Single-member vs multi-member LLC for foreign owners

Single-member vs multi-member LLC at a glance

Both are the same kind of company under state law, with the same formation filing, registered agent and annual report. The differences are almost all federal tax and paperwork, and they grow when owners live outside the US.

How a single-member LLC owned from abroad is taxed

The IRS treats an LLC with one owner as a disregarded entity: for income tax, it's as if the owner earned the income directly. When that owner is a foreign person, the LLC still has its own yearly filing. It files Form 5472 with a pro forma Form 1120, a mostly blank corporate return that carries only the LLC's name, address and a couple of items on page 1.

Form 5472 reports transactions between the LLC and related parties, and you're one. Money you put in, money you take out and payments tied to forming or closing the LLC all count. File by April 15 for a calendar year, or get 6 more months with Form 7004. It can't be e-filed: a foreign-owned single-member LLC sends it by fax or mail. Not filing costs $25,000.

If the LLC earns income effectively connected with a US business, you report that income on your own Form 1040-NR. Our Form 5472 guide goes through the form line by line, and our Pro plan includes it prepared by our US tax partner.

How a multi-member LLC is taxed: Form 1065 and Schedules K-1

With two or more members, the default is partnership treatment. The LLC files Form 1065, an information return, and gives each member a Schedule K-1 showing their share of income, deductions and credits. The partnership pays no income tax itself; members report their shares on their own returns.

Form 1065 is due by the 15th day of the 3rd month after the tax year ends, which is March 15 for a calendar year, or 6 months later with Form 7004. It's required unless the LLC had no income and no expenses that count as deductions or credits. Filing late costs $255 per member for each month, up to 12 months, and each Schedule K-1 not given to a member on time can cost $340.

Partnerships with foreign members may also need Schedules K-2 and K-3 for international tax items. And unless the partnership validly elects out of the centralized audit rules, it must name a partnership representative with a US street address, a US taxpayer ID and a US phone number. When every member lives abroad, plan on a US tax preparer.

Section 1446 withholding on foreign members

If the LLC has income effectively connected with a US business, it must pay withholding tax on each foreign member's share of that income: 37% for individuals and 21% for corporations. It owes the tax whether or not it distributes any cash. Payments go in with Form 8813 on the 15th day of the 4th, 6th, 9th and 12th months of the tax year, and the year is reported on Form 8804, with a Form 8805 for each foreign member, by the 15th day of the 3rd month after year end.

Foreign members then file their own US returns, such as Form 1040-NR, and claim the withheld tax as a credit by attaching Form 8805. If a foreign member sells their interest, the buyer may have to withhold 10% of the amount realized.

Spouses as co-owners: one member or two?

A married couple who both own an LLC generally count as two members, so the LLC is a partnership that files Form 1065. The IRS election that lets spouses skip a partnership return, the qualified joint venture, isn't available for a business run through an LLC.

There is one exception. If spouses own the LLC as community property under the law of a US state, a foreign country or a US possession, and nobody else owns part of it, the IRS accepts either treatment: disregarded entity or partnership (Revenue Procedure 2002-69). Whether your country's marital property rules count as community property is a question for a lawyer there.

The simplest alternative is for one spouse to own 100%. That keeps the LLC single-member, but ownership has real consequences, such as who controls the business and its bank account, so decide it on those grounds and not for paperwork alone.

Banks, payment processors and the operating agreement

Under FinCEN's customer due diligence rule, a US bank must identify and verify every individual who owns 25% or more of a business customer, plus one individual who controls it. For a single-member LLC that's you. For a multi-member LLC, each owner at 25% or more goes through identity checks, so one owner's missing document can hold up the account.

Payment processors run their own checks and make their own decisions; nobody, including us, can guarantee approval. See opening a US bank account as a non-resident and Stripe for a US LLC.

A bank may ask for your operating agreement to confirm who owns and runs the LLC. For a multi-member LLC, it's also where each member's percentage, capital contribution, voting rights, profit split and exit terms live. Without one, state default rules fill the gaps: in Wyoming, distributions default to equal shares among members unless an operating agreement or the LLC's IRS filings say otherwise. Read what to include in an LLC operating agreement.

Adding or removing members later

Because the default tax treatment depends on how many members the LLC has, adding a second member turns a disregarded entity into a partnership, and dropping to one member turns a partnership back into a disregarded entity. The change affects which federal returns you file for that year, so plan it with your tax preparer.

1. 1

   Put the terms in writing

   Amend the operating agreement to record the new member's percentage, contribution, votes and profit share, or the departing member's buyout price and timing.

2. 2

   Check the state record

   Neither Wyoming nor Delaware lists members on the formation filing, so a change of members doesn't mean amending it. A change of name, manager or registered agent is a different matter.

3. 3

   Update the IRS if needed

   If the responsible party on your EIN changes, file Form 8822-B within 60 days. Ask your preparer which returns cover the year of the change.

4. 4

   Tell banks and processors

   They may need to verify a new 25% owner or remove a departing one, so contact them before the change takes effect.

5. 5

   Plan the tax on a sale

   A member who sells their interest can owe tax on the gain, and when the LLC has US business income, a buyer paying a foreign seller may have to withhold 10% of the amount realized.

Which should you choose?

• You're the only owner: a single-member LLC. It's the lightest structure for a founder abroad.
• Your spouse is involved, but one of you can own it: single-member, after checking what ownership means for you at home.
• Two or more real co-founders: a multi-member LLC with a detailed operating agreement and a US tax preparer for Form 1065.
• Co-founders planning to raise venture capital: skip both and read LLC vs C-corp.

Frequently asked questions