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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22635
Experience:  Taxes, Immigration, Labor Relations
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Hello, I want to incorporate an LLC in Delaware with two members.

Resolved Question:

Hello,
I want to incorporate an LLC in Delaware with two members. I am currently located in the US, Massachusetts but my partner is in Romania. Can you please let me know the following:

1. What taxes am I liable for in the US (tax rates included)
2. What taxes in my partner liable for in the US? (tax rates included)

Many thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
1. What taxes am I liable for in the US (tax rates included)
The LLC with several members is treated as a partnership for US federal tax purposes. That means - all taxable income is passed to members - and each member will pay its own taxes.
See tax rate schedule on the last page - www.irs.gov/pub/irs-pdf/i1040tt.pdf
State income taxes will be extra.
2. What taxes in my partner liable for in the US?
Your nonresident alien partner will be taxed only on income from US sources.
Same tax rates - because that woudl be income effectively connected with the US business.
Let me know if you need any help.

LEV :

For income tax purposes an LLC with several members is generally treated as a partnership. While the LLC with several members is treated as a partnership and it is not disregarded entity - it is not a taxable entity for income tax purposes. When passing income to members - the type of the income is not changes.

LEV :

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return. Some additional information about partnerships may be found in IRS Publication 541 -http://www.irs.gov/publications/p541/index.html


All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf


Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
So - income tax liability is passed to partners.

Customer:

Hi,

LEV :

Because that is US LLC - all income is assumed to produced in the US - unless the LLC runs operations in other countries. In this case - the LLC need to be officially registered in these countries and based on local laws might be required to pay taxes in these countries.

Customer:

Just to clarify, the LLC will mostly do business with UK customers for the first year. After, we will start doing business in the US as well. What taxes should we pay in this case?

Customer:

Just to clarify, my income will be 12k from the LLC (mostly from UK customers) and 20k from real estate rental in Romania. Are the taxes still the ones that you have mentioned above?

LEV :

Location of customers generally is irrelevant - what is important - where the LLC is performing business activities.
Because that is the LLC registered in the US - it is assumed that all business activiutioes are in the US.
However if for instance the LLC will run operations in teh UL or other countries - it should be registered there according to local laws. In this case income will be apportioned - and only part of the income attributable to the US will be taxed in the US.

Customer:

So if my Romanian partner is doing all of the work and lives in Romania we should incorporate the company there? Are you implying that if we incorporate in Delaware then we would both pay federal tax in the US? If we incorporate in Delaware it will be considered than the business activity is US based and all our LLC income and our personal income derived from the LLC will be liable to US tax?

LEV :

So if my Romanian partner is doing all of the work and lives in Romania we should incorporate the company there?
That would be most logical in your situation. The alternative would be - that the US LLC will be registered in Romania as a foreign entity.
Are you implying that if we incorporate in Delaware then we would both pay federal tax in the US?
Not exactly. If that is the US LLC - it is assumed that all activities are dome in the US - and as such all income from US sources. However - if that LLC is doing business in other countries - its income is apportioned - and only a part attributable to the US activities will be taxable in the US.
If we incorporate in Delaware it will be considered than the business activity is US based and all our LLC income and our personal income derived from the LLC will be liable to US tax?
That is correct - unless you may proof differently.

Customer:

Would the situation be simplified if we decided to pay taxes as a c corp?

Customer:

And would the taxes be significantly higher ?

Customer:

I mean, the LLC might choose to pay taxes as a corporation, right?

LEV :

Yes - you may either register a corporation or you may choose that the LLC is treated as a C-corp[oration.
However - you need to be aware that the C-corporation is a separate legal and taxing entity.
The C-corporation files its own tax return and pays corporate income tax.
You may be employees of the C-corporation - and may receive wages - which will be deductible business expenses for the corporation - but will be your taxable income.
In additional - as shareholders of the C-corporation - you might receive dividends - but they will be taxed twive - on the corporate level - and to shareholders.

Customer:

So the LLC acting as a c corp will pay the corporate income tax and after that my partner will pay the tax on dividends in Romania? (Last question :)

LEV :

That is correct - dividends paid by the US corporation will be taxable income in the US for nonresident aliens.

Customer:

So he will pay the tax on dividends at the US tax rate or at the Romanian one? He is getting income from the US corp as dividends but he lives and works in Romania. (lastest question)

LEV :

For nonresident aliens - dividends paid by the US corporation is income from US sources and taxable in the US.
His tax liability in Romania is based on local laws - but most likely - that income will be taxable in Romania as well based on his residency .
Most likely - he will be able to claim a credit for foreign tax - thus effectively will avoid double taxation.

Customer:

ok, many thanks!

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22635
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you

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