownership alone does not require it; an individual with an effective section 6013(g) election is not a foreign person for this test (IRS: Form 5472 instructions). See foreign-owned C corporation filings for filing and recordkeeping rules.

Does a small investment from a relative abroad change the answer?

A shareholder who remains a nonresident alien for US income tax rules out S corporation status even with a small stake (IRS: S corporations). In an LLC taxed as a partnership, a small foreign stake can also create withholding when the partner is allocated taxable income connected with the US business (IRS: partnership withholding). The operating agreement's profit allocations and the investor's tax status matter.

For a C corporation, a small foreign share does not by itself trigger Form 5472, but a US-source dividend to a foreign person can still trigger withholding and Form 1042-S. The Form 5472 ownership test includes certain family and entity attribution rules, so a shareholder's certificate alone may not show whether the threshold is met (IRS: Form 5472 instructions; IRS: NRA withholding).

What if the foreign co-owner invests through a company?

The holding company's US tax classification matters: if it is disregarded, its owner is treated as the partner or shareholder (IRS: Form 1065 instructions; IRS: Form 1120-S instructions). If it is classified as a partnership, tiered-partnership withholding and reporting rules can apply (IRS: Forms 8804 and 8805 instructions). If a foreign corporation owns part of an LLC taxed as a partnership and the LLC conducts a US trade or business, the foreign corporation generally files Form 1120-F; its allocated income may also face branch profits tax under the applicable rules (IRS: Form 1120-F instructions).

If the foreign corporation holds C corporation shares instead, US tax generally arises on a dividend payment, with any treaty reduction tested for that corporation rather than presumed from its owner's home address (IRS: claiming tax treaty benefits). The foreign company's US return and treaty position need their own review; see foreign company US tax returns.

What extra issue does a Canadian co-owner face with a US LLC?

Canada treats a US LLC as a taxable corporation even when the US treats a two-owner LLC as a partnership. That mismatch can put US tax and Canadian tax on different people or in different years, so the US K-1 and withholding do not settle the Canadian result (CRA: Competent Authority Assistance, paragraph 88). See Canadian partner in a US LLC for the Canadian filings and possible double-tax issue.

Can we change the tax classification later without cost?

An LLC can change its federal tax classification on Form 8832, but the election can trigger taxable deemed transactions. All current members or an authorized officer, manager or member sign it; former owners in a retroactive period also sign. Its effective date can be up to 75 days before filing or 12 months after. Another classification change is generally barred for 60 months, except when the first election took effect on formation (IRS: Form 8832; IRS: LLC classification repercussions). Evaluate the structure before issuing interests; see changing your business structure before changing an existing company.

Example

Illustrative amounts in US dollars. Two individuals own a US business: a US tax resident owns 60% and a nonresident alien owns 40%. Assume the business has $100,000 of taxable income, all effectively connected with its US trade or business, with no special allocations or treaty reduction.

If their LLC is taxed as a partnership, it reports $60,000 and $40,000 on the owners' K-1s. The foreign partner's $40,000 share is allocated even if the LLC makes no distributions. At the general 37% rate, the LLC would withhold $14,800 for that partner, subject to any permitted reduction. The foreign partner uses Form 8805 to claim the withholding on a US return; $14,800 is a payment toward tax, not necessarily the final tax.

If instead the business is a C corporation, assume it pays $21,000 of federal corporate tax on the $100,000 and distributes the remaining $79,000 as dividends. The foreign shareholder's 40% share of the dividend is $31,600. At the general 30% withholding rate, the corporation would withhold $9,480 on that payment, subject to any permitted treaty rate. Each shareholder then considers the dividend on their own return; neither gets a partnership K-1. State and other taxes are left out of both illustrations.

Different for you?

• The foreign owner lives in Canada: the LLC's Canadian classification changes the comparison. See Canadian partner in a US LLC.
• The foreign owner is a company: its Form 1120-F and treaty position need review. See foreign company US tax returns.
• You need to calculate or correct foreign-partner withholding: see foreign partner withholding.
• The C corporation has foreign owners and related-party dealings: see foreign-owned C corporation filings.
• You are deciding how to pay an owner abroad: see paying yourself as a foreign owner.
• The entity already exists or an election was made: see changing your business structure.
• You are choosing the entity and ownership terms now: gather each owner's citizenship, tax residence, and legal entity; proposed ownership and profit shares; formation state; planned US activities; and profit, cash and payout forecasts. Review those together through cross-border tax before issuing interests.