US tax for an owner abroad · A term for founders abroad
What is pass-through taxation?
Tax treatment where a company pays no income tax itself and its profit is taxed to its owners, as with an LLC or a partnership.
Checked against the IRS's instructions and the states' own rules. Reviewed by Saais Patel, compliance reviewer.
Term 75 of 105 in the glossary, filed under P.IRS: limited liability company
Pass-through taxation, for a founder abroad.
An LLC or partnership passes its profit through to its owners, who report it. A single-member LLC is a disregarded entity, so its owner reports the profit directly. A partnership files an information return, Form 1065, and gives each owner a Schedule K-1 showing their share. A C-Corporation works the other way: it pays tax itself, and its owners pay again on dividends.
Profit is taxed when it's earned, whether or not it's paid out. An owner who leaves the money in the company still owes tax on their share for that year.
For an owner abroad
- US tax: what passes through is generally untaxed by the US if the company has no US trade or business, because the profit is earned outside the US.
- Withholding in a multi-member LLC: if the company does have income connected with a US business, it withholds tax on each foreign partner's share, generally 37% for individuals and 21% for companies, and files Form 8804.
- Your own country: it taxes the profit under its own rules. Some countries treat a US LLC as a company rather than looking through it, which changes when and how you're taxed at home, so ask a local adviser.
Sources: IRS: limited liability company; IRS: instructions for Forms 8804, 8805 and 8813.
What founders ask next.
- Is an LLC a pass-through entity?
- Yes, by default. A single-member LLC is disregarded and a multi-member LLC is a partnership, so neither pays federal income tax itself. Either can elect to be taxed as a corporation instead.
- Do I pay US tax on pass-through profit if I live abroad?
- Generally not, if the company has no US trade or business: no office, staff or agent in the US. The profit is earned outside the US, and the US doesn't tax that for a non-resident. The tax guide sets out the test.
- Is pass-through better than a C-Corporation?
- For a founder abroad who isn't raising money, usually yes: profit is taxed once, at home, instead of 21% in the US and again on dividends. A founder raising from US investors needs the corporation anyway.
03 · See also
- The company itselfLLCA US company whose owners aren't personally liable for its debts, and whose profit is taxed once, to the owners, unless it elects otherwise.Read the term
- US tax for an owner abroadDisregarded entityA single-member LLC the IRS ignores for income tax, treating its income as the owner's; it still files Form 5472 if the owner is foreign.Read the term
- US tax for an owner abroadEffectively connected incomeIncome connected with a US trade or business, which the US taxes a foreign person on at ordinary rates; pay for work done abroad usually isn't ECI.Read the term
- The EIN and IRS formsForm 1065The US partnership return, filed yearly by a multi-member LLC, with a Schedule K-1 for each owner showing their share.Read the term
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