Choosing the Right Business Entity for an E2 US Investor Visa
Stephanie Oliver, US Senior Tax Manager at Frank Hirth Plc, examines the various types of business entity for E2 US investor visa applicants to consider when looking at their US investment.
Aside from the tax differences, the main difference between an LLC and a corporation is the level of flexibility in management.
Corporations have a required structure, with directors and officers, board meetings, board resolutions, annual meetings, etc. LLCs do not have the same formal management requirements, and their operating agreements may name any owner to act as the manager of the LLC or to elect no distinction between an owner and the manager of the LLC. Both a US corporation and a US limited liability company (LLC) provide limited legal liability to their owners, but the form of your US business greatly impacts your US tax filing obligations and the total amount of income tax due on your profits.
A corporation is fiscally opaque for US tax purposes and pays corporate income tax on its net income at a rate of up to 39%. Any losses suffered by the company can be carried back two years and forward 20 years but do not flow up to the shareholders. A second layer of tax is imposed when after-tax earnings and profits are distributed to shareholders as dividends.
Any distribution to shareholders is treated as a dividend to the extent the company has current year earnings and profits or accumulated earnings and profits. Higher rate individual US shareholders are taxed at a rate of 20% on dividends from US corporations plus the 3.8% net investment income tax (NIIT). Overall US tax on net business income of a corporation if all after-tax earnings are distributed to a 100% US resident shareholder could be more than 50%. A US corporation must file a corporate tax return and issue statements with respect to distributions made to shareholders. Note that a US corporation has a federal tax filing obligation even if it is dormant.
An LLC is fiscally transparent for US tax purposes unless an election is made otherwise. This means that it is disregarded/treated as a branch or sole proprietorship if it has one owner and is treated as a partnership if it has two or more owners. Income and gains, or losses, flow up to the owners regardless of whether any distributions are made. There is, therefore, one layer of tax on net business income at individual tax rates up to 39.6% for individual owners or at corporate tax rates of 39% for corporate owners. If the LLC has one owner, the business income is included on such owner’s US tax return. If it has two or more owners and is treated as a partnership, it must file a partnership return and issue statements to all owners/partners with respect to their share of income, gains, losses, and deductions. A US partnership has a federal tax filing obligation if it has any revenue or expense for a taxable year.
Most States impose individual and/or corporate income tax, which can increase the total effective tax rate regardless of whether an LLC or corporation is used. The rates of tax vary from State to State, and some metropolitan areas impose yet another layer of income tax. Although the rate of State income tax varies between individuals and corporations, after factoring in State income tax, an LLC typically is more tax efficient from a purely US tax perspective.
US investor visa: tax implications of UK investors repatriating
Small business investors from the UK have more to consider if they could potentially return to the UK within five years of becoming US-resident. In that case, the UK may look back to dividends and gains received in the period that would have been subject to UK income tax had the recipient been resident when received.
Tax credit would be given for US individual income tax paid on dividends received from a US corporation against the UK tax on dividends, but the UK tax rate on dividends is higher, and additional tax would be due.
Further, the UK generally treats a US LLC as fiscally opaque, and income taxed to the owners in the US but not actually distributed to them may be seen as remaining in the company, complicating the creditability of US taxes paid against any UK taxes due. This recapture rule applies only with respect to interests in companies owned before losing UK residency and could be mitigated by waiting to incorporate the US LLC or corporation when the investor is no longer UK resident, but that timing may not be in line with what is required for immigration purposes.
Note that the process and cost of setting up an LLC versus a corporation can vary dramatically in some states. In New York, for example, a corporation can be set up with little fanfare in a day or two, whereas an LLC requires the publication of a notice in certain papers and can take weeks.
Those looking to start their new US business in California should be aware that California imposes an “LLC fee” on all LLCs incorporated in or operating in the State, including those that own an interest in another LLC that is incorporated in or operating in the State. The LLC fee is based on gross revenue, and ranges from an annual minimum tax of $800 up to a maximum of around $12,000.
An investor may want an LLC due to the ease of administration compared to a corporation but prefer the tax treatment of a corporation. In that case, an election can be made to treat the LLC as a corporation for US tax purposes from the date of incorporation. This would also align the US and UK tax treatment of the company. Alternatively, an LLC can be rolled up into a corporation at some point in the future by making such an election, for example if the business is looking for outside investment.
US investor visa: consider your choice of business entity
As is probably clear by now, there is no one size fits all structure for small business investors setting up a new business in the US. For some, a corporation is the best solution, and for others it is an LLC. Investors would be wise to contemplate their short and long term business plans, as well as what States in which they anticipate having operations and/or sales, and then consult a tax advisor.
Written by Stephanie Oliver, US Senior Tax Manager at Frank Hirth Plc. This article is not directed at any particular taxpayer and is not a substitute for specific tax advice. Small changes in facts can create very different tax results. Please consult with your own tax advisors.
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