833-456-6272We Serve Start-Ups
About 60% of our clients are start ups so you are not alone. Most of those are in consultancy and software development. We understand your unique needs and will help you navigate the complex tax structures in the US. Find out for yourself why so many start-ups choose Fractional Tax as their go-to tax and accounting experts.
June 26, 2023
Understanding the Structure and Tax Implications of a Stand-alone US LLC
1. Understanding the Structure and Tax Implications of a Stand-alone US LLC
1.1 Overview of a US LLC as a separate legal entity
A Limited Liability Company (LLC) is a type of business structure permitted under state law. There may be differences in state regulations, so check with your state before setting up a limited liability company. The members of an LLC are called owners1. LLCs are treated as separate legal beings from their owners. LLCs are held responsible for their actions when they enter into contracts and agreements, acquire debts, and take on business obligations. The separation provides the owners with important personal liability protection2.
Source: Limited Liability Company (2023).
1.2 Taxation of a stand-alone US LLC
LLC members can elect to be taxed as corporations rather than pass-through entities. LLC taxes come in several forms as state, the federal government, and local governments, may tax your LLC on its income, property or sales3.Single-member LLCs are taxed by the IRS as “Disregarded Entities.” The IRS will ignore the fact that you own a single-member LLC and tax your business as a sole proprietorship regardless of its structure. Upon the completion of the LLC’s fiscal year, the income will be included on your personal tax return 4
2 Establishing a Subsidiary LLC under a Foreign Company
For more advice on setting up an LLC, please consult your accounting professional or tax attorney.
2.2 Tax implications and filing requirements for a subsidiary LLC
The same tax rules apply to subsidiary LLCs, but there may be exceptions.
3. Comparing Liability and Asset Protection
3.1 Legal liability and asset protection in a stand-alone LLC vs. a subsidiary LLC
A stand-alone LLC is a limited liability company that is not part of another company. It is a separate legal entity from its owners and provides liability protection for its owners. The assets of the LLC are protected from the personal debts of the owners. A subsidiary LLC is a limited liability company that is owned by another company. It is a separate legal entity from its parent company and provides liability protection for its parent company. The assets of the subsidiary LLC are protected from the debts of the parent company 12.
Source: Hoffmann, (2017)
4. Business Expansion and Funding Considerations
4.1 The impact of business structure on expansion plans
The structure of a business can have a significant impact on its expansion plans. It is possible for well-suited organizational processes and structures to crumble under the strain of new demands or become unworkable, which is why all businesses need a robust Business Plan. In addition, key employees might lack the skills to handle the increased levels of complexity brought about by growth16.
4.2 Attracting investors and securing funding with a stand-alone LLC or a subsidiary
LLC is attractive to investors to a degree due to the liability protection of a corporation with the tax benefits of a partnership..
5. International Tax and Compliance Factors
5.1 Understanding international tax laws and how they impact your decision
International tax laws can be complex and vary depending on the country and the type of income. You may need to consider the tax implications of your investment.
5.2 Complying with reporting requirements for both stand-alone and subsidiary LLCs
Reporting requirements for both stand-alone and subsidiary LLCs can vary depending on the state where the LLC is registered and the type of LLC.
For subsidiary LLCs, the parent company is required to prepare consolidated GAAP and AFRS compliant financial statements that include the subsidiary’s financial information.
6.1 Taxation of LLCs
LLCs do not file tax returns as LLCs. Instead, the type of tax form required depends on the election (or not election) done by the LLC.
For example, if no election is made, single member LLCS are taxed as sole proprietorships. Multi-member LLCs are taxed as Partnerships. In the first case, the single member owner will report their income on Schedule C of the 1040.
In the second case, a form 1065 partnership return is required.
Many companies choose to make an S Corporation election, which changes their tax status. In this case, S Corporation will file a form 1120S. This does not affect the pass through status of the company, and all profits and losses will pass through to the S Corporation’s shareholders.
Finally, the LLC can choose to be taxed as a C Corporation. This is picked up steam in recent years, as the corporate tax rate was lowered to 21%. Nevertheless, C Corporations are double taxed, once at the entity level and once again at the shareholder level when profits are distributed. LLCs taxed as C Corporations will file a form 1120 with the IRS.
You can see how different tax elections change the forms required to be filed with the IRS. States may also have differing rules on these entities, so it is important to stay up to date on all relevant laws and regulations.
References
(1) Limited Liability Company (LLC) | Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc Accessed 6/16/2023.
(2) Is an LLC a Legal Entity? | UpCounsel 2023. https://www.upcounsel.com/is-an-llc-a-legal-entity Accessed 6/16/2023.
(3) How LLCs Pay Taxes – NerdWallet. https://www.nerdwallet.com/article/small-business/small-business-llc-taxes Accessed 6/16/2023.
(4) LLC Taxes – How is an LLC Taxed? | TRUiC – How to Start an LLC. https://howtostartanllc.com/taxes/llc-taxes Accessed 6/16/2023.
(5) Functional Structure: Advantages and Disadvantages | Indeed.com. https://www.indeed.com/career-advice/career-development/functional-structure Accessed 6/16/2023.
(6) Setting up a U.S. Subsidiary of a Foreign Company. https://www.supportingstrategies.com/blog/setting-up-a-u-s-subsidiary-of-a-foreign-company/ Accessed 6/16/2023.
(7) How do I create an LLC subsidiary? | LegalZoom. https://www.legalzoom.com/articles/how-do-i-create-an-llc-subsidiary Accessed 6/16/2023.
(8) Publication 3402 (03/2020), Taxation of Limited Liability Companies. https://www.irs.gov/publications/p3402 Accessed 6/16/2023.
(9) Tax Filing for LLC Subsidiaries | Legal Beagle. https://legalbeagle.com/tax-filing-for-llc-subsidiaries.html Accessed 6/16/2023.
(10) The Advantages & Disadvantages of Creating Subsidiary & Operating …. https://smallbusiness.chron.com/advantages-disadvantages-creating-subsidiary-operating-companies-25733.html Accessed 6/16/2023.
(11) Pros and Cons of Subsidiaries | Zegal. https://zegal.com/blog/post/what-is-a-subsidiary/ Accessed 6/16/2023.
(12) Single-Member LLC vs. Sole Proprietorship | Wolters Kluwer. https://www.wolterskluwer.com/en/expert-insights/singlemember-llc-vs-sole-proprietorship Accessed 6/16/2023.
(13) What is a holding company & how to use it to mitigate risk – Wolters Kluwer. https://www.wolterskluwer.com/en/expert-insights/using-a-holding-company-operating-company-structure-to-help-mitigate-risk Accessed 6/16/2023.
(14) 14 Smart Ways To Manage Business Risk – Forbes. https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2021/02/23/14-smart-ways-to-manage-business-risk/ Accessed 6/16/2023
(15) Can an LLC Have Subsidiaries | UpCounsel 2023. https://www.upcounsel.com/can-an-llc-have-subsidiaries Accessed 6/16/2023.
(16) Preparing your organization for growth | McKinsey. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/preparing-your-organization-for-growth Accessed 6/16/2023.
(17) Here’s How To Leverage A Business Plan For Expansion Decisions – Forbes. https://www.forbes.com/sites/forbesbusinesscouncil/2023/02/27/heres-how-to-leverage-a-business-plan-for-expansion-decisions/ Accessed 6/16/2023.
(18) 15 Ways To Find And Attract Investors Remotely – Forbes. https://www.forbes.com/sites/forbesbusinesscouncil/2020/11/12/15-ways-to-find-and-attract-investors-remotely/ Accessed 6/16/2023.
(19) 15 Ways Startup Founders Can Attract Investors – Forbes. https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2023/04/20/15-ways-startup-founders-can-attract-investors/ Accessed 6/16/2023.
(20) Holding Company: What It Is, Advantages and Disadvantages – Investopedia. https://www.investopedia.com/terms/h/holdingcompany.asp Accessed 6/16/2023.
(21) Simplifying subsidiaries’ reporting – KPMG Global. https://kpmg.com/xx/en/home/insights/2021/09/ifrs-sme-subsidiaries-ed.html Accessed 6/16/2023.
(22) Consolidated Financial Statements: Requirements and Examples – Investopedia. https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp Accessed 6/16/2023.
(23) 4 Types of Business Structures — and Their Tax Implications. https://www.netsuite.com/portal/resource/articles/business-strategy/business-structure.shtml Accessed 6/16/2023.
(24) Waterandshark (2019). Can a Foreign Company own a US LLC ? Retrieved June 17, 2023, from https://www.waterandshark.com/blog/can-a-foreign-company-own-a-us-llc
(25) Limited Liability Company (2023). What is an LLC. Howtostartanllc.Com. https://howtostartanllc.com/what-is-an-llc
(26) Hoffmann, P. (2017). 4 Most Common Business Legal Structures. PathwayLending. https://www.pathwaylending.org/news-and-blog/news/business-legal-structures/