Expats looking to start US businesses or invest in US real estate should consider the following business entities. We highly recommend consulting with an experienced professional to choose which business structure will be most tax advantageous and also give a level of liability protection. Tax treaties must be considered to determine tax consequences in an expat’s foreign residence.
Limited Liability Companies (Schedule C, Form 1040, 1065, 1120, or 1120s)
A Limited Liability Company business structure is formed under state regulations. Members of LLCs’ (owners) are not restricted in most states and therefore can include corporations, and foreign individuals or entities. Limited Liability companies offer personal protection from company’s debts and obligations (similar to a corporation) while affording flow-through tax advantages (like partnerships or sole proprietorships).
In the case of a single member LLC, by default the business will be treated as a disregarded entity for tax purposes. The income and losses will be reported directly on the owner’s personal tax return, Form 1040, Schedule C. For LLCs’ with two or more members, the default status of the LLC is to be treated like a partnership and the LLC will file form 1065. Members will be issued k-1 schedules and will report the flow through income and expenses on Form 1040, Schedule E. LLCs’ have the option of electing to be treated as a C corporation that will be taxed as a separate legal entity. In order to do so, they must file form 8832. Once the election takes effect, the LLC will file Form 1120.
C-Corporations: Form 1120
The C-corporation is the only form of the US Corporation that gets taxed as a separate legal entity. All others have “flow through” status where the income flows through to the shareholders who report this income on their personal tax returns (or business tax return in instances where the shareholder is not an individual.) The major disadvantage of a corporation is that income is subject to double taxation. Net income is taxed on the corporate level and then again to the individual shareholder upon distribution of income in the form of dividends.
S Corporation: Form 1120S
S Corporations are small corporations that elect to be treated as pass through entities. Shareholders of the S Corporations report corporate income and losses on their personal tax returns, Form 1040, Schedule E. S corporations allow shareholders to avoid double taxation; however, some built-in gains and passive income are taxed at the entity level. To elect to be treated as an S corporation for tax purposes, the corporation must submit Form 2553 within the first two months and 15 days after organization. In order to qualify for this election, the corporation must be a domestic corporation and shareholders cannot include partnerships, corporations or non-resident alien shareholders. Additionally, it must have no more than 100 shareholders, have only one class of stock, and cannot be a bank, insurance company or domestic international sales corporation.
Partnership: Form 1065
General partners are liable for the debts and obligations of a limited partnership. However, limited partners are only liable for debts up to their capital contribution. Some states now allow limited partnerships to elect to be treated as a limited liability limited partnership (LLLP). Under this election, general partners are given limited liability for debts that arise once the LLLP election is in effect. LP’s and LLLP’s file Form 1065 and issue k-1’s to partners that are then reported on Form 1040, schedule E of the partners personal tax returns.