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Hi, I need tax advice...
Hi, I need tax advice on a proposed corporate structure and reporting requirements in the US. Following are the details related to my business, current and proposed structure and my questions. Business Overview: We are an IT company specializing in Internet
Marketing and related services. We have clients all over the world. Our production facility is based in Karachi, Pakistan, and we market our services Internationally through Google, Guru.com, Freelancer.com and other outsourcing portals. Current Corporate
Structure: In late 2012, we registered a single member LLC company in Delaware, purchased virtual addresses and US toll free numbers and opened a bank account in New York to attract more international customers. Proposed Corporate Structure One of the most
critical point from marketing / pricing perspective in our business is location of the service provider. A business based in USA can dictate a much better price compared to someone sitting in Asia. Therefore, we try not to disclose our location / identity
and take the advantage of having an LLC in USA with local bank accounts. The current corporate structure works well for us from tax stand point, however, given that LLC is considered a Fiscally Transparent Entity (FTE), our identity / location is compromised
when a client requests us to provide W9 / W8 Ben Form, which requires disclosure of ultimate beneficial owner. Considering the foregoing, I have been exploring the option of incorporating a Corporation in Delaware, and in this regard would appreciate if you
could answer the following queries: • I understand that we have to form a C Corporate since I am a non US person. Please confirm or advise if there are any other suitable options. • Would forming a corporation resolve the issue of maintaining anonymity / claiming
presence in USA since a Corporation is not an FTE, and is considered a distinct legal entity. • What would be the tax implications of Incorporating a C Corporation. Would the entire income generated from USA based clients would become taxable even though all
the services are rendered from outside USA? If yes, is it ok to incorporate the company with the sole objective of acting as a payment processing company. The said company will get a certain commission in consideration of collecting payments from clients and
remitting the same to Pakistan. Hence tax would be paid on a substantially reduced amount. Kindly advise on the foregoing, or if there is any other suitable alternate. • In future, we plan to expand our business in USA by opening a sales office in cities like
NY to solicit more business. Kindly advise the tax consequences as a result of opening a place of business / sales office in the USA.
Submitted: 3 years ago.Category: Tax
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Answered in 23 minutes by:
5/26/2015
Tax Professional: Lev, Tax Advisor replied 3 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,338
Experience: Taxes, Immigration, Labor Relations
Verified
Hi and welcome back!
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner's tax return (a "disregarded entity").
An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes.
.
As long as you did not select that single member LLC to be classified as a corporation - it is simply ignored for income tax purposes.
For other purposes - that LLC is a separate legal entity - it may pay sales tax, real estate taxes - it may own assets, may hire employees and pay employment taxes, etc.
But for income tax - it is ignored - and all income and expenses are treated as received and paid by the owner.
Facts of using the US address and US bank account woudl not be relevant for that treatment - when W9 / W8 form is requested - the owner's tax ID must be disclosed.
If that is what you want to avoid - you MAY choose that LLC to be treated as a corporation - and in this case - the corporation is a separate taxing entity - it will file its own income tax return - and will pay corporate income tax tax.
You still will have an LLC - a separate legal entity - but the tax treatment would be different.
As an alternative - you may just register a corporation instead of the LLC - for the IRS - that will not make any difference.
.
Either LLC or a corporation are distinct entities - the difference is only with income tax treatment.
Please be aware that with C-corporation - income will be taxed twice - on the corporate level - and then for shareholders when dividends are distributed.
Having a single member LLC allows to avoid double taxation.
.
As that woudl be US corporation - it will report (and would be taxable) on all worldwide income - including income from services rendered outside the US.
However is the corporation runs business activity in a foreign country - it must be according to that country's laws.
While specific requirements must be verified - in most cases that means - registration requirements and tax liability on income apportioned to that country.
In the US - foreign income tax may be credited - thus effectively - there should not be double taxation of the same income.
Please elaborate if needed.
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Customer reply replied 3 years ago
Dear Lev,
Thank you for your answer. Although your answer addresses some of the queries, however, there are certain queries which remain unanswered. Further, some of the points that you have mentioned need further elaboration. Would appreciate if you could kindly provide response to our comments (in all caps and bracket) noted in the below response.
ThanksHi and welcome back!A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner's tax return (a "disregarded entity").[WE ARE ONLY CONCERNED WITH STATUTES APPLICABLE IN DELAWARE UNLESS SOME STATE OFFERS BETTER TERMS. WHAT'S THE REQUIREMENT IN DELAWARE RE FORMATION OF A CORPORATION FOR A NON US RESIDENT, AND WHAT'S THE REQUIREMENT IN TERMS OF MINIMUM NUMBER OF MEMBERS.]An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes.As long as you did not select that single member LLC to be classified as a corporation - it is simply ignored for income tax purposes.
For other purposes - that LLC is a separate legal entity - it may pay sales tax, real estate taxes - it may own assets, may hire employees and pay employment taxes, etc.[IF WE ARE CLASSIFIED AS CORPORATION, WILL WE BE REQUIRED TO DEDUCT APPLICABLE TAXES FROM THE SALARIES OF EMPLOYEES HIRED IN USA AND BECOME LIABLE TO PAY SALES TAX DESPITE THE FACT THAT ALL THE SERVICES ARE RENDERED OUTSIDE USA?]But for income tax - it is ignored - and all income and expenses are treated as received and paid by the owner.
Facts of using the US address and US bank account woudl not be relevant for that treatment - when W9 / W8 form is requested - the owner's tax ID must be disclosed.If that is what you want to avoid - you MAY choose that LLC to be treated as a corporation - and in this case - the corporation is a separate taxing entity - it will file its own income tax return - and will pay corporate income tax[SO ONCE WE ELECT FOR RECLASSIFICATION AS A CORPORATION, WE DO NOT HAVE TO DISCLOSE THE ID AND LOCATION OF ULTIMATE BENEFICIAL OWNER. PLEASE CONFIRM].You still will have an LLC - a separate legal entity - but the tax treatment would be different.
As an alternative - you may just register a corporation instead of the LLC - for the IRS - that will not make any difference.
.
Either LLC or a corporation are distinct entities - the difference is only with income tax treatment.
Please be aware that with C-corporation - income will be taxed twice - on the corporate level - and then for shareholders when dividends are distributed[WHAT'S THE APPLICABLE TAX RATE ON A CORPORATION'S INCOME AND ON THE DISTRIBUTION OF DIVIDEND?].Having a single member LLC allows to avoid double taxation.
.
As that woudl be US corporation - it will report (and would be taxable) on all worldwide income - including income from services rendered outside the US.[AS ALSO MENTIONED IN OUR INITIAL QUERY, THE US BASED COMPANY WILL ONLY ACT AS A SALES AND PAYMENT PROCESSING COMPANY, AND, IT WILL GET SAY 5% COMMISSION ON ALL SALES / PAYMENT PROCESSING MADE THROUGH THAT COMPANY. DO YOU SEE ANY ISSUE WITH THAT ARRANGEMENT. ARE THERE ANY TRANSFER PRICING OR OTHER LEGAL REQUIREMENTS THAT PRESCRIBE A MINIMUM RATE OF COMMISSION ON SALES]However is the corporation runs business activity in a foreign country - it must be according to that country's laws.
While specific requirements must be verified - in most cases that means - registration requirements and tax liability on income apportioned to that country.In the US - foreign income tax may be credited - thus effectively - there should not be double taxation of the same income.Please elaborate if needed.
Tax Professional: Lev, Tax Advisor replied 3 years ago
Hi again.
I will try to address all your questions one-by-one...
.
[WE ARE ONLY CONCERNED WITH STATUTES APPLICABLE IN DELAWARE UNLESS SOME STATE OFFERS BETTER TERMS. WHAT'S THE REQUIREMENT IN DELAWARE RE FORMATION OF A CORPORATION FOR A NON US RESIDENT, AND WHAT'S THE REQUIREMENT IN TERMS OF MINIMUM NUMBER OF MEMBERS.]
I Delaware - you may register either LLC or corporation.
Please see here a list of entity types available in this state
http://corp.delaware.gov/formsentitytype09.shtml
For the LLC - see here
http://corp.delaware.gov/corpformsllc09.shtml
There is no limit for the number of members - Delaware allows a single member LLC.
.
[IF WE ARE CLASSIFIED AS CORPORATION, WILL WE BE REQUIRED TO DEDUCT APPLICABLE TAXES FROM THE SALARIES OF EMPLOYEES HIRED IN USA AND BECOME LIABLE TO PAY SALES TAX DESPITE THE FACT THAT ALL THE SERVICES ARE RENDERED OUTSIDE USA?]
There are two options - you may register a corporation OR you may register the LLC and select it to be taxed as a corporation.
From tax prospective - there woudl not be any difference.
When the corporation (or any other entity) hires employees in the US - it will be required to withhold federal and state employment taxes from wages - and some employment taxes are paid by the corporation.
All employment taxes are remitted to the IRS and state taxing authorities.
If the corporation hires employees abroad - in a foreign country - there is no US employment taxes - but there might be similar tax responsibility in that country.
[SO ONCE WE ELECT FOR RECLASSIFICATION AS A CORPORATION, WE DO NOT HAVE TO DISCLOSE THE ID AND LOCATION OF ULTIMATE BENEFICIAL OWNER. PLEASE CONFIRM].
If that is US corporation - it is under US jurisdiction and pays US corporate income tax. When dividends are paid out to shareholders - For tax purposes - that information is reported to the IRS.
That is regardless if shareholders are physical persons or entities and regardless if they are US persons or aliens.
If that is a multi-state business venture - you might want to register in "business friendly" state - most popular states are - Wyoming, Nevada or Delaware.
See some comparison here
http://wyomingcompany.com/nevada-corporation/
Delaware also has corporate income tax, personal income tax, a state franchise tax, reporting requirements, and regulations compelling disclosure of substantial amounts of information resulting in far less privacy for you.
.
[WHAT'S THE APPLICABLE TAX RATE ON A CORPORATION'S INCOME AND ON THE DISTRIBUTION OF DIVIDEND?].
US corporations with foreign ownership ares taxed the same as all US domestic corporations at graduated tax rates between 15% and 35%.
Specifically for tax rate schedule - see instructions
http://www.irs.gov/pub/irs-pdf/i1120.pdf
page 17 - middle column - as we see - net income up to $50k is taxes at 15% on the federal level.
Distributions from US corporations to foreign shareholders are generally subject to mandatory withholding at 30%. However depending on the country of residence - a reduced treaty rate may apply.
.
[AS ALSO MENTIONED IN OUR INITIAL QUERY, THE US BASED COMPANY WILL ONLY ACT AS A SALES AND PAYMENT PROCESSING COMPANY, AND, IT WILL GET SAY 5% COMMISSION ON ALL SALES / PAYMENT PROCESSING MADE THROUGH THAT COMPANY. DO YOU SEE ANY ISSUE WITH THAT ARRANGEMENT. ARE THERE ANY TRANSFER PRICING OR OTHER LEGAL REQUIREMENTS THAT PRESCRIBE A MINIMUM RATE OF COMMISSION ON SALES]
Commissions are not limited by the law - and based on agreement between parties.
We need to be clear - when the US company ONLY provide some services to foreign individuals or foreign entities - that means - these individuals and entities are conducting business activities in the US and as such - are subject of US tax and other regulations.
In additional - the IRS issued regulations that require companies that process payments on behalf of other businesses, to submit an annual report on Form 1099K, Merchant Card and Third-Party Payments.
The exception is for DeMinimis Payments if
•the total payment transactions for the year does not exceed $20,000, and
•the total number of transactions does not exceed 200.
In this case - no information report is required.
See here
http://www.irs.gov/pub/irs-pdf/i1099k.pdf
I appreciate if you take a moment to rate these answers.
Experts are ONLY credited when answers are rated positively.
If you still have any doubts, need clarification - please be sure to ask.
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Customer reply replied 3 years ago
Hi,I have one last question, with regard to the disclosure of ID and location of ultimate beneficial owner, you have noted that the information is reported to the IRS. We are not concerned about reporting to IRS but are more concerned about disclosure of our identity to our client.As already noted earlier that LLC is considered a Fiscally Transparent Entity (FTE), therefore our identity / location is compromised when a client requests us to provide W9 / W8 Ben Form, which requires disclosure of ultimate beneficial owner.
We understand that after converting to a corporation, we will be required to provide w9 form to our clients instead of w8 ben form. Please confirm.Thanks
Tax Professional: Lev, Tax Advisor replied 3 years ago
That is correct - when the payment is made - the payer is required to report that payment to the IRS - and should used the corresponding name and tax ID of the recipient for withholding and other purposes.
Specifically - for a single member LLC that is classified as a disregarded entity - the name and the tax ID of the owner must be used.
That is regardless in which state the LLC is registered.
If however - the LLC is classified as a corporation or as a partnership (multi-member LLC) - then no need to provide the identity of owners.
I appreciate if you take a moment to rate these answers.
Experts are ONLY credited when answers are rated positively.
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