LLC as a Disregarded Entity
When an LLC is treated as a Disregarded Entity (DE), as its name suggest, the LLC is disregarded for the purpose of Federal taxation. If a domestic LLC is owned by a single owner, then the owner is supposed to file his individual return in Form 1040 NR reflecting LLC’s activities whereas DE is not subject to file federal tax return but it will file Proforma 1120 which only includes the name, EIN and address of business on page 1 of form 1120 and Form 5472 which will show related party transactions detail. These forms can be paper filed only and due date is April 15. The penalty is $25,000 for noncompliance for this reporting per form 5472 per year.
If a foreign-owned LLC is a Proprietorship LLC which is ETOB, its owners will be subject to pay US taxes and file Form 1040-NR -US Return Form for Non-Resident Aliens engaged in a Trade or Business in the US.
If Foreign-owned single member LLC file Form 8832 and elected as a C- Corp, then for Federal filing purpose it will be treated as a C-Corp and it must file Form 5472 and Form 1120 and is subject to pay taxes as a C-Corp. Also, if an LLC is ETOB (Engaged in a Trade or a Business in the US), then also it may be subject to US Federal Taxation.
Form 1040-NR:
- You need to have ITIN (Individual Tax Identification Number) to file this form.
- You need to report “Income Effectively Connected with U.S. Trade or Business”, deductions/ adjustments and tax liability/ refund due
- Due date for filing this Form is April 15. However, If the person is not available in US on deadline day, then there is automatic extension for 2 months and the due date is June 15 instead of April 15 for personal tax return.
- Penalty for non-filing of Form- 1040 NR is 5% of the unpaid taxes for the month or part thereof for which the delay continues. Maximum penalty is up to 25% of the unpaid taxes.
LLC as a C-Corp
Any multi-member LLC formed is by-default classified as a Partnership until it files Form 8832 to be elected as a Corporation.
Depending upon the classification of an LLC as a Proprietorship, Partnership, Corporation, an LLC will be subject to respective Federal tax filing.
An LLC elected as a C-Corp needs to file Form 1120 to report to IRS along with Form 5472.
Foreign owners can never opt to be treated an S-Corp.
If an LLC chooses to be classified as a C-Corp for tax purposes, it will be subject to Federal tax return Form-1120. It will be subject to flat rate of tax applicable to a C-Corp at 21%. C-Corp will also be subject to other State/ Franchise filing requirements.
The tax years beginning after 31st Dec 2021, the tax rate will increase from 21% to 28%.
Apart from Federal Income-tax and State Taxes, a C-Corp is subject to Payroll, Unemployment and Disability taxes. Taxes may vary depending upon the jurisdiction/ state of incorporation of the C-Corp.
Some of the basic information required to file Form 1120:
- A Corporation must have an EIN (Employer’s Identification Number)
- Other information reported is Name, Corporation’s Address, Date of Incorporation, Total Assets of the Corporation, Income, deductions, taxes, refunds, credits and payments, other financial information
- Due date of filing this form is 15th day of the 4th month from the end of the tax year for the Corporation. If tax period is Jan to Dec, the due date will be April 15.
- Penalties for filing taxes late 5% of the unpaid tax charged for each month or part thereof till delay. Maximum liability is 25%
Double-taxation:
One of the most important features of a C-Corp is Double-taxation. A C-Corp pays corporate-tax on its income and it pays dividends to shareholders from its after-tax income, these dividends are taxed in the hands of the shareholders in their individual capacity. This is how one amount is charged twice.
There are ways to reduce the effect of double-taxation by reducing dividends and increasing retained earnings of the business or by paying more salaries from Business.
For more information regarding Taxation of an LLC as a Disregarded Entity refer below:
Taxation of US LLC as a Disregarded Entity
For more information regarding Taxation of an LLC as a C-Corporation refer below: