Owning part of a US Company

I have been offered a percentage share of an LLC based in the US. Right now it is a small company that is breaking even and making very little profit but that has the potential to change a lot in the next few years.

If it does start making money then I will have to pay tax on dividends etc but in the short term are there any ways I could end up shooting myself in the foot tax wise, or anything else, by owning a part of a foreign company?
 

bentobox

Old-Salt
I would suggest your first point of contact should be a lawyer who is familiar with the industry the LLC is associated with. LLC laws could be very different in the USA, and may even be different based on what US state the LLC is located in.
 
Bentobox is largely correct, but it's the State tax jurisdiction that will impact it's position more than anything else. Corporate law and tax law vary between States. Delaware is a common jurisdiction for LLC incorporation, largely because of its liability laws.

The more pertinent and immediate question is how you, as a UK domiciled and resident taxpayer, wish to own the US company equity. At its most basic, you can own it in your own name. At the more complex end, you could own it through a company or trust domiciled offshore from the UK for tax purposes. Obviously, there's a spectrum of structures you could employ, one of which will be beneficial to you relative to the rest.

You should, therefore, concentrate your efforts on the UK taxation end of things rather than the US end. It will have a much greater impact on matters, whether income or capital gain.
 
As long as you pay the relevant taxes where you need to pay them it should not be an issue.

Remember though in the USA there can be City taxes, State taxes, and Federal taxes.

City taxes are few and far between, off the top of my head I can only think of New York at the moment.

State taxes most States have some form of State income tax - which may apply to your LLC, but not you personally that is a question for your accountant.

Federal taxes are no different to what the Inland Revenue, or whatever they call themselves this month, would want to be paid.

LLC's are not the same as a UK Ltd Company. The best way to describe it is that an LLC is an arms length business extension of the individual. Whilst they appear to offer the same protections as a Ltd. Co. they actually do not. We had that from our accountant who is a British Chartered Accountant (FCA), lives here in NY now, and is a qualified US accountant too. We waffled on about starting an LLC and he basically told us it would cost us money to run with no real personal safeguards as such. We still started one though.

Here is a situation for you: Say you earn $100 out of the business. Then imagine that the top US tax rate applicable to you is 28%, but in the UK it is 35%. The US would want its 28% paid, then as you come under the UK tax authorities they would want the difference between 28% and 35% - which is 7%. They have a pretty comprehensive dual taxation treaty which allows them to peek into each others domains - you can thank the religion of peace crowd for that. We have to declare all US and UK financial and banking activity to the US authorities every year. Try and fib and huge penalties apply, and as a non-resident you can be barred from ever being allowed to set foot in the US.
 
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Bentobox is largely correct, but it's the State tax jurisdiction that will impact it's position more than anything else. Corporate law and tax law vary between States. Delaware is a common jurisdiction for LLC incorporation, largely because of its liability laws.

The more pertinent and immediate question is how you, as a UK domiciled and resident taxpayer, wish to own the US company equity. At its most basic, you can own it in your own name. At the more complex end, you could own it through a company or trust domiciled offshore from the UK for tax purposes. Obviously, there's a spectrum of structures you could employ, one of which will be beneficial to you relative to the rest.

You should, therefore, concentrate your efforts on the UK taxation end of things rather than the US end. It will have a much greater impact on matters, whether income or capital gain.

It is the UK end I am interested in at the moment. I can get the answers for the US end from the accountants the company uses there.

I would be holding the shares in my own name. Due to the work they do for the USG they can't be even part owned by a foreign company.

I am going to be speaking to my accountant here about it but I didn't think she would appreciate a call at this time of night so I thought I would get a general idea from here. This is like nothing I have ever done before.
 
I would be holding the shares in my own name. Due to the work they do for the USG they can't be even part owned by a foreign company.

You misunderstand. Under US law, it matters not whether the foreign owner is an individual or company (or other such entity) for the purposes of extraterritorial ownership. If foreign ownership is banned, then you will not be eligible to own equity as a foreign individual. I rather think that wouldn't be the case (I own equity in a PE fund management company (and fund units) that undertakes very sensitive work for the USG, and I hold that equity in an offshore vehicle for tax purposes where I'm the only shareholder).

You can achieve very significant tax benefits by, for example, holding the equity in a single-purpose-foreign-owned company domiciled in Gibraltar (zero corporations tax, zero capital gains tax). It's entirely transparent and not in the least unusual.

If you are seeking beneficial tax arrangements through structuring, don't use a "vanilla" UK accountant, they won't have a clue.

It's extremely important to set your structure up correctly at inception, as to change it ex post is an almighty pain in the proverbial, and usually carries with it unintended consequences.
 
You misunderstand. Under US law, it matters not whether the foreign owner is an individual or company (or other such entity) for the purposes of extraterritorial ownership. If foreign ownership is banned, then you will not be eligible to own equity as a foreign individual. I rather think that wouldn't be the case (I own equity in a PE fund management company (and fund units) that undertakes very sensitive work for the USG, and I hold that equity in an offshore vehicle for tax purposes where I'm the only shareholder).

You can achieve very significant tax benefits by, for example, holding the equity in a single-purpose-foreign-owned company domiciled in Gibraltar (zero corporations tax, zero capital gains tax). It's entirely transparent and not in the least unusual.

If you are seeking beneficial tax arrangements through structuring, don't use a "vanilla" UK accountant, they won't have a clue.

It's extremely important to set your structure up correctly at inception, as to change it ex post is an almighty pain in the proverbial, and usually carries with it unintended consequences.

I am only repeating what I was told by the owner of the company. His understanding is that a foreign individual can own part of the company, but not a foreign company.

I will ask him about that tomorrow. I am wondering if it is to do with the status of the business for competing on set asides that is the issue.
 
I am only repeating what I was told by the owner of the company. His understanding is that a foreign individual can own part of the company, but not a foreign company.

I will ask him about that tomorrow. I am wondering if it is to do with the status of the business for competing on set asides that is the issue.

Unfortunately, he's wrong on both counts.

By way of an exaggerated example, the head of intelligence for the PRC would be barred from holding equity as an individual, whereas British Aerospace would very likely be allowed. Indeed, the evaluation criteria suggest that it is more difficult to qualify as an individual than as a company.

The specific criteria for evaluation are here:


The key is transparency and the ability of assessors to determine ultimate legal and beneficial ownership (i.e. no "blind" trusts).
 
Foreign ownership is a problem and as far as I am aware it relates to individuals as well as corporates owned by foreign individuals. The most high profile example of this is the fact that Rupert Murdoch only bothered to become a US citizen because of the requirements for owners of radio and TV stations to be US citizens.

There is <cough> an avenue you may want to examine. Nevada owned LLCs are sort of like the Société Anonyme (S.A.) - Luxemburg used to provide some nice ones that were popular amongst tax evaders. Anyway, as far as I am aware your name does not appear on any paperwork relating to a Nevada based LLC - but you would need to look into it. If it is possible you set up the Nevada company as a holding company which in turn owns shares in the other company. Just an idea.


There is something about Corporations providing anonymity and the ability to own stuff too. You really need to speak to a decent US corporate lawyer about it though. AND, I MEAN LAWYER, NOT ACCOUNTANT.

The reason being: In the UK we have Chartered Accountants who are really a cross between an accountant and a lawyer, they are acknowledged, even in the USA, as probably the best accountants in the world. In the USA they have accountants who are the equivalent of the lower qualified UK accountants who do a little legal stuff, but more of balancing the books and personal taxes. The best qualified business accountants in the US are the dual qualified lawyers who are also accountants, bringing them to the level of UK chartered accountants. My Bil was a chartered accountant senior partner at DeLoittes, he spent lots of time flying back and forth and held accounting licences in NY, DC and Illinois - he explained the situation here to me.
 
I can’t think of any good reason why I would ever again put myself in a position of having to file a US tax return (and I had top notch US, Canadian and UK expertise on tap paid for by my employer).
The risk/reward evaluation of this investment is for you to do. The PITA level of filing US taxes when not a US resident tax payer should be included.


PITA = Pain in the Arrse
 
I think much of the advice on here is flawed; the FOCI stuff is IMHO largely irrelevant. If the LLC chooses to invite you as a member, it’s up to their managing members to sort out FOCI compliance. In any event, if they are offering you 5% or less, FOCI does not apply.

From your OP, the company you are being offered a stake in is an LLC. As such, it does not have shareholders; it is akin to a UK LLP. Members of an LLC own units of the LLC, not shares. And they receive income by way of a proportional distribution of the profits, not a dividend. They also their proportion of the assets of the LLC, not stock equity in the business.

Anyone or any structure can hold units in an LLP; with one exception, there is no legal prescription on how units can be held. So individuals of all nationalities, corporations, trusts, charities, pension funds etc etc can hold units. The one exception is where an LLP elects to be taxed as a company; if that is the case, then members have to be individuals and US citizens so it cannot apply to your case. However, it’s not uncommon for founders and members of LLCs to prescribe that all members must be individuals or to put a limit on the number of corporate members.

Next, tax. Any income you make from your membership of an LLC is “passed through”. That means it is only taxed once as personal income for the members assuming they are individuals. If you are a non-resident individual alien engaged or considered to be engaged in business in the USA, you have to file your taxes on an F1040 NR and your income will be taxed at a flat rate of 30% as FDAP with no deductions. If your membership is owned at arms length, that entity has to comply with US tax law; I don’t know any more than that as I’ve never done it.

So, to conclude, if the members of the LLC you are joining have prescribed that membership can only be held as an individual, you have no choice in how you own your units and no choice about how your income is taxed. You have to file a personal US tax return and pay tax in the US, but your income from the LLC would not then be double taxed in the UK.

If you can put your membership in an offshore vehicle, you need proper advice about the tax implications. If you can’t, then you will have to file and pay US tax. I am in exactly that position.
 

Sarastro

LE
Kit Reviewer
Book Reviewer
I have been offered a percentage share of an LLC based in the US. Right now it is a small company that is breaking even and making very little profit but that has the potential to change a lot in the next few years.

If it does start making money then I will have to pay tax on dividends etc but in the short term are there any ways I could end up shooting myself in the foot tax wise, or anything else, by owning a part of a foreign company?
You need to look into the LLC, possibly get advice if it's a large holding. As @bobthebuilder says, I think a lot of the advice on here doesn't apply or is wrong, but I'm not a US tax lawyer either (though I have dealt with some of these issues).

Being a shareholder in a public company is no different to shares in a public UK company. But LLCs are private and the rules depend on what type they are and where they are set up. These days most are in Delaware, which is the most allowing and has the least stupid rules, precisely to maximise the pool of potential investors - including foreign investors - with minimal problems to them. If the company is in a highly protected industry there might also be additional rules on foreign ownership, but the number of such companies is very small and they don't tend to be startups (which I presume yours basically is).

Filing US tax returns is indeed a massive ballache, as are foreign ownership laws as a US citizen. But this doesn't apply to you as (I assume) a non-resident non-US citizen: they have no right to tax you, and any tax you pay will be on capital gains in the UK. They will tax the company, however, so it may have consequences for them. The US tax system is horribly intricate and often punitive for any entity they deem to be removing $$ from the country. I disagree with @bobthebuilder that share ownership, even of a private company, implies you are engaged in business - that may be the case if the shares are part of compensation or you are a major shareholder, but not if you are a minor investor with no formal role. I'm assuming from his previous posts that his share ownership is part of compensation. However, much of this depends on what "offered" means. They will let you buy shares at price? As a gift? Compensation? Different rules apply for all three, either in the UK or US. Remember that the UK laws on gifts are fairly strict, and if it's a large amount of money, you often only get one (and the amount is limited).

Finally, if you go forward - no dividends, all capital gain, so plan accordingly (the tax allowances in the UK are radically different). If size of holding is applicable, it would be sensible hold the shares in an ISA, or transfer £20k per year worth of shares into an ISA, so capital gains on sale are tax free.

All of that probably doesn't answer anything. In short: be clear about the type of company, location, and the form of the offering (if buying non-publicly traded shares, you/they need to demonstrate the price is reasonable, so you cannot be accused of it being a de facto gift). Research the results. If any of it looks unclear or iffy, or the amount is significant, you need to get professional advice.

If the amount isn't significant, ensure that in no way are you legally responsible for the company, and if so you can just roll the dice.
 
Im
You need to look into the LLC, possibly get advice if it's a large holding. As @bobthebuilder says, I think a lot of the advice on here doesn't apply or is wrong, but I'm not a US tax lawyer either (though I have dealt with some of these issues).

Being a shareholder in a public company is no different to shares in a public UK company. But LLCs are private and the rules depend on what type they are and where they are set up. These days most are in Delaware, which is the most allowing and has the least stupid rules, precisely to maximise the pool of potential investors - including foreign investors - with minimal problems to them. If the company is in a highly protected industry there might also be additional rules on foreign ownership, but the number of such companies is very small and they don't tend to be startups (which I presume yours basically is).

Filing US tax returns is indeed a massive ballache, as are foreign ownership laws as a US citizen. But this doesn't apply to you as (I assume) a non-resident non-US citizen: they have no right to tax you, and any tax you pay will be on capital gains in the UK. They will tax the company, however, so it may have consequences for them. The US tax system is horribly intricate and often punitive for any entity they deem to be removing $$ from the country. I disagree with @bobthebuilder that share ownership, even of a private company, implies you are engaged in business - that may be the case if the shares are part of compensation or you are a major shareholder, but not if you are a minor investor with no formal role. I'm assuming from his previous posts that his share ownership is part of compensation. However, much of this depends on what "offered" means. They will let you buy shares at price? As a gift? Compensation? Different rules apply for all three, either in the UK or US. Remember that the UK laws on gifts are fairly strict, and if it's a large amount of money, you often only get one (and the amount is limited).

Finally, if you go forward - no dividends, all capital gain, so plan accordingly (the tax allowances in the UK are radically different). If size of holding is applicable, it would be sensible hold the shares in an ISA, or transfer £20k per year worth of shares into an ISA, so capital gains on sale are tax free.

All of that probably doesn't answer anything. In short: be clear about the type of company, location, and the form of the offering (if buying non-publicly traded shares, you/they need to demonstrate the price is reasonable, so you cannot be accused of it being a de facto gift). Research the results. If any of it looks unclear or iffy, or the amount is significant, you need to get professional advice.

If the amount isn't significant, ensure that in no way are you legally responsible for the company, and if so you can just roll the dice.
I’m sorry, but most of that is absolute garbage. An LLC does not have shareholders; it has members. It cannot create shares; its members hold units. It does not pay dividends, it distributes profits to members according to their unit holdings. It isn’t taxed as a company; the profits are passed through to the members and are taxed as their income. If they are individual members, then it’s taxed as personal income. And the US tax code is quite clear about how individual alien income generated in the US is taxed. Nor is filing hard; the income is taxed as FDAP at a fixed rate with allowances.

Even if the OP finds that he can paying tax on personal income produced in the UK and therefore is taxed in the UK, it’s taxed as earned income, not capital gains. It’s no different from the profit share from a UK LLP or drawings from a sole tradership.
 

Sarastro

LE
Kit Reviewer
Book Reviewer
Im

I’m sorry, but most of that is absolute garbage. An LLC does not have shareholders; it has members. It cannot create shares; its members hold units. It does not pay dividends, it distributes profits to members according to their unit holdings. It isn’t taxed as a company; the profits are passed through to the members and are taxed as their income. If they are individual members, then it’s taxed as personal income. And the US tax code is quite clear about how individual alien income generated in the US is taxed. Nor is filing hard; the income is taxed as FDAP at a fixed rate with allowances.

Even if the OP finds that he can paying tax on personal income produced in the UK and therefore is taxed in the UK, it’s taxed as earned income, not capital gains. It’s no different from the profit share from a UK LLP or drawings from a sole tradership.
Think you've misread every sentence I wrote there. Clearly I could have been clearer.
  • I was differentiating an LLC and public shareholding, not saying it's the same.
  • It can be taxed as a company (you said so yourself), which changes your income assumption, so the point was: check. Some US startups opt for an LLC structure taxed (while they make no profit) as a corporation, for some arcane benefit that I forget: I think it was about ease of doing a second job (personal income) at the same time and ease of reinvesting capital in the startup.
  • I said no dividends, and he said it was basically zero profit, which means no income.
  • The US tax code has never been clear about anything in two hundred years.
We've made different assumptions about the purpose from what @LEGZ30 said. I've assumed from what he said that the aim is to hold equity in case the company builds value, which will usually be realised in some form as capital gains. Capital gains are not taxed as FDAP - see point 3. So it's the UK end that matters, if that assumption is correct. But you may well be correct instead, and it's a US annual income problem.

Either way, the point remains: these particular details are what Legz needs to establish, because they totally change the implications and course of action.

The gift point stands regardless, by the way - if it's part of compensation it's usually not an issue, but if you are buying equity or receiving a gift, particularly abroad, you need to establish not just the value but how that valuation was arrived at. Otherwise, should the equity become valuable, you can trigger a financial crime investigation pretty quick (it's a red flag for money laundering).
 
Think you've misread every sentence I wrote there. Clearly I could have been clearer.
  • I was differentiating an LLC and public shareholding, not saying it's the same.
  • It can be taxed as a company (you said so yourself), which changes your income assumption, so the point was: check. Some US startups opt for an LLC structure taxed (while they make no profit) as a corporation, for some arcane benefit that I forget: I think it was about ease of doing a second job (personal income) at the same time and ease of reinvesting capital in the startup.
  • I said no dividends, and he said it was basically zero profit, which means no income.
  • The US tax code has never been clear about anything in two hundred years.
We've made different assumptions about the purpose from what @LEGZ30 said. I've assumed from what he said that the aim is to hold equity in case the company builds value, which will usually be realised in some form as capital gains. Capital gains are not taxed as FDAP - see point 3. So it's the UK end that matters, if that assumption is correct. But you may well be correct instead, and it's a US annual income problem.

Either way, the point remains: these particular details are what Legz needs to establish, because they totally change the implications and course of action.

The gift point stands regardless, by the way - if it's part of compensation it's usually not an issue, but if you are buying equity or receiving a gift, particularly abroad, you need to establish not just the value but how that valuation was arrived at. Otherwise, should the equity become valuable, you can trigger a financial crime investigation pretty quick (it's a red flag for money laundering).
OK, I get where you’re coming from now that you have made the distinction between an LLP and one that has elected to be taxed as a corporation.

To be crystal clear, the way the company has elected to be taxed makes a huge difference. If it is taxed as an LLC, then income is passed through as a profit share and taxed as FICA.

If it’s elected to be taxed as a C Corporation, then any dividends it pays to alien shareholders will be subject to withholding tax which is IIRC 15% for the UK. If those shares are held by a trust or corporation, then the rules differ and are complex; it’s still taxed.

If it’s elected to be taxed as an S Company, then the shareholders have to be individuals and must be US citizens.

As for capital gains; the US does not charge CGT on alien owned equity. The OPs challenge is how to avoid UK CGT.
 
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