What do I do if I want to bring in someone from outside the USA as a partner in my business?
How do I register my business in that case? And, does the other person have to pay taxes?
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Listen to the audio
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In this audio snippet, you'll hear about:
- Cannot be an S Corp if you have a foreign shareholder
- Could be C Corp, could be LLC
- May or may not have to pay taxes, depending on the tax treaty that the US has with their country
Audio Transcript
Travis:
Here's another question. A very specific
question that I received recently, it says: "What do I do if I want to
bring in someone from outside the USA as a partner in my business? How
do I register the business in that case, and does the other person have
to pay taxes in the US or not?
Yosef:
This is a really great question, and I'm not going to have all the answers for you.
Travis:
OK.
Yosef:
I can just give you some of my own experiences with dealing with that kind of issue.
Travis:
All right.
Yosef:
Typically, there is the traditional corporation, and then there is the
LLC, or partnership, genre of Limited Liability Company. To be a
traditional corporation –– again, there's the federal qualification ––
either as C corp or as an S corporation.
Travis:
OK.
Yosef:
You cannot be an S corporation if you have a foreign shareholder.
Travis:
OK.
Yosef:
Obviously, it will go beyond the scope of this question, but there are
certain tax advantages by being an S corporation which will not be
provided to a non–US resident shareholder. So a foreign shareholder
cannot be a shareholder of an S corp. A foreign shareholder can
definitely be a shareholder of a C corporation, but the advantages of a
C corporation are not necessarily that simple for a smaller business
that's just beginning and incorporating.
Travis:
Right: a little more overhead, a little more accounting expenses, and perhaps larger taxes.
Yosef:
Right. Now, for an LLC, most states most likely allow partners, in a limited liability, that are foreign.
Travis:
OK.
Yosef:
Now, those foreign partners, if they do earn income in the United
States, may or may not have to pay income in the United States,
depending on the tax treaty that the United States has with their
foreign country.
Travis:
[laughs] Wow.
Yosef:
And this actually gets very complicated, which is why there's really
very little that I can answer in that respect, because I can tell you
that different countries have very different arrangements with the
United States regarding the taxation aspects of their citizens and
vice–versa.
Travis:
Oh, excellent. Well, I think that, from my perspective, the question
has been answered. We know what type of entity a foreign person can be
part–owner of, and they would need to research their specific case in
order to know whether that person needed to pay taxes in the US or not.
Yosef:
Right. Travis, I'm going to add one more thing that I think is worth considering.
Travis:
OK.
Yosef:
The LLC, in general, is a far more recent innovation. And because it's
so relatively new––I can tell you, in my own practice––I'm not
necessarily so comfortable advising foreign shareholders to have a
partnership in an LLC.
Travis:
Oh, really?
Yosef:
Because I don't know what would actually happen if there was a
partnership dispute, and how courts would actually determine the
ultimate result of such a dispute if one of the partners was actually a
foreign entity. I just don't know.
Travis:
OK.
Yosef:
When I'm trying to advise one of my clients, one of the things that I
look for is trying to keep them as safe as possible. I don't
necessarily want to try to be innovative at the risk of not being able
to protect them.
Travis:
So that really narrows the field down, then. [laughs] Can't be an S
corp. May not be advisable to be an LLC. That leaves C corps.
Yosef:
Mm–hmm.
Travis:
OK.
Yosef:
Which is something that I've actually done in the past. Now, I know
there are a number of attorneys that will vehemently disagree with me
on that.
Travis:
Right. I imagine..
Yosef:
They'll say, "No, there's nothing wrong with an LLC!" Again, it's
always going to depend on the facts and specific circumstances of each
case.
Travis:
OK.
Yosef:
But at least this gives you some framework to work with.
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