Taxes and reporting

This page will provide guidance on what to do with regards to taxes and reporting for your OtoCo created LLCs.

This page is purely educational and is not legal or tax advice. Information found here cannot be relied upon or used as a replacement for discussion with a professional. Please use this page as a starting point before you conduct research pertinent to your individual circumstances.

Income Taxes and Reporting

There are three distinct types of LLCs with very different requirements:

  • Domestic LLCs

  • Foreign owned single-member LLCs

  • Multi-member LLCs

Multi-member LLCs are typically what a DAO LLC would be considered to be. This includes OtoCo LLCs generated in Gnosis Safe with multiple owners.

Domestically-owned Single-member LLCs

These are U.S. LLCs that are owned by one person who is a resident of the USA. It is up to the individual member of the LLC to pay taxes personally based on the LLC's profit for that year. In practice, this means including a Schedule C with the 1040 personal income tax form.

The member is required to declare and pay taxes regardless of if the member actually "receives" the profit or it is “kept inside” the business.

Don’t forget, you will be responsible for paying self-employment taxes!

Foreign-owned Single-member LLCs

For those of you without roots in the USA, these are the entities for you: U.S. LLCs that are owned by one member that is not a resident or citizen.

If you have U.S. source income, you will likely be required to file a personal income tax form (1040-NR) and get an ITIN (Individual Taxpayer Identification Number). Some examples of U.S. source income would be services performed in the USA or goods sold in the USA.*

If you do not have any U.S. source income and engage in business purely outside the USA, you will likely not have any U.S. income taxes to file.

You could be required to file taxes both in the USA (for the U.S. source income) and your own country of residence (for other taxable income).

There are additional reporting requirements if your LLC has “reportable transactions” and they are with a “related party” (including but not limited to: family members or subsidiary companies).

These LLCs are required to file a Form 5472 and Form 1120 every year regardless of whether there is income that must be reported to the Internal Revenue Service (IRS).** In most cases, a transaction is not a “reportable transaction” if neither party to the transaction is a United States person, which keeps things quite simple for foreign-operated businesses.† Further reading on this subject can be found at the bottom of this page.

If you do not engage in “reportable transactions” with “related parties,” and have no U.S. source income, you could have zero reporting obligations to the USA as a foreigner!

Multi-member LLCs

These LLCs are taxed much the same way as single-member LLCs but each member is required to pay taxes personally for their share of the LLC's profits. The tax requirements will be based on each member’s local jurisdiction. In many countries, taxes owed will be based on "allocated profit" not received profit. In this case, the member is required to declare and pay taxes regardless of if the member actually receives income from the LLC. The Operating Agreement of the LLC, or an additional supplementary agreement, should outline the allocation of profit to all its members.

Some members may live in a country like Brazil, which allows the member to delay paying taxes until actually receiving the funds. Some members may live in a country with no foreign income taxes at all!

Each member of an LLC needs to review the guidelines of their local territory. Thankfully, U.S. LLCs are very popular and the tax and reporting requirements are well documented in nearly every country.

Unless a multi-member LLC has no revenue or expenses/credits to claim, a Form 1065 will need to be filed with the IRS and each member will be required to fill out and attach a Schedule K-1.†† This does not mean you are liable to pay taxes, it is just a reporting requirement.

In some cases, multi-member LLCs may be required to file a Form 8804 and 8805.§ Please be sure to determine if this applies to your circumstance.

Note: non-resident members of the LLC are still supposed to submit a personal 1040-NR for any income sourced from the U.S. and would need an ITIN.

Who Qualifies as a Non-resident Alien?

For foreigners to avoid much of the U.S. tax and reporting requirements previously mentioned, it’s vital that they pass the “non-resident alien” test. Such non-resident alien is someone who is not a citizen or permanent resident (i.e. Greencard holder) of the US, and who does not meet the substantial presence test.

In practice, this means you should count the number of days you spend on American soil. In true IRS fashion, the calculation is anything but straightforward.

To meet the substantial presence test, you must be physically present in the United States on at least:

  • 31 days during the current year, and

  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

  • All the days you were present in the current year, and

  • 1/3 of the days you were present in the first year before the current year, and

  • 1/6 of the days you were present in the second year before the current year.

If you satisfy these conditions, you are a resident alien from a taxation perspective, and you will not be able to enjoy the benefits for true foreigners.

Conclusion

Reporting and tax requirements for a U.S. LLC are well documented and are in many cases quite simple for both foreigners and residents. Make sure to look up your local jurisdiction’s laws with regards to how U.S. LLCs should be handled. Do not hesitate to consult a professional during times of uncertainty as it will almost always be cheaper than consequences and fines imposed by the IRS.

Consult a Professional

If you would like to speak to a professional, please email support@otonomos.com and we will do our best to try and connect you.

Sources

*https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-source-of-income

** https://www.loeb.com/en/insights/publications/2021/03/obligations-to-file-form-5472-for-foreign-owned-disregarded-entities#:~:text=If%20you%20are%20a%20foreign,a%20U.S.%20Trade%20or%20Business). & https://www.lexology.com/commentary/private-client-offshore-services/usa/kozusko-harris-duncan/completing-us-tax-forms-form-5472-foreign-owned-disregarded-entities

† https://www.law.cornell.edu/cfr/text/26/1.6038A-2

†† https://www.legalzoom.com/articles/do-i-need-to-file-a-tax-return-for-an-llc-with-no-activity

§ https://www.taxesforexpats.com/expat-tax-advice/forms/f8804-8805.html

Further Reading

Foreign-owned single-member LLCs: https://www.llcuniversity.com/irs/form-5472-foreign-owned-llc/ https://www.cadesky.com/us-18-06/

Multi-member LLCs: https://www.legalzoom.com/articles/how-are-profits-split-in-an-llc

General LLC taxation rules: https://bench.co/blog/tax-tips/llc-taxes/?blog=e6

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