How an LLC is taxed: the pass-through principle
One of the most attractive features of the LLC is its "transparent entity" tax treatment (pass-through taxation). Unlike a corporation (C-Corp), the LLC itself does not pay federal income tax. Income and expenses "pass" directly to the owner (member) and are reported on your personal statement.
For a non-resident with a single-member LLC, this means that the LLC is treated as a "disregarded entity" by the IRS: the income is reported as if the owner had received it directly.
If you are a resident in LATAM or Europe, your services are provided outside the USA, and you do not have employees or an office on American soil, generally you do not pay federal income tax in the USA on that income. This is known as income "not effectively connected" to the USA (non-ECI).
However, this does not mean that you do not have reporting obligations to the IRS. And this is where many entrepreneurs make costly mistakes.
Form 5472: the obligation you cannot ignore
Form 5472 is the form that non-residents with LLCs in the USA must file with the IRS when there are "reportable transactions" between the LLC and its foreign owner or other related parties.
What are reportable transactions?
Basically any movement of money between you and your LLC counts as a reportable transaction. This includes:
- Capital contributions (money you put into the LLC)
- Distributions (money you take out of the LLC)
- Loans between the owner and the LLC
- Payments for services that the LLC makes to you as a contractor
- Purchase or sale of assets between the LLC and the owner
Form 5472 is filed along with a "pro forma" Form 1120 (basically a completed corporate income tax sheet just to accompany the 5472). The deadline is generally April 15 of the following year (with the possibility of extension to October 15).
The penalty for not submitting Form 5472 on time is $25,000 USD per year per form. If the omission extends beyond 90 days after the IRS notification, an additional $25,000 is added for each 30 days of delay. It is not a minor sanction.
The IRS has stepped up auditing of foreign LLCs in recent years. Not filing 5472 is one of the most common and most expensive mistakes.
EIN vs ITIN: which one does your LLC need?
| Characteristic | EIN | ITIN |
|---|---|---|
| Who is it for | Companies (LLCs, corps) | Individuals without SSN |
| Cost | Free (IRS direct) | Free (with Form W-7) |
| Who applies for it | The LLC, not the owner | The owner of the LLC |
| Required for | Bank account, Stripe, contracts | Personal statement, Form 1040-NR |
| Time to obtain | Same day (online) / 4–6 weeks (mail) | 6–11 weeks |
| Mandatory? | Yes, always for the LLC | Only if you have income with withholding in the USA |
The vast majority of non-residents only need the EIN to operate their LLC. The ITIN is only necessary if you have income subject to tax withholding in the USA (for example, income from real estate in the USA, certain payments from American corporations, etc.).
You can read more about the EIN in our dedicated article: What is the EIN and how to obtain it?
Annual Report: do you have to submit it?
The Annual Report is an annual statement that some states require you to file to keep your LLC in good standing. It is important not to confuse it with the tax return: they are different things.
- New Mexico: Does not require Annual Report. One of its main advantages.
- Wyoming: Requires submitting an Annual Report before the first day of the anniversary month of formation. Fee: minimum $60 USD based on assets in Wyoming.
- Delaware: Requires Annual Report with payment of Franchise Tax (minimum $300 USD).
- Florida: Annual Report required with a fee of $138.75 USD, with a deadline of May 1.
If you do not file the Annual Report in the states that require it, your LLC may lose its "good standing" status and eventually be administratively dissolved by the state. This can cause banking, contractual and legal problems.
Tax calendar: key dates for your LLC
Benefits of tax treaties: how they can help you
The United States has double tax treaties with more than 65 countries, including Spain, Mexico, and several countries in LATAM and Europe. These treaties may reduce or eliminate withholding taxes at source on certain types of income.
However, the tax treaties apply primarily to natural persons (individuals), not directly to the LLC as an entity. If you are a resident of a country with a treaty with the USA and your LLC receives certain types of payments (dividends, royalties, interest), you can benefit from reduced rates by invoking the treaty using a Form W-8BEN.
For most digital services entrepreneurs, the most relevant treaty is the tax exemption on services provided outside American territory, which is protected by the non-ECI (not effectively connected income) rule.
Common mistakes to avoid
- Not submitting Form 5472: the most costly mistake. Minimum penalty of $25,000 per year.
- Confusing EIN with ITIN: The EIN belongs to the LLC, the ITIN is yours as an individual. They are different and serve different things.
- Forgetting the Annual Report: Depending on the state, it may result in the administrative dissolution of your LLC.
- Not keeping accounting: Even if the LLC has no taxes to pay, the IRS may require accounting books to support the transactions reported on Form 5472.
- Mixing personal and business finances: one of the most common reasons for bank rejection and problems with the IRS.
- Assume that "I do not pay taxes in the USA" means "I have no obligations": the reporting obligation exists even if no taxes are owed.
Start Companies provides administrative assistance, not tax or legal advice. The information in this article is educational in nature and does not constitute tax advice. Every situation is different. We recommend consulting with a CPA (Certified Public Accountant) familiar with international taxation and non-resident LLC taxation.
When to hire a CPA? Signs that you need it
Not all LLC owners need a CPA from day one. For LLCs with simple operations (single owner, digital services with no US revenue), the tax burden can be manageable with good information. However, you should hire a CPA when:
- Your LLC invoices more than $50,000 USD per year
- You have clients or contracts directly with US companies that make withholdings
- You have partners (multi-member LLC), which implies a declaration of partnership (Form 1065)
- You plan to open a real estate or investment account in the USA
- Your country has a tax treaty with the USA and you want to optimize your tax burden
- You have been contacted by the IRS or have questions about your past compliance
- Your business has grown and you want a comprehensive tax strategy
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Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, graduated in 2020 from the National University of Tucumán. Founder of Start Companies since 2023, he advises clients worldwide on forming LLCs in the United States and on proper tax filing. His expertise combines legal, tax, and practical knowledge, offering a comprehensive service that spans from company formation to bank account setup and sales platform integration.
