Recent IRS clarification has increased scrutiny on foreign-owned U.S. company structures, particularly pass-through LLCs. Many now must provide W-8BEN-E forms, raising withholding risk. Tax experts say entity choice, business model, and where services are performed now directly affect cash flow, compliance, and client payments outcomes.
Recent clarification around U.S. tax documentation has brought renewed attention to how foreign-owned companies are classified, with potentially significant financial consequences for non-U.S. founders doing business with American clients.
Tax advisors and compliance specialists say one point has become increasingly clear: foreign ownership and tax classification now play a far greater role in determining whether U.S. withholding applies.
Historically, many foreign-owned U.S. limited liability companies were able to submit a W-9 form to clients, even when all owners were non-U.S. residents. That practice allowed payments to be made without withholding in many cases. According to recent guidance and enforcement trends, that approach is no longer broadly accepted for foreign-owned pass-through entities.
Foreign-owned LLCs that are treated as pass-through entities for tax purposes are now generally expected to provide a W-8BEN-E rather than a W-9. In practice, this shift can trigger withholding, depending on several factors.
These factors include the founder’s country of tax residence, where services are physically performed, and whether the business is service-based or product-based. When structures are not aligned with these variables, companies may face withholding that could have been avoided with a different setup.
By contrast, experts note that a U.S. LLC taxed as a C-corporation is considered a U.S. person for tax purposes. As a result, it may submit a W-9 even when ownership is entirely foreign. This distinction has made C-corporation taxation a more common consideration for certain non-U.S. founders, particularly those providing services to U.S. clients.
Business model also plays a critical role. Product-based businesses typically do not receive 1099 forms at all, reducing exposure to withholding concerns. Service-based businesses, however, are far more likely to receive 1099 payments, making documentation, tax classification, and treaty considerations increasingly important.
As a result, the question of how a foreign-owned U.S. company should be structured has moved beyond theory. Advisors say it now has direct implications for cash flow, client relationships, and ongoing compliance.
How VALIS International Supports Foreign Founders
VALIS International works with non-U.S. residents forming U.S. companies, focusing on reducing unnecessary withholding, avoiding misclassification, and ensuring compliance from the outset.
The firm advises clients on entity structure based on how income is earned, helps determine when pass-through treatment is appropriate versus when C-corporation taxation may be more suitable, and clarifies W-8 and W-9 implications before payment issues arise. It also assists service-based businesses in documenting where services are performed and aligning their structure with U.S. tax rules rather than common assumptions.
For foreign founders earning income from U.S. clients, experts say company structure is no longer a mere legal formality. It is a decision that directly affects tax outcomes, and understanding those implications early can help prevent costly issues later. VALIS International City: Wilmington Address: 501 Silverside Rd Website: https://valisinternational.com/ Phone: +1 302-792-0175 Email: dgendron@valisinternational.com