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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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Hello, I am a US citizen living in NY and I have a business

Customer Question

Hello,

I am a US citizen living in NY and I have a business partner living in Portugal. We are looking to go 50/50 on an Delaware LLC and I am running into some major headaches trying to figure out the tax situation. All of the monies earned are gotten from digital subscriptions, and we are not selling any tangible goods.

Here are some questions:

1. What taxes and what percentage of the monies earned is the US citizen responsible for? Ny State, Delaware, Federal?

2. Does his 50% of earnings have any bearing on my taxation?

3. Assuming we set up a bank account in the US with the Tax ID fromt he delaware LLC, are withdrawals taxable when being transferred to Portugal?

4. Is the Delaware LLC the best choice here?

5. If I missed anything please let me know!

Thanks in advance,
Jeff
Submitted: 5 years ago.
Category: Business Law
Expert:  socrateaser replied 5 years ago.

1. The LLC pays State income taxes where it does business, not where it's incorporated (unless it does business where it's incorporated).

 

2. No.

 

3. Typically, the LLC would have to withhold 30% of your partner's distributions to the IRS. It will be up to him to try to figure out how to reduce the tax obligation and get some of the money back. But, let's suppose that the LLC does business in Portugal, and all of your partner's revenues come from there, and all of yours come from, well, wherever your taxes are cheapest. Maybe you should be operating out of Nevis-St. Kitts.

 

4. Delaware corps operate under very favorable laws, when it comes to internal governance. In dealing with customers and vendors, the law of the jurisdiction where you're doing business will generally apply, unless the other party agrees to a different jurisdiction.

 

 

Customer: replied 5 years ago.
Thanks for the reply. Let me give you soem more detailed information.

We sell only online products, and accept Paypal for our payments, so I think Delaware is our best choice in this regard. Also, we will be selling to higher education institutions and I have been told that a US presence is best for that as well.

A couple of questions:

1.Assuming we go with Delaware, does the operation agreement need to cover the allocation of funds in regards XXXXX XXXXX? Example: Partner B (Portugal) must agree to have 20% withheld from all transactions from the US to Portugal.etc...

2. What else might we need in this agreement? Would you reccommend any further legally binding cotnracts? Such as those which fall outside of the LLC and speak in general terms?

3. Are you familiar with Intellectual rights issues?

4. I just want to get a better idea of some very rough estimate numbers if you can...it would help tremendously.

XYZ LLC has 2 owners. It is formed in Delaware, and one member is living in NY, and another in Portugal (as we discussed). We are slling ONLY online goods, and we are not operating out of any specific state. Owner A in NY has given his SS# XXXXX obtain the Taax ID # XXXXX the Delaware LLC. We plan on using a bank within the United States which allows for this type of business setup. (Any suggestions?)

Let's assume the company earns 100,000 USD in the first year. Can we attempt to break down who owes what?

So for me, living in NY: I see 50,000 USD of this money, so I am charged federally, and in NY? How about Delaware? How much should one in this situation (rough estimate) withhold?

For him, he would be taking his 50000 USD and wiring it to Portugal. How much should he withold in regards XXXXX XXXXX LLC responsibilites.

Sorry for all of these extra questions, but this is my very first attempt at International type business, and I am in desperate need of some sound advice (which I can see you can indeed provide).

If I forgot anything that you see as being noteworthy, please let me know and I would love to hear that input as well.

Thanks a million,
Jeff
Expert:  socrateaser replied 5 years ago.

1. No. If you don't withhold, the LLC could be fined. See http://www.irs.gov/pub/irs-pdf/iw8.pdf.

 

2. A well-drafted operating agreement would cover everything. You may want to consider looking at some typical agreements, because it's more what you want, than what the attorney wants. The attorney's goal is to get you to where you want to be. Sample agreement: http://www.uslegalforms.com/de/DE-00LLC-1.htm.

 

3. Yes. But, that is outside the scope of your question, here.

 

4. The LLC is a pass-through entity if you elect to treat it as a partnership. It will owe no Delaware income taxes, unless you are operating the business in Delaware. You will be taxed on your K-1 distributions as an individual. So, whatever you would pay in taxes on $50K today, is what you will pay on your distributions from the LLC.

 

 

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