Income Tax and Offshore LLCs

U.S. income tax rules allow you to make an important choice for your LLC.

A foreign limited liability company is, by default, classified as a foreign corporation for U.S. income tax purposes. However, your LLC can elect out of that classification — which it almost certainly should do if you are going to use the LLC has an investment holding company — by filing IRS Form 8832 (Entity Classification Election) .

If you are the sole Member (you own 100% of the company), the LLC can elect to be classified as a “disregarded entity.” In that case, you would be deemed, for income tax purposes, to own everything the LLC owns and would be treated as earning all the income that the LLC earns. All of the LLC’s income, deductions and credits would go on your personal tax return, so you would avoid the disadvantages that come with using a foreign corporation to hold investments.

There are no income tax consequences to contributing capital — even appreciated assets — to your disregarded-entity LLC. And there are no income tax consequences to receiving a distribution from the LLC. It’s as though you are moving assets into or out of your own brokerage account — or into and out of your own pocket.

If you own less than 100% of an LLC (perhaps because your spouse or other family member owns part of it), the LLC can elect to be classified as a partnership for income tax purposes. In that case, each member includes his share of the LLC’s income, deductions and credits on his personal income tax return, so again the disadvantages of using a foreign corporation are avoided.

NEXT: Commercial Privacy

In some businesses, it’s smart to hold your cards close to the vest.

or… Start over with Your Own Offshore Limited Liability Company

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