Foreign-owned multi-member LLC: Form 1065, K-1s and partner withholding

How is a foreign-owned multi-member LLC taxed?

An LLC with two or more members is classified as a partnership for federal income tax unless it elects to be taxed as a corporation. The members' nationality does not change that. The partnership itself pays no federal income tax: its income, deductions and credits pass through to the members, who report their shares. The difference for foreign members is in what they must report, and in withholding. See how LLCs are taxed and single-member vs multi-member LLC.

How does it differ from a single-member LLC?

What goes on Form 1065?

The partnership reports its income and deductions on Form 1065, and gives each member a Schedule K-1 showing their share. A domestic partnership must file unless it had no income and no deductions or credits for the year. That applies even if all its income is foreign-source and none is taxable in the US: the return still shows the partnership's activity and each partner's share. See Form 1065 and Schedule K-1.

What are Schedules K-2 and K-3?

Schedules K-2 and K-3 report items of international tax relevance, such as the source of income and information foreign partners need to work out their own US tax. A partnership with foreign partners generally completes them, because the domestic filing exception is available only to partnerships with no foreign partners and little foreign activity. For foreign partners, the K-3 is the document that shows which of their share is effectively connected income.

When is there US business income?

The key question is whether the partnership has income effectively connected with a US trade or business. If it does, each foreign partner is treated as engaged in that business too, and their share is taxable in the US. Typical triggers are a US office or warehouse, staff or dependent agents in the US, or members working in the US. An LLC run entirely from abroad, with no US office, employees or agents, often has no effectively connected income. Inventory held in US fulfillment centers needs careful analysis. See effectively connected income and US trade or business.

How does section 1446 withholding work?

If the partnership has effectively connected income allocable to a foreign partner, the partnership must pay a withholding tax on that partner's share during the year, whether or not it distributes any money. The rate is the highest US rate for that type of partner: 37% for individuals and 21% for corporations.

1. Work out each foreign partner's share

   Of the partnership's effectively connected taxable income.

2. Pay quarterly installments

   With Form 8813, by the 15th day of the 4th, 6th, 9th and 12th months of the tax year.

3. File the annual return

   Form 8804, with a Form 8805 for each foreign partner, by the 15th day of the 3rd month after the year ends.

4. Give partners their Form 8805

   Each partner claims the tax as a credit on their own return.

The partnership is liable for withholding it should have paid, with penalties and interest. Partners can sometimes reduce the withholding by certifying deductions and losses, under the rules in the regulations.

What must each foreign partner file?

• A partner with no effectively connected income from the partnership, and no other US filing reason, generally has no US income tax return to file.
• A foreign individual partner with effectively connected income files Form 1040-NR, reporting their share and claiming the section 1446 credit. They need an ITIN or Social Security number. See Form 1040-NR and ITIN for a foreign LLC owner.
• A foreign corporate partner with effectively connected income files Form 1120-F and may owe branch profits tax.

Treaty benefits can change this: a partner resident in a treaty country may be exempt on business profits if the partnership has no US permanent establishment. See tax treaties and your US LLC.

How are distributions treated?

Money taken out by members is a distribution of profit already allocated to them, not separate income. Distributions do not trigger section 1446 withholding, which is based on allocated income, not on cash paid. Keep a capital account for each member in the books.

What if a foreign partner sells their interest?

Gain on selling an interest in a partnership with a US business can be treated as effectively connected income. The buyer must generally withhold 10% of the amount realized under section 1446(f), unless an exception applies, and the partnership can be required to withhold from distributions to the buyer if the buyer fails to. Plan any change of ownership with advice. See how to amend an LLC.

What does a worked example look like?

Two members, an individual in the UK and one in the UAE, each own 50% of a Delaware LLC that has a US warehouse and a US employee. In 2026 its effectively connected taxable income is $200,000, so each member's share is $100,000.

• The LLC must pay section 1446 withholding of $37,000 for each member, 37% of $100,000, through quarterly Form 8813 installments.
• By March 15, 2027, it files Form 1065 with K-1s, K-2 and K-3, and Form 8804 with a Form 8805 for each member.
• Each member files Form 1040-NR, reports their $100,000 share, works out their actual tax at graduated rates, and claims the $37,000 as a credit. Any excess is refunded.

If the same LLC had no US warehouse or employee and was run entirely from abroad, it might have no effectively connected income at all. It would still file Form 1065 and the K-1s, but no section 1446 withholding or partner returns would be needed.

What records should the partnership keep?

A capital account for each member, showing contributions, allocated profit and loss, and distributions. Evidence of where work is done and where inventory, staff and offices are, because that decides whether there is effectively connected income. Copies of each member's Form W-8BEN or W-8BEN-E, which document their foreign status and support the withholding calculations. And the operating agreement's allocation rules, which the return must follow.

What are the key dates?

What are the penalties?

• Late Form 1065: $255 per member per month for returns due in 2026, up to 12 months. A two-member LLC filing six months late owes $3,060. See late partnership return penalties.
• Late or missing K-1s and K-3s: separate penalties per statement.
• Section 1446 failures: the unpaid withholding, plus penalties and interest.

What about state taxes?

Many states require partnerships with income from the state to file a return and to withhold or pay tax for non-resident partners. A partnership that only exists in Wyoming or New Mexico, with no activity in other states, usually has little state filing beyond the formation state's own requirements.

Should the LLC elect corporate tax instead?

Sometimes. An election to be taxed as a C corporation replaces the partnership rules with a 21% corporate tax, Form 1120 and Form 5472 for each 25% foreign owner, and 30% withholding on dividends unless a treaty reduces it. It can suit a business that will reinvest profits in the US, but it adds a second layer of tax on profits paid out. Compare both before deciding. See LLC or C corp for a foreign founder.

This guide is general information. It is not tax or legal advice for your situation.