Forming an LLC is usually the simplest part of the process. However, tax, estate planning, and compliance considerations should be analyzed from day one.
In recent months, I’ve seen an increasing number of posts and advertisements offering to incorporate LLCs in Delaware in just a few days, including an EIN and bank account, for very low fees.
The reality is that incorporation is usually the simplest part of the process.
However, what is often intentionally omitted from these types of posts are:
- The implications of US tax treatment and inheritance tax issues, which will be driven by the contemplated activities of the company and ultimately determine how it should be structured; and
- The compliance obligations that arise once the LLC or company is operational.
Compliance Obligations That Should Not Be Overlooked
A few examples of these compliance obligations and its possible consequences are:
- An LLC with a foreign single member may be required to file Form 5472 annually, reporting certain reportable transactions. Failure to comply with this obligation can result in significant fines of up to $25,000 USD.
- Depending on the structure, there may be additional reporting obligations, such as filing FBARs when certain requirements related to foreign bank or financial accounts are met.
- It is also common to find LLCs without adequate corporate documentation or with insufficient accounting records to support their reporting obligations.
A Common Scenario: LLCs Used to Acquire US Real Estate
Another scenario we frequently see involves LLCs or Corporations used to acquire real estate in the United States, whether for personal use or otherwise.
In this regard, many owners mistakenly assume that if the property doesn’t generate income or remains vacant for part of the year, there are no compliance obligations.
However, the absence of income does not imply the absence of tax, corporate, or reporting obligations.
An LLC Should Never Be Considered a Universal Solution
Beyond the specific tax, estate planning, or other considerations of each structure or family, every case must be analyzed considering very carefully its compliance obligations from day one.
From a tax and estate planning perspective, an LLC should never be viewed as a universal solution.
The appropriate structure should always depend on several factors, such as: who the owners are, their tax residence, the activities the entity will carry on, the type of assets held, the long-term objectives of the owners, among others.
These factors may affect not only the US tax treatment of the entity, but also generate potential US estate tax exposure and other cross-border tax considerations.
The Real Cost of Choosing the Wrong Offshore Company
In summary, the structure chosen should always be designed around the intended business and objectives, rather than selecting an entity first and addressing the tax consequences afterwards.
The decision to save a few hundred dollars when forming a company may seem like a good one today.
However, the fees involved in correcting non-compliance, addressing regulatory requirements, or regularizing a poorly implemented structure are often considerably higher.
As we often say, forming an entity is not the end of the process; it’s just the beginning.
Before Incorporating a US LLC
Before implementing a structure—or if you already have one in place—it is worth confirming that all applicable compliance obligations are being properly addressed.
If you have any questions, please feel free to contact us. We will be happy to discuss your situation with you, at no cost and with no obligation.
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