Two Indian Founders, One US LLC: Who Taxes What?

The short answer

When two Indians open a US LLC together, the LLC usually pays no US tax itself. Each partner pays tax on his own share, and where each partner lives and works decides which country taxes that share.

That one idea runs through this whole article. Keep it in your pocket.

A story to start

Ravi and Meera are college friends. Ravi lives in Hyderabad. Meera has moved around a bit. They want to sell software to American clients, so they open an LLC in Wyoming in ten minutes online.

The registration is easy. The tax is not. Over the next few years, Meera may stay in India, move to the US, or move to the UK. Each move changes who taxes what.

This article walks through five common setups, one by one:

• Both partners run the LLC from India
• One in India, one in the US
• One in India, one in the UK
• One in the UK, one in the US
• Both run it from the US

For each one, we look at three parties: the LLC, partner one and partner two. We also explain, in plain words, the two court cases and rules that people in this space keep quoting.

This article explains general rules in simple language. It is not advice for your specific case. Tax law in three countries changes often, so check your facts with an adviser before you act.

The basics, peeled

What is a US LLC?

An LLC (limited liability company) is a US business form. It protects the owners' personal assets, like a company does, but it can be taxed like a partnership.

How the US looks at it: a glass box

Think of a two-member LLC as a glass box. The US tax office looks right through the box at the people inside.

A US LLC with two or more members is taxed as a partnership by default. It can choose to be taxed as a company instead, by filing Form 8832.

As a partnership, the LLC itself pays no federal income tax. It files an information return (Form 1065) and gives each partner a K-1 slip showing his share.

Each partner then pays tax on his share, whether or not the money was actually paid out to him.

The magic US words: "US trade or business" and "ECI"

The US taxes a foreigner's business profit only if it is effectively connected income (ECI): profit from a trade or business carried on in the US.

In plain words: is real work happening on US soil? A US office, US employees, or a person in the US running the business usually means yes. Partners sitting in India selling to US clients usually means no.

If there is ECI and a partner is foreign, the LLC itself must hold back tax on that partner's share. That is called Section 1446 withholding: generally 37% for foreign individual partners. The partner later files a US non-resident return and claims credit for what was held back.

How India looks at it

India taxes its residents on their worldwide income. If you are a resident of India, your LLC profits are taxable in India, wherever the money sits.

Putting money into a foreign LLC is an overseas direct investment (ODI) under FEMA. It needs to go through your bank with the right filings, and there are yearly reports.

If the LLC is effectively run from India, India may treat the LLC itself as an Indian resident. More on this under POEM below.

How the UK looks at it: a locked box

The UK tax office usually treats a US LLC as a locked box, like a company. It does not look through it.

HMRC's default position is that US LLCs are opaque, so a UK resident member is taxed only when profit comes out of the box as a distribution, a bit like a dividend.

That mismatch (glass box in the US, locked box in the UK) is where double tax comes from. We explain it with the Anson case later.

A quick picture of the three views

Scenario 1: Both partners run it from India

Ravi and Meera both sit in Hyderabad. They find clients online, do the work on their laptops, and get paid into the LLC's US bank account.

The LLC

No US office, no US staff, nobody in the US signing deals on their behalf. So there is usually no US trade or business and no ECI.

An Indian resident running a US LLC this way generally has no US effectively connected income, so US federal tax on the profits is zero.

Zero tax does not mean zero paperwork. The LLC still files its federal partnership return and K-1s, and pays its yearly state fee and report.

Partner one and partner two (both in India)

Both are Indian residents, so each pays Indian tax on his share of the LLC profit, at his slab rate.

There is no US tax to claim credit for, because none was paid.

Both must show the LLC in Schedule FA (foreign assets) of their Indian return every year, even in a year with no income.

The money they put into the LLC was an ODI under FEMA. That means the right bank route at the start and yearly reporting after.

The hidden trap: POEM

Here is the twist. If every single decision is taken in India, India can say the LLC is really an Indian company in a US costume.

Section 6(3) treats a foreign company as Indian-resident if its place of effective management is in India. A US LLC run entirely from a home office in India can, in principle, fall into this.

If it does, the LLC itself pays Indian corporate tax on its global income, at the foreign-company rate. That is a much bigger bill than two partners paying slab tax.

We explain POEM in plain words in the case law section below.

Bottom line for scenario 1: usually no US tax, Indian tax for both partners, full Indian reporting, and a POEM question to think about before the business grows.

Scenario 2: One in India, one in the US

Ravi stays in Hyderabad. Meera moves to Texas and starts meeting clients, signing contracts and managing the team from there.

The LLC

Meera's work in the US gives the LLC a US trade or business. Its profit from that work becomes ECI.

Because Ravi is a foreign partner, the LLC must hold back tax on Ravi's share of that ECI. A US partnership must withhold under Section 1446 on effectively connected income allocated to foreign partners, even if no cash was paid to him.

The LLC files Form 1065, K-1s and the withholding forms, plus state returns where it does business.

Ravi (in India)

In the US: he files a non-resident return and claims credit for the tax withheld using Form 8805. He may get a refund or pay a bit more.

In India: he pays Indian tax on his share, because he is an Indian resident. He then claims credit for the US tax under the India, US tax treaty, using Form 44 (it was Form 67 before Tax Year 2026-27).

He reports the LLC in Schedule FA, and keeps up his ODI reporting.

Meera (in the US)

If she spends enough days in the US, she becomes a US tax resident. The US then taxes her on her worldwide income, not just the LLC share.

In India: once she is outside India for most of the year (more than 182 days abroad, broadly), she usually becomes a non-resident. India then taxes only her Indian-source income.

Check her visa. Some US work visas do not allow you to actively run your own business. That is an immigration question, but it can sink the whole plan.

Bottom line for scenario 2: the moment one partner works from the US, the LLC has US business income. The India partner gets US tax withheld, then claims it back as credit in India.

Scenario 3: One in India, one in the UK

Ravi stays in Hyderabad. Meera moves to London and works on the business from there. Nobody works from the US.

The LLC

Nobody is working on US soil, so the LLC usually has no US trade or business and no ECI, just like scenario 1. Usually no US federal tax, but the US filings still go in.

New risk: if the main decisions are made in London, the UK may say the LLC is run from the UK. There is a risk that an LLC managed or controlled from the UK is treated as UK tax-resident and pays UK corporation tax.

The same question can also come up in India (POEM) if Ravi takes the key decisions. Write down clearly where decisions are made.

Ravi (in India)

Same as scenario 1: Indian tax on his share, Schedule FA, ODI reporting, and a POEM check.

Meera (in the UK)

From 6 April 2025, UK residents are taxed on their worldwide income and gains as they arise, unless they qualify for the new four-year regime.

The four-year regime (called FIG, for foreign income and gains) helps only people who have recently arrived in the UK after a long time away. It gives only limited relief, and only to those who qualify on the basis of recent non-residence.

Because the UK sees the LLC as a locked box, Meera is taxed when profits are paid out to her. UK residents can pay income tax at up to 39.35% on distributions from an LLC.

In this scenario there is usually no US tax, so the classic double-tax problem is smaller. It grows the moment anyone starts working from the US (see scenario 4).

If she stays out of India long enough, she becomes a non-resident of India and India taxes only her Indian income.

Bottom line for scenario 3: usually no US tax. Ravi is taxed in India, and Meera is taxed in the UK on what she takes out. Watch where the decisions are made, because both India and the UK can claim the LLC itself.

Scenario 4: One in the UK, one in the US

Ravi moves to London. Meera runs the business from Texas. Neither lives in India any more.

The LLC

Meera works on US soil, so the LLC has a US trade or business and ECI, as in scenario 2.

Ravi is now a foreign partner living in the UK. The LLC must hold back US tax (up to 37%) on his share of the US business profit.

Ravi (in the UK): where double tax bites

This is the setup that hurts most. Here is why, step by step:

• Year 1, US side: The US looks through the glass box. It taxes Ravi on his share of the profit this year, whether or not he got any cash.
• UK side: The UK sees a locked box. It says Ravi has no income until money is actually paid out to him.
• Year 3, money comes out: The UK now taxes the payout as foreign dividend-type income, at up to 39.35%.
• The mismatch: The US tax was charged in year 1 on "profit share". The UK tax is charged in year 3 on a "distribution". The UK may not treat them as the same income, so the credit for US tax may not fully work.

KPMG shows this with numbers: a member pays US federal tax of up to 37% in year one, then UK tax of 39.35% on the distribution when it is paid out later. One consultation suggested the effective tax rate could go as high as 75%.

Help is coming, but check the date. HMRC published a consultation on reform on 10 June 2026, and the government has since announced a new domestic foreign tax credit mechanism for UK residents in US LLCs. Until the new rule is in force for your year, plan as if the old problem still applies.

Meera (in the US)

Likely a US tax resident, taxed on her worldwide income, including her LLC share.

If she has been away from India long enough, India taxes only her Indian-source income.

What about India?

Both are now likely non-residents of India. India stops taxing their foreign income.

Their ODI was made when they were residents. Once they become non-residents, their FEMA status and reporting change. Get this sorted with your bank.

Bottom line for scenario 4: the US taxes both partners every year on their share. The UK partner can be taxed again when money is paid out, and the credit may not fully match. This is the scenario to plan most carefully.

Scenario 5: Both run it from the US

Ravi and Meera both move to the US and run the business from an office there.

The LLC

Fully a US business. It has a US trade or business, and its profit is US business income.

If both partners are US tax residents, they are not foreign partners for US purposes, so the Section 1446 withholding on foreign partners does not apply to them. The LLC simply files Form 1065, K-1s and state returns.

If one of them is still a non-resident in US terms (for example, in the first year before enough days are spent), withholding can apply to that partner for that year.

Ravi and Meera (both in the US)

Once they are US tax residents, the US taxes each of them on worldwide income, like any American.

India: once they have been outside India long enough (broadly more than 182 days abroad in a year), they usually become non-residents of India. India then taxes only income that arises in India, such as rent on an Indian flat or Indian bank interest.

The years of moving are tricky. In the year they leave, they may still be Indian residents for part of the year, and may be taxed in both countries. The India, US treaty and foreign tax credit sort out that overlap.

When they come back to India later, there is a softer middle status (RNOR, resident but not ordinarily resident) that keeps much foreign income outside Indian tax for a while.

FEMA after the move

Their LLC investment started as an ODI made by Indian residents. Once they become non-residents, the Indian ODI reporting may change or end. Speak to your bank so the records match your new status.

Any Indian bank accounts should be redesignated as NRO/NRE accounts.

Bottom line for scenario 5: simplest from the US side: a normal US business with US-resident owners. India drops out for their foreign income once they are non-residents. The move years need care.

The case law, peeled like a banana

Two ideas come up again and again in this area: the UK's Anson case and India's POEM rule. Here is each one, peeled layer by layer.

Anson v HMRC [2015] UKSC 44 (UK Supreme Court)

• Who was he? Mr Anson lived in the UK. He was a member of an LLC set up in Delaware, USA.
• What happened? The LLC made profits. Because the US sees an LLC as a glass box, the US taxed Mr Anson on his share of those profits. Later, money came to him in the UK, and the UK taxed it too.
• What did he ask for? "I have already paid US tax on this same money. Please let me subtract the US tax from my UK tax." That subtraction is called a foreign tax credit.
• What did HMRC say? "No. To us, the LLC is a locked box, like a company. The US taxed the company's profit. We are taxing you on a payout from the company. That is different income, so no credit."
• What did the court decide? The Supreme Court sided with Mr Anson. It looked at Delaware law and the LLC's own agreement and found that the members were entitled to the profits as they arose, so he could claim a credit against his UK tax for the US tax paid. In other words, for this LLC, it was the same income, so no double tax.
• So is the problem solved? Not quite. The day after Mr Anson won, HMRC said it would still treat US LLCs as opaque, and saw Anson as specific to its facts. HMRC's view today is that almost all US LLCs are opaque for UK tax purposes, and it sets a high bar to accept otherwise.

What it means for you, in one line: if you live in the UK and own part of a US LLC, Anson gives you an argument for credit, but HMRC will push back unless your LLC agreement and state law clearly give members the profits as they arise. Draft the LLC agreement with this in mind, and watch the UK reform consultation, which aims to fix this mismatch.

POEM: when India says your US LLC is really Indian

POEM stands for place of effective management. It is not one court case. It is a rule in the Income-tax Act, with guidance from the tax department.

The banana, peeled:

• The rule: A company set up abroad is treated as an Indian resident if its place of effective management is in India during the year.
• What "effective management" means: Where the key management and business decisions are really made, in substance. Not where the registration certificate says. Not where the bank account is.
• The test in real life: Who signs the big contracts? Who decides prices, hiring, borrowing? Where do the partners sit when they decide? If all of it happens in Hyderabad, the honest answer is "India".
• The consequence: If POEM is in India, the LLC itself is taxed in India on its global income, at the higher foreign-company rate. Then the partners are taxed again on what they take out. That is two layers of Indian tax.
• The comfort: The tax department's POEM guidelines carve out smaller companies (by turnover) and companies with an active business outside India. A small LLC with real activity abroad is less exposed. The thresholds and tests change over time, so check the current guidance.

What it means for you, in one line: if both of you run the LLC fully from India, keep records of where decisions are made, and get advice once the business grows. Decide early whether a US LLC is the right vehicle at all.

All five scenarios side by side

Compliance checklist

For the LLC (every year)

• Federal partnership return (Form 1065) and a K-1 for each partner. The exception for skipping it is narrow: it applies only when there is no ECI, US-source income is $20,000 or less, and almost nothing goes to US partners. Treat filing as the default.
• Section 1446 withholding and its forms (Forms 8804, 8805 and 8813), if there is US business income and a foreign partner.
• The state annual report and fee for the state where it was formed, and returns in states where it does business.
• A written operating agreement that says how profits are shared and where decisions are made.

For a partner who lives in India

• Before investing: route the money as an ODI through your bank, with the right forms.
• Every year: declare your LLC share as income and show the LLC in Schedule FA. If US tax was paid, file Form 44 (Form 67 for years up to 2025-26) to claim credit.
• Every year: the yearly ODI report to the bank, and a POEM check if the business is run from India.

Income earned through a US LLC by an Indian resident is generally liable to be reported and taxed in India, wherever the business is registered or the funds are held.

For a partner who lives in the US

• A US resident return covering worldwide income, including the LLC share.
• A US non-resident return instead, if you are not yet a US resident, claiming the withholding credit shown on Form 8805.
• Check your visa allows you to run the business.

For a partner who lives in the UK

• A UK self-assessment return. Payouts from the LLC are usually taxed as foreign dividend-type income.
• Check whether you qualify for the four-year FIG relief.
• Make sure the LLC is not managed from the UK, unless you are ready for UK corporation tax.

Common mistakes

• "The US charges no tax, so I owe nothing." If you live in India, India taxes your share anyway.
• "No money came out, so there is no income." The US taxes partners on their share each year, whether paid out or not. India can also tax you before cash reaches you.
• Skipping the US return because the tax is zero. The paperwork is still due, and the penalties for missing it can be heavy.
• Forgetting Schedule FA. Indian residents must report foreign assets every year. Missing it can attract heavy penalties under the Black Money Act.
• Sending money abroad without the ODI route. FEMA breaches are a separate headache from tax.
• Running everything from India and forgetting POEM. The LLC itself can end up taxed in India.
• Moving to the UK without checking how the UK sees the LLC. That is the double-tax trap.

Quick questions

Can we choose to have the LLC taxed as a company in the US?

Yes. A multi-member LLC can elect corporate classification on Form 8832. That changes everything above: the LLC then pays US corporate tax itself, and partners are taxed on dividends. It suits some businesses and hurts others.

Does it matter which US state we pick?

For federal tax, not much. For yearly fees, state tax and where you must file, yes. The state where you actually do business can matter more than the state where you registered.

One of us is moving next year. What should we do now?

Write down where decisions are made, update the operating agreement, plan the move date (the 182-day count matters in India), and tell your bank about your new residential status.

The takeaway

The LLC is only a box. The tax depends on the people in the box, and on where they sit. Before you sign the operating agreement, map each partner's residence for the next few years, then pick the structure. Fixing it afterwards costs more.

Sources and Reference Materials

• Single-member US LLCs and POEM for Indian residents (Taxguru)
• Indian individuals owning a US LLC (Taxguru)
• US tax for Indian founders running US LLCs (GlobalSolo)
• Indian obligations for US LLC owners (TaxTMI)
• Foreign partnership US tax implications (Taxes for Expats)
• Foreign co-owners in a US LLC and Section 1446 (Beancount)
• US LLCs and the UK/US mismatch (Buzzacott)
• US LLC holdings under the new UK regime (Taylor Wessing)
• US LLCs caught between two systems (Tax Adviser)
• HMRC on reverse hybrids (KPMG)
• HMRC's view of Delaware LLCs after Anson (Proskauer)
• HMRC consultation on US LLCs (Paul Hastings)
• Reform of UK taxation of US LLC members (Deloitte)
• UK consultation to remove US LLC double taxation (AAB)
• The Anson case and UK LLC taxation (Collyer Bristow)