Frequently Asked Questions
US Taxes and Foreign Owned LLCs
How are C-Corps Taxed?
The biggest reason why most foreign owners choose Sole Proprietorship LLCs is that when you are a C-Corp you are subject to what is known as “double taxation”.
Unlike a pass through entity (LLC taxed as Sole Proprietorship), an LLC with C-Corp tax classification must file a tax return with the IRS AND the owners must also file federally with the IRS. This means you are taxed on the corporate level as well as the personal level.
This means that, unlike a sole-member LLC, the company itself is taxed on income. Any additional profits leftover that are distributed to shareholders (usually in the form of dividends) are then subject to income tax at the personal level.
The personal income tax is paid in the USA by the shareholder because it was earned in the USA.
Retaining earnings is one way to avoid double taxation in a C-Corp. By retaining income rather than distributing it to shareholders through dividends, you can avoid double taxation. In that scenario the shareholders won’t be forced to pay taxes since no distributions will have been made. This is particularly a good idea for corporations that can afford to reinvest the cash into the company to further grow and expand the business.