Foreign-owned US LLC taxation: Essential guide for non-US entrepreneurs

Starting a US LLC as a non-US entrepreneur opens the door to global customers, credibility, and US banking. But it also introduces tax filing requirements that can surprise many first-time founders. If you have a foreign-owned single-member LLC in the US, it’s important to know how the IRS treats your business, when US taxes apply, and what you must report each year.

Many entrepreneurs only dive into tax obligations after their LLC is formed. But understanding US LLC taxation beforehand helps you make more informed decisions during company formation. (Hint: the business model, type of entity, and state of registration matter all matter to tax and compliance.)

We help you understand the tax rules, stay compliant, and avoid unnecessary penalties. We can also help you with the tax filings.

In this guide, we’ll cover:

1. How does the IRS treat foreign-owned LLCs

A US LLC (Limited Liability Company) is pretty unique because the US tax authorities don’t actually treat it as a corporation, unless the LLC elects to be one. Without that election to be taxed as a corporation, a LLC is a “disregarded entity” for US federal tax purposes.

What is a disregarded entity?

This means that for US federal tax purposes, the LLC is not treated as a separate taxpayer. Instead, its income or losses pass directly to the owner. In other words: even though the business is US-based, the IRS “ignores” the LLC as an entity for income-tax purposes. The owner of the LLC must report all income on their individual tax return.

The owner might have to disclose the LLC’s income in their own country and pay taxes there. Whether they also have to file a US individual tax return as owner, depends on factors we’ll discuss below. Most foreign-owned LLCs are tax-free in the United States. (We will give detailed examples of tax-free and taxable LLCs in this guide.)

You can also elect to have your LLC taxed as a C corporation by filing Form 8832. This may be advantageous depending on your business model. More on this later.

Tax filing requirements for disregarded entities with foreign owners

Even though the IRS “ignores” (disregards) the LLC for tax purposes, it still imposes specific reporting requirements for foreign-owned LLCs.

A foreign-owned single-member LLC must file an information return, Form 5472 and pro forma Form 1120, no matter whether it has US income or pays US tax. A multi-member LLC with foreign owners must file a partnership return, Form 1065. (We explain this later in this guide.)

2. Are foreign-owned LLCs tax-free in the US?

A foreign-owned LLC can be tax-free in the United States – in fact many are. However, some do have to pay US taxes. A US LLC is not tax-free if it generates US-sourced income.

US-sourced vs foreign-sourced income

Whether income is US-sourced or foreign-sourced matters greatly for taxation. Key factors include:

• Where services are performed
• Where property is located
• Where title to goods transfers

Having clients or a bank account in America doesn’t make the income “US-sourced”. Let’s see how the IRS determines when income is US-sourced and therefore taxable. It uses two key concepts that are closely related to each other:

• ETOB – Engaged in a US Trade Or Business
• ECI – Effectively Connected Income

ETOB: Engaged in a US Trade or Business

Your LLC may be considered “engaged in a trade or business” in the US if it has meaningful activity taking place inside the country, such as:

• US-based employees or managers
• Warehouses or office space in the United States
• Dependent agents

When your LLC meets any of the ETOB criteria, some or all income may become taxable in the US.

Examples for ETOB:

• The LLC has a sales representative in the US who works solely for the LLC, not for any other company. The sales rep contacts leads and closes business. Even when working from home, not from a company office, the sales rep is a dependent agent. 
• The LLC has a few part-time contractors in the US that may also work for other companies. But they work out of a physical company office in the United States. This makes the income connected to their work taxable in the US. (A virtual office on the other hand does not create a physical presence and tax-liability.)
• The LLC buys products and keeps inventory in a warehouse or a storage facility (in the US or anywhere else – location doesn’t matter for this). The products are then sold to US customers. Because the ownership of the products transfer to customers in the US, the associated income is US-sourced and therefore taxable.

ECI: Effectively Connected Income

When your LLC is ETOB, then any income that is tied to those US business activities is Effectively Connected Income (ECI) and therefore US-sourced. ECI is taxable in the United States, and the LLC owner must file an individual income tax return (Form 1040NR) to disclose it.

So, understanding if your business is indeed ETOB and your income US-sourced is crucial for determining the tax obligations. Let’s dive a little deeper, because the rules are nuanced.

3. Foreign-owned LLC that are tax-free in the US

As explained above, when the LLC does not have specific business activities in the United States, the IRS does not consider the income US-sourced. And without US-sourced income, there is no US federal income tax for foreign-owned LLCs. This is typically the case for online service providers, including:

• Marketers
• Consultants
• Coaches
• Programmers
• Other service providers that provide their services online while located outside of the US.

Services are sourced to the country, where they are performed, no matter where the client is located or the payment takes place.

Example: You are providing marketing services to clients in the US, while you are physically located in Spain or another country (not US), the income is foreign-sourced and not taxable in the US.

However, when you travel to the States for a few weeks and work from there, the same marketing activities become US-sourced. (And you would need a work visa – just having a US company does not entitle you to work in the United States.)

Keep in mind though that having no US tax liability does not mean no reporting obligations. You must still file Form 5472 for a single-member LLC.

4. Foreign-owned LLCs that may not be tax-free in the US

E-commerce LLCs face a more complex tax situation. For US LLC taxation it matters where the physical products are made, stored, and change ownership. And there are subtle but crucial differences between an Amazon seller and a “pure” dropshipper who sells through their own website, and has a supplier handle the rest. Let’s look at different scenarios.

Ownership of the inventory

If and how inventory is held greatly impacts US tax treatment:

1. When the LLC buys inventory from a supplier before selling it to their customers in the United States, the income is US-sourced, ECI and taxable.
   
2. Now, if the LLC produces the goods itself (instead of buying them) outside the US and then sells to US customers, the income is not US source. It is sourced to the country of production, i.e. foreign-source and therefore tax-free in the US.
   
3. A different situation is an LLC that only acts as a middle man between the customer and the supplier. It never takes ownership of any inventory. It only connects the customer to the supplier, who then handles shipment and payment. The supplier pays the LLC a commission. In this case, the LLC acts as a marketer, like a service provider. The resulting income would typically be tax-free.

5. US income taxes for e-commerce businesses

Most foreign-owned e-commerce businesses that sell to US customers must likely pay US income taxes. However, there are specific situations where the income would not be taxable in the United States.

Is selling products on Amazon, Shopify, etc tax-free?

FBA is a common business model for online entrepreneurs. Others use Shopify or other online platforms to present their webstores.

In the past, many tax advisors said that this business model is tax free for a foreign-owned LLC. However, the IRS’ reading and enforcement of the relevant tax code has become much stricter over the last few years. Now, income from selling products on Amazon or other platforms to US customers is typically considered US-source income and therefore taxable.

Some sellers might argue that they are not really taking ownership of the goods before selling them. Those platforms, however, typically consider the seller as the owner of the goods. 

Is selling products on your own website tax-free?

If an LLC sells physical products through its own website, instead of a platform like Amazon, and never takes ownership of the goods, it might be tax-free in the US. Important is that the seller does not prepay the supplier for products, i.e. creating inventory that the LLC owns. 

It would be tax free, if the LLC only performs marketing activities and receives a commission from the supplier. The supplier ships the goods and invoices the customer directly.

An experienced tax accountant (like our team) can help you determine if your e-commerce business falls into the tax-free category.

6. Sales and state taxes

In this guide, we focus on US federal taxes. But there might also be taxation on the US state level. 

Even if no federal tax is due, some US states may impose franchise or income tax. In addition, states have different sales tax rates on goods sold in the state. 

Both topics can be complex and depend on the specific state the business operates in. This is beyond the scope of this article.

7. US LLC taxation of passive income like royalties, rents or dividends

Tax-withholding on FDAP income

Besides generating income from selling services or products, there is another income type that has US tax implications: FDAP income.

FDAP stands for Fixed, Determinable, Annual, or Periodic. It refers to passive income such as:

• Dividends
• Certain interest
• Royalties
• Rents

FDAP income is often subject to withholding tax (commonly 30%), though tax treaties may reduce or eliminate this.

If your LLC will have any of these types of passive income, talk to our tax specialists. We can analyze the treaty situation and get you set up with lower or no withholding, if possible.

8. IRS filing & reporting obligations for foreign-owned LLCs

No matter if your LLC is tax-free or not, you must file certain tax forms every year.

Form 5472 + Pro Forma Form 1120 for single-member LLCs

Foreign-owned single-member LLCs generally must file:

• Form 5472 – reporting transactions between the LLC and foreign owner(s)
• Pro forma Form 1120 – basic corporate info with “Foreign-owned US D.E.” written on top

The forms must be mailed or faxed. They cannot be e-filed. 

Reportable transactions include:

• Capital contributions
• Distributions
• Loans or reimbursements
• Payments between the owner and LLC
• Non-monetary transfers

Our in-depth guide to Form 5472 explains everything you need to know about this filing. 

The filing due date is April 15. You can request an extension until October 15 by filing IRS Form 7004. 

If the LLC generates taxable US-source income, then there are additional forms required. Because a LLC is a disregarded entity, as we discussed earlier, the income flows through to the LLC owner. The LLC owner must then file a personal tax return to disclose that income. 

• Form 1040NR – individual tax return for a non-resident.

Need help with your tax compliance? Contact our experienced incorporation and tax team.

Form 1065 for multi-member LLCs

Multi-member LLCs do not file Form 5472 and pro forma 1120. The IRS treats multi-member LLCs as partnerships, so the tax filing requirements are different from LLCs with a single owner. 

• Form 1065 – partnership return

For each owner, their pro-rata share of the partnership LLC income, credits, and deductions is shown on Schedule K-1. 

Other possible IRS tax filings

In addition to the 5472 or 1065 forms, LLC owners may have to file other tax forms, depending on the business and income type.

Typical forms include:

• Form 1042-S / 1042 withholding for payments to foreign persons – This applies, for example, to LLCs with passive income like royalties, dividends, rents.
• FBAR (FinCEN 114) for foreign financial accounts – If the LLC has one or more financial accounts at non-US banks, and the combined value exceeds $10,000 at any time during the year, it must disclose all those accounts.

9. Penalties for not complying with tax filing requirements

Ignoring the filing requirements is risky. The penalties are high, not only for not filing, but also for filing incorrectly.

• $25,000 per missing filing.
• Additional $25,000 for each 30-day period after IRS notice.
• Possible criminal liability for fraudulent reporting.

Do not overlook these compliance obligations. 

Need expert help with filing taxes for you LLC? We got you covered.

10. Recordkeeping and bookkeeping for foreign-owned LLCs

Because a foreign-owned LLC must disclose certain transactions in their tax filings, proper record keeping is important.

Maintain documentation for:

• Capital contributions/distributions
• Intercompany loans
• Expenses and shared services
• Service agreements, invoices, and bank statements

Hiring a professional bookkeeper helps ensure that nothing gets overlooked. While bookkeeping is not legally required for LLCs, it is a good business practice. It’s also highly recommended to maintain proper books to facilitate tax filing and other compliance tasks, like annual report filing with the state.

We can help with this. Our inhouse bookkeeping team works seamlessly with the tax department to streamline the entire process.

11. Real-world examples of foreign-owned US LLC taxation

Service provider abroad

A consultant in Germany invoices clients globally via a US LLC, works entirely abroad, and owes no US federal income tax. The LLC must file Form 5472.

E-Commerce business with US inventory

A Brazilian seller uses Amazon USA warehouses to sell to US customers. The ownership of the product changes in the US, creating US-sourced income and ECI. As a single-member LLC, it would have to file Form 5472. In addition, the LLC owner must disclose the US-sourced income on a personal  tax return, Form 1040NR.

In many cases, a C corporation can be a better business structure for foreign founders with US-sourced income. It depends on factors such as income level, home country taxation, tax treaties, and more. Our tax accountants have experience in this evaluation. Schedule a tax consultation here.

Hybrid / mixed exposure

A SaaS provider with part of the team abroad and occasional US travel may have both foreign-sourced income and US-sourced ECI. – When business operations happen both in the US and abroad, a careful analysis is needed to determine the taxable income.

12. Frequently Asked Questions (FAQ)

Do I need an ITIN to file Form 5472?

Does my LLC need to file 5472 if it had zero income?

Can I e-file 5472 and pro forma 1120?

What if I miss the April 15 deadline?

What if I filed the wrong forms, e.g. 5472 for a multi-member LLC?

13. Tax help for foreign-owned LLCs

We hope this in-depth guide provided you with helpful information, but it can only be a general overview. Tax rules are complex and nuanced, and not every business situation falls into the same clear category. 

Expert guidance prevents not only penalties – it helps you set up your business the right way, with compliance in mind from the start. It also gives you peace of mind, so you can focus on business growth. 

Our team of experts can advise you on the requirements and take care of your tax filings. Entity Inc. offers:

Bookkeeping services  – tailored to foreign-owned businesses and seamlessly integrated with tax filings.

Tax & compliance packages for single-member LLCs, multi-member LLCs, C Corporations and S Corporations – includes a consultation with a tax accountant, required business tax filings and other compliance requirements, e.g. annual reports, registered agents.

Standalone 5472 tax filing – includes Form 5472 and pro forma 1120 filing (no other compliance).

Tax consultation – consultation with an experienced tax accountant to get personalized advice (a consultation is included in our full service packages, but you can also just buy this standalone consultation if you are not sure yet.)