US Limited Liability Companies - New Reporting Requirement for Single-Member LLCs
Contributed by US Trust Advisory Services LLC
06 January, 2020
Since January 2017, United States Limited Liability Companies (LLCs) which are wholly owned, directly or indirectly, by non-US persons ("nonresident aliens" OR "NRAs"), are now subject to previously enacted Final Regulations as issued by the U.S. Department of Treasury (TD 9796), which now require such LLCs to file annually an informational report to US Treasury on Internal Revenue Service (IRS) Form 5472 and such LLCs must also obtain an Employer Identification Number ("EIN").
Business entities formed in the US are classified, for tax purposes, based on the number of persons involved in the entity. For example, a business entity with two or more members can be classified as either a corporation or a partnership while a business entity with only one owner is usually classified as a corporation or an entity disregarded as being separate from its owner ("disregarded entity"). A US LLC with one member may be classified as a disregarded entity but is also eligible to elect to be classified as corporation. An LLC that is treated as a disregarded entity does not need to obtain an EIN unless its member wishes to change the LLC's classification from a disregarded entity to a corporation. Otherwise, a US LLC does not require an EIN because the single member owner is treated as owning directly the entity's assets and liabilities and any information available with respect to the disregarded entity would depend solely on the single member's own tax return filings, if any.
However, the US Treasury and the IRS have broad authority under the Code to make regulations to require the keeping of records and the reporting of information by persons who may be liable for any tax. As such, a domestic business entity, under current provisions, that is owned by at least 25% non-US shareholders is also subject to informational reporting and record maintenance requirements pursuant to Internal Revenue Code Section 6038A. Any such entity is required to file annually Form 5472, ("Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business").
The IRS will now treat a LLC owned wholly by a non-US person as a domestic corporation separate from its owner for the limited purposes of the reporting and record maintenance requirements that would normally apply to 25 percent foreign-owned domestic corporations under the previously referred IRC Section 6038A. As a result, the single member LLC, with a non-US owner, must file Form 547 and also maintain related records for reportable transactions with the entities' foreign owners or other foreign-related parties.
Failure to file Form 5472 will result in the imposition of a penalty in the amount of USD 25,000. Additionally, failure to maintain proper record maintenance or filing an incomplete Form 5472 will result in a penalty of USD 25,000.
NOTE: Form 5472 is an informational return only - it is not a tax return and no taxation will result from the filing of the form.
As a final note, notwithstanding the above reporting requirement, the single member LLC will continue be treated as a disregarded entity for all legal and tax purposes.
For additional information or for assistance, with filing form 5472, please contact your UTAS representative.
Phone no.: +1-954-442-7861
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