If you are thinking of setting up a United States Limited Liability Company, are you aware of the tax implications of doing this under Federal tax code?

Don’t make the mistake of projecting the concepts of a New Zealand Limited Liability Company on to a United States entity with the same name. The two entities are very different animals for tax purposes.

The State-formed LLC

  • Is the most frequent entity that tends to be formed by foreign persons who intend to conduct business in the United States.
  • Is treated in different ways for Federal tax purposes because it is not recognized as a separate entity Federally.
  • May be disregarded, treated as a partnership, or if an election is made, treated as a C-Corporation or an S-Corporation.

Frequently an LLC is actually treated – by default in the absence of a Form 8832 election – as a partnership for Federal tax purposes. In this case, the entity and the individuals are required to obtain an Employer Identification Number, file a partnership tax return, obtain Taxpayer Identification Numbers and file individual income tax returns. This is irrespective of whether there were any transactions either by partners in their capacity, outside their capacity as partners, or between the partnership and an outside party.

What’s more, as a partnership for Federal tax purposes the entity is subject to complex tax accounting on an annual basis until dissolution. Key principals in accounting for partnerships include the at-risk rules and basis which impose various restrictions on the ability to claim losses and bring various gains to account on transactions between either the partners and the partnership or the partnership and a third party.

Any transaction whatsoever will have a tax effect whether this is current or effectively deferred until dissolution or exit by the partner by way of the taxing mechanisms that exist under the Federal tax code.