Dutch partnership wishes to create US entity for fashion business. US LLC seems to be most preferable based on ability to have foreign person or foreign organization ownership. Is it better to have our Dutch partnership own the US LLC, or would it be better to have the two partners own the US LLC. One partner is Dutch citizen. Other partner is resident green card holder. When filing tax calims for the LLC, how would these two structures have implications both on the company, and the two partners (one residing in US one residing in NL).
A limited liability company is the most flexible form of organization for both tax and business purposes. Most likely that would be a smart choice. Much of the issue depends on how this is taxed in the Netherlands. I presently have a Dutch client that is a partnership that owns the US LLC as a solely owned member. US federal and state tax returns are filed and the income passes through to the Dutch entity. If the individual partners were to own the entity, then the partners would both have to file US tax returns. The green card holder would file a resident 1040, and the Dutch resident would file a nonresident 1040. I do not know how this would be treated in the Netherlands and whether there would be tax on the US source income.
Normally, having the entity own the LLC membership interests simplifies the tax reporting. This issue is going to require not only the advice of a US tax and business attorney, but also your current business attorney in the Netherlands.
I hope this helps!
The legal, corporate and tax repercussions are numerous. This is something you should plan in advance. There is very information that you can obtain here on Avvo. In addition, even after having selected a particular corporate structure you need to work with a CPA and international tax attorney to help you navigate the intricacies of US law. The selection of the most appropriate structure is a false problem. There is wrong or correct answer. Any structure can work, but you need to understand the various components of the US tax system to select the most appropriate one. If you select to form this company personally or through your foreign holding are decision that must be taken after a careful analysis of the financials of all the individuals and/or entities involved. Feel free to visit our website as we are specialized in cross border legal and tax work. Best.
I agree with my colleagues here. While we have many clients similarly situated each case is different and will require a careful and thoughtful analysis way beyond what is appropriate for this type of forum.
I do agree that having the LLC be owned by the foreign entity will likely be the cleanest way to approach it however.
You are welcome to contact me for further clarification.
It looks like you have gotten some good information here; you'll need more than short Avvo answers to get the solution. That said, you are wise to gather as much information as possible so that you can best interact and manage your US and NL legal advisors.
I would add that you may wish to explore a multi-entity approach with this particular venture. With two (or even three) legal entities in the US and NL, you might get more profits through tax advantages.
For example, companies in the NL generally pay lower tax rates that US companies. This means that with two companies, the US company could limit its US income by paying for services rendered by the NL company, thus shifting profits to NL (where company taxes may be lower) and shifting costs to the US company (where the company deductions give more value).
I'll try to boil it down a little more. Let's assume that: (1) you manage the company in the NL, and (2) the company gets $100k of sales profits in the US.
In the single US entity option:
- The US company pays 40% in US income tax ($40k) on the 100k profits;
- You and your so-owner split the after-tax profit, which is $30k each for a total of $60k after taxes.
However, in the multi-entity approach:
- The US company can pay the NL company a $42,862 management fee;
- The US company will deduct that $42,862 expense from its sales income (leaving $57,138 in total income);
- The US company will pay 40% on $57,138 income ($22,855);
- The NL company will pay 20% NL income tax on that $42,862 management fee ($8,572); and
- The NL company will bring home $34,290 after taxes;
- The US company gets $34,280 after taxes; and
- The combined income is $68,570.
Thus, the multi-entity makes both businesses together a little richer: about $8,570 richer.
A couple caveats:
1. This is an estimate of tax liabilities that leaves out some very important details and rounds the numbers!
2. You'll need to keep your eye on an issue called transfer pricing, which basically means you can't abusively shift profits and costs based on tax rates.
3. You may also want to explore offshoring the profits in the NL, if you want to reinvest them there with a tax deferral to get additional tax savings.
I hope this overly-simplified description helps explain the potential benefits of a multi-entity structure. I'd be happy to discuss further over email or telephone with a complimentary consultation!
Todd M. Heine
No, no no no no Stop, do NOT take that advice.
Ok, here's the pragmatic answer.. You don't want a US company Well, at least not for a couple of years. Here's why.
The single most important reason to use a LLC or other structure is to limit liability. And for a start up business, that is even more important. If you hit a rough patch (and in your chosen industry it is likely) you could be sued by unpaid vendors. creditors. . . basically everybody. And, as a US LLC with US assetts You Would Be a Sitting Duck.
But, as a Dutch corporate form, it would be much harder to sue or collect in a successful suit. They would have physical distance, venue, hague treaty issues to contend with just to get you into a lawsuit. If you want to negotiate with a vendor from a position of strength, tell him he has to translate his legal papers into another language. I guarantee he will settle.
So, to circle back. DO NOT make a US entity. But, if you feel you must, make two. The first can be any corporate form you like. S corp works nicely. Have all of the stock owned by an llc. and all of the llc owned by the dutch partnership.. All contracts are to be signed by the llc naming the scorp as a beneficiary party. This will give you the ability to get out of a disastrous situation should the concern start to fail. In the event of failure, bankrupt the llc in a liquidating chapter 11 so you maintain controll. and no independant trustee. Then, re-write the executory agreements more favorably and the scopr will emerge squeaky clean and newly profitable.
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