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US Business Tax Lawyer | Tax Definition of Business Owner

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The Tax Owner is really a Holder of Economic Interest, not necessarily the Legal owner of the actual entity.

Let me clarify that with an example. Let’s say this is a Taxpayer; this is the LLC and he owns 100% of that LLC. The LLC owns 50% of the Limited Partnership. The Taxpayer owns 50% of the Limited Partnership.

How many entities do we have for US Tax Purposes? Does anyone want to take a gander? The Taxpayer is not an entity. There’s a maximum of two available.

Anyone else want to guess? None. There are no entities for US Tax Purposes here.

This is Disregarded because it’s 100% owned. Because there’s one, a single Holder of Economic Interest, the Taxpayer from both sides is basically that the Taxpayer’s being treated as 100% Disregarded Entity.

You cannot have a one Partner; there’s always got to be at least two Partners. So, the Taxpayer owns the assets of the LP and the LLC directly for US Tax Purposes. That’s what I mean by the Holder of Economic Interest.

International Tax Lawyers Duluth | Definition of US Owners

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US Owners: I listed out for you what US Owner means.

It’s US Citizens, US Tax Residents, meaning Permanent Residents and a person who has satisfied the US Presence Test, Non-residents who declare themselves as Tax Residents for the purposes of filing a joint tax return are also considered to be US Owners.

Residents of Puerto Rico and all other US Possessions are also considered to be US Owners.

Determination of Whether a Business Entity Exists | FACC Seminar October 19 2017

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The question of a Business Entity actually involves a complex analysis and I lay out some of it here; it is a very simplified analysis but basically the very first question that we have to ask is: Is there a Business Entity?

I’m going to jump to the point 1b right away. Suppose that ‘Pierre’ a French National and let’s say ‘John’ a US National come together in Paris over a glass of wine and they decide: ‘You know what? Why don’t we sell product X on the streets of Paris? We’re going to sell it together; then divide it up – profits and that’s it. Each of us will report it on the French Tax Return: our share of profit and that’s it.’

Did they create an entity? Or let’s put it this way: Do you think they created an entity under French Law? Audience member answer: ‘No.’ Most likely, No. French Law is a civil law system; they wouldn’t apply the Common Law Partnership concept.

But US Law would and when it comes to determining whether there is or there isn’t a business entity in existence, it’s the US Federal Law that will dominate. We always go to US Federal Law to determine whether there is identity or not and probably in this case they created a Common Law Partnership which means they have created a Partnership for tax purposes which I will explain the difference in a second.

The second question that we have to ask is: Is this a Business Entity or Trust? I’m not going to spend much time on it because it’s a huge topic, but one thing I will mention here just so that I know that some of you may have clients or deal with investment trusts outside of the United States if an Investment Trust happens to have one class of beneficiaries, most likely it is a Trust. If it has more than one class of beneficiaries, most likely it is a Corporation.

International Tax Lawyers Indianapolis | Default Classification of Foreign Businesses

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Once we decide that this is a business entity, then our next question we have to ask is: What type of an entity is it?

There are three choices available when it comes to US International Tax Law:

a Corporation

a Partnership or

a Disregarded Entity

The equivalent here of a Disregarded Entity is precisely this; in the United States, a single member LLC would be considered a Disregarded Entity. It doesn’t exist for tax purposes. There’s only taxpayer; there’s nothing else.

For legal purposes there is an LLC, but for tax purposes there isn’t. To be honest with you, it’s really hard to find a Disregarded Entity outside of the United States for US Tax Purposes unless someone makes a specific election to do so. We’ll talk about that election in a second. But what I want to do is I want to give you sort of two examples from France and I’d like you to tell me if this is a Partnership, a Corporation or a Disregarded Entity.

Let’s talk about Societe Civile; Societe Civile is a noncommercial partnership. (I took the definitions off their website; so it’s interesting for our purposes here.) “Heavily formed by members of the Professions Liberale – so farmers or those engaged in so-called intellectual activities including, writers, researchers or any type of consultant.” A Societe Civile can elect to pay corporate tax or not; so it may pay or it may not pay. If not, each Shareholder will include the portion of the entity’s profits or losses on his personal tax return.

Is this a Partnership or a Corporation or Impossible to Tell at this point based on what I said? Does anyone want to guess? (Member of audience guess) “It’s impossible to tell.”

Why? Well, let’s hold off on this one and talk about the second one.

A Societe a Responsibilitie Limitee a SARL which is a very very common Entity and it’s also very common for US Taxpayers who come to France when they want to form some kind of business will usually open up a SARL. So a SARL must have between 2 to 50 Shareholders and a Managing Director who is usually paid a salary. A SARL can elect under circumstances to pay Corporate Tax rather than having its income included on the Director’s personal income tax declaration. Corporation Partnership, Impossible To Tell? Corporation? Why do you think so? (inaudible answer)

Okay, okay, but now remember we’re dealing with US International Tax Law; so just because an Entity is classified as a Corporation under Local Law does not in any way mean that it would be a Corporation under US Law. That’s an important point to remember. The answer to both is: it is impossible to tell because I didn’t give you the most important piece of information.

And actually the only one that really matters: Limited Liability. I didn’t say in either case whether the owners, the members of each entity had Limited Liability. This is the only test that matters. If all members of a Foreign Entity have Limited Liability, it is a Corporation. If at least one of them does not; it’s a Partnership as long as there are more than two members of/in the company.

If there is One Member and there is no Limited Liability it’s basically a Disregarded Entity. So it all hinges on the issue of Limited Liability.

International Tax Lawyers Colorado Springs | Definition of Limited Liability

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The question is: What is a Limited Liability? It is important to understand that a Limited Liability is a situation where a member has no personal liability for the debts of or claims against the entity by the reason of being a member.

The determination of Limited Liability is made based on the local law; so even though the general framework, whether a company is a corporation or a partnership, is determined by US Law. The very fact, the most important factor of whether a person/member has Limited Liability or not is determined by local law. So in this case it would be French Law.

Comment: ‘So you are saying that this is what the IRS code says?’ Exactly! These are straight from the regulations.

Do you think organizational documents would matter.. of the company? Answer: ‘Yes’. Partially, yes; as long as local law says that: yes, it is possible for the entity and its organizational documents to assign Limited Liability or to remove Limited Liability from the member.