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When would you set up an LLC plus blocker to expand into the US market?
LLC Plus Blocker
Using an LLC plus blocker is a popular set up among Australian businesses entering the US market. In this episode Marsha Dungog of Withers in San Francisco will tell you how and why.
Here is what we learned but please listen in as Marsha Dungog explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
LLC Plus Blocker
In the LLC plus blocker structure you have a C-Corp blocker company holding an interest in an LLC.
Example
You might have a structure where the Australian holding uses a Delaware C-Corp as a blocker which holds 20% of an LLC. The other 80% of LLC are held by another C-Corp (‘HoldCo’) held by a US shareholder.
LLCs
Limited Liability Companies (LLCs) are created by state law but accepted at the federal level for tax purposes.
Some states like Wyoming and Delaware had LLCs for almost a century and hence have well-established rules and minority shareholder protection. Other states like California only introduced LLCs a decade or two ago, hence their rules are relatively thin and new.
You can elect to have the LLC treated as a company. But if you don’t make this election, then the LLC is treated as a look-through vehicle. So the LLC doesn’t pay any tax but its members do.
If the LLC just has one member, then that one member is treated like a sole trader. With more than one member it is treated as a partnership.
The LLC files a tax return but pays no tax. Just like a partnership in Australia the income is attributed to its partners who include the income in their tax returns.
C-Corps
A C-Corporation (C-Corp) is a US company. The real thing. Not a hybrid construct like an S-Corp or an LLC, but a proper company. It pays 21% federal income tax plus of course relevant state taxes.
Where you incorporate your C-Corp is an important question. Popular states are Delaware, Nevada, Texas, Wyoming, Washington, South Dakota, and Ohio.
If you have several C-Corps, you can consolidate some or all of them as long as you hold at least 80% in each of them.
When it comes time to sell your interest in the C-Corp, the capital gain is not taxable in the US since it counts as personal property held by a non-US resident. And the capital gain is also reduced or exempt in Australia if you hold at least 10% in an active business.
Advantages
So why not go just for an LLC or a C-Corp? Why the combination of LLC plus blocker? There are two reasons why this structure is popular among non-US residents. Both of them are closely related.
Whoever holds the LLC share has to lodge a US tax return. So by having a C-Corp blocker, you keep the Australian entity outside of the US tax system.
The second advantage of using an LLC plus blocker is that you only pay US tax once not twice. If you held the trading business within a C-Corp and then had a C-Corp blocker, you would pay tax twice since the US has no imputation system.
Non-US Blockers
Your blocker doesn’t need to be based in the US. You could have a US-based LLC with a blocker outside the US, for example in the Cayman Islands.
You do this if privacy is an issue. If your blocker is a foreign entity, you have a lot less information to file with the IRS than if your blocker is a US C-Corp.
So if privacy is an issue, then you use a blocker outside the US and a C-Corp or LLC within the US. If privacy is no issue, then you use an LLC with a C-Corp blocker.
Disadvantage
The LLC plus blocker structure has one big disadvantage: tax leakage around distributed profits upon distribution to the ultimate shareholder.
Capital gains are alright since they are exempt in the US and Australia as long as you hold at least 10% in an active business. So the capital gains arrive as NANE in the Australian holding and then get taxed at marginal tax rates upon distribution to shareholders.
But profits already pay 21% tax in the US. And then in addition you pay tax at full marginal tax rates again on the profit upon distribution to shareholders.
So if you want to avoid tax leakage, you either wait for the capital gain at the end or you avoid using a company in your structure.
This was just a very rough summary and we only scraped the top. Please listen in as Marsha Dungog shares a lot more insights.
MORE
Australian Companies in US Returns
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 26 October 2021
Tax Talks spoke to Marsha Dungog - Partner at Withersworldwide - for more details.
