Many foreign entrepreneurs choose to register an LLC in the United States because it is simple, flexible, and low-cost. However, when it comes to taxes, an LLC may not always be the best choice—especially for foreign owners without an ITIN (Individual Taxpayer Identification Number).
In such cases, filing Form 8832 (Entity Classification Election) to change the LLC’s tax status to a Corporation is often necessary. Below we explain the key points, benefits, limitations, and when you should consider this option.
1. Default Tax Treatment of LLCs
- Single-Member LLC (SMLLC) → By default, treated as a Disregarded Entity. All income flows through to the owner’s personal tax return, requiring an ITIN.
- Multi-Member LLC → Treated as a Partnership. Income is allocated to members, and each member must have an ITIN to file.
👉 Problem: Foreign owners without an ITIN cannot properly file U.S. taxes under the default LLC tax treatment, even if the LLC already has an EIN.
2. Why File Form 8832 to Elect Corporation Status
Electing Corporation status for your LLC may solve the ITIN issue:
Advantages:
- The Corporation files its own tax return (Form 1120) using only the EIN.
- Owners without ITINs can still remain compliant.
- Sometimes easier for investors or banks to understand.
Disadvantages:
- Double taxation risk:
- Corporation pays tax on profits.
- Dividends distributed to shareholders may be subject to 30% withholding (can be reduced under tax treaties).
3. 5-Year Rule & Irreversibility
- LLC → Corporation: Once elected, you generally cannot change back for 5 years, unless IRS grants special relief.
- Corporation → LLC: A Corporation cannot be converted back to an LLC through 8832 unless it was originally formed as an LLC.
⚠️ This is an important long-term decision.
4. Comparison: LLC vs Corporation
| Feature | LLC (Default) | Corporation (After 8832) |
|---|---|---|
| Tax Filing | Pass-through (owners file personal returns) | Separate corporate tax return (Form 1120) |
| ITIN Requirement | Required for each foreign owner | Not required (EIN is enough) |
| Double Taxation | No (profits taxed at owner level) | Yes (corporate + dividend tax) |
| Flexibility | Easier to distribute profits | More rigid (dividends, salary structure) |
| Change Rules | Can elect Corporation anytime | Cannot revert to LLC for 5 years |
| Investor Perception | May look informal for large deals | Seen as more “serious” entity type |
5. When Should You Elect Corporation Status?
- If you do not plan to apply for an ITIN but still need to file U.S. taxes.
- If you prefer the simplicity of filing only a corporate return.
- If you expect to raise capital or work with investors who prefer corporations.
If you want to keep the pass-through benefit, you must apply for an ITIN and stay with the LLC tax treatment.
6. Key Takeaways
- An LLC by default is pass-through, but this requires ITINs for foreign owners.
- Filing Form 8832 allows you to elect Corporation status, solving the ITIN issue.
- However, this comes with double taxation and a 5-year lock-in period.
- Choosing between LLC and Corporation should be based on your tax goals, ownership structure, and long-term business plan.