5 min read
- LLC
- Structure
- Form 5471
- Brits in the US
A US limited liability company is a sensible default for a US-resident founder. It is simple, flexible, and for tax purposes it usually disappears: profits flow through to the owner and are taxed once, on their personal return.
That transparency is the whole point. It is also the problem, because the UK does not necessarily see it the same way.
Two countries, two characterisations
The US treats a single-member LLC as disregarded and a multi-member LLC as a partnership, unless it elects otherwise. Either way, the owner is taxed on the profits as they arise.
The UK's position has not consistently followed that. An LLC can be treated as opaque — a company — with the owner taxed on distributions rather than on the underlying profits. The consequence is that the US taxes profits when earned and the UK taxes distributions when paid, and the two charges may not line up well enough for credit relief to work.
What that costs
In the worst case, the same money is taxed in the US as it is earned and again in the UK when it is drawn, with the foreign tax credit unable to bridge the gap because the two countries are taxing different things in different years. It is the kind of outcome the treaty exists to prevent, and this is one of the places it struggles.
It is rarely catastrophic on a single year. It is expensive over a decade, and it is the sort of structure people only discover has a problem when they try to unwind it.
What usually works better
For a UK-resident owner, a UK limited company is often the cleaner choice, with the US side handled through the company reporting a US person is required to file. That reporting is real and it needs doing, but it is predictable, and it does not produce the same mismatch.
There are situations where an LLC is still right — US clients, US employees, investors who expect one. The point is not that LLCs are wrong. It is that the decision should be made with both countries in the room, and it usually is not.
If you already have one
Do not panic and do not dissolve it. Changing structure has its own consequences, and the right answer depends on what the LLC holds and how long it has been running. But do get the position reviewed, because the cost of the mismatch compounds, and an election made now may be far cheaper than one made later.
General commentary, not advice for your circumstances. Cross-border tax turns on detail, and the right answer for someone in an apparently similar position may not be the right answer for you.
