IRS Form 8832 and UK Corporations
Form 8832 is often cited as a source for entity classification. “According to form 8832, the only UK entity classified as a corporation is a public limited company. “ It is important to read between the lines - default entity classification on form 8832 is not all inclusive.
The instructions to form 8832 also contain interesting definitions which we will outline and explain below.
Foreign default rule
Unless an election is made on Form 8832, a foreign eligible entity is:
1. A partnership if it has two or more members and at least one member does not have limited liability.
2. An association taxable as a corporation if all members have limited liability.
3. Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
What is a Foreign Eligible Entity?
According to the IRS, a “foreign eligible entity” is generally defined as “an eligible entity that is not created or organized in the U.S. or under the law of the U.S. or any State.“
Now - to determine the classification, the key determinant is whether the members have limited liability.
Limited Liability - Key Tenet
1. A foreign eligible entity is an association and thus a corporation if all of its members have limited liability.
2. A foreign eligible entity is a partnership if it has two or more members and at least one member does not have limited liability.
3. The entity is a branch or proprietorship if it has a single owner and that owner does not have limited liability.
4. The entity is a disregarded entity if it has a single owner and that owner does not have limited liability with respect to that foreign eligible entity.
Rule of thumb - if your corporation has “LTD” in the name, it is likely required to file Form 5471.
It is a common misconception that filing utilizing the ‘disregarded entity election’ will simplify your tax filing. Not exactly.
A corporation set up in a foreign country would require form 5471 - please review our guide to foreign corporations. We have also outlined various corporate structures for countries around the world and what the equivalent U.S. filing requirement will be for your entity.
In general we would not recommend utilizing the 'disregarded entity election'. Your tax compliance will not become simpler, but quite the contrary. You will no longer file form 5471, but you will instead file form 8858 along with Schedule C (the combination of which is more expensive than 5471); but costs aside, the main problem is that you will not reap the added benefits that we describe in the foreign corporation guide.