What Is a US LLC?
The Limited Liability Company (LLC) is the most widely used business structure in the United States precisely because of its flexibility. As the name suggests, members enjoy limited liability — their personal assets are shielded from the entity’s debts. At the same time, the LLC imposes no rigid corporate formalities: it can have a single owner (single-member LLC) or multiple owners (multi-member LLC), and it is not required to issue shares or hold annual shareholder meetings the way a corporation does.
LLCs can be formed in any US state — Delaware, Wyoming, and Florida are the most common choices due to their favorable legal frameworks — and registration is relatively straightforward and inexpensive.
US Tax Treatment: The IRS and Default Pass-Through
The IRS applies the so-called check-the-box system to LLCs. The default rules are:
- A SMLLC (single-member LLC) is a disregarded entity: the IRS ignores the LLC and the sole member reports all income directly on their Form 1040 or Form 1120, as if the entity did not exist.
- A MMLLC (multi-member LLC) is treated by default as a partnership: each member receives a Schedule K-1 and reports their proportionate share of profits on their personal return.
- In either case, members can elect to have the LLC taxed as a C-Corporation by filing Form 8832.
How Spain Classifies a US LLC
This is the critical point that many advisors overlook: Spain does not automatically accept the IRS’s classification. The AEAT applies its own test, set out in the DGT Resolution of February 6, 2020 (BOE-A-2020-2108), which requires three cumulative criteria for a foreign entity to be treated as a flow-through (entidad en atribución de rentas) under Spanish law:
- The entity is not subject to a personal income tax in its state of formation.
- The entity’s income is attributed to its members under the laws of the state of formation.
- That attribution occurs by the mere act of earning the income, without any distribution being required.
An LLC that satisfies all three criteria is transparent for Spanish tax purposes: the Spanish member will be taxed on their share of profits in their personal income tax (IRPF) for the year in which the LLC earns them — even if not a single euro has been received. If the LLC does not satisfy the criteria — for example, because it has elected corporation treatment in the US — the AEAT treats it as an opaque entity, and the member is only taxed when dividends are distributed.
The DGT confirmed in ruling V3074-22 that an LLC with its own legal personality may be treated as opaque, and in V0681-25 that the interest in such an LLC must be reported on Form 720 as a participation in a foreign legal entity (Block 2, Art. 42 ter of RD 1065/2007). Separately, V2353-20 applied the Spain-US tax treaty to an LLC holding a Spanish company, concluding that the gain on sale was only taxable in the US.
Risk: Effective Management from Spain
If the managing member resides in Spain and runs the LLC from there — making decisions, signing contracts, holding meetings — the AEAT may argue that the LLC’s effective place of management is in Spanish territory (Art. 8 LIS) and subject it to Spanish corporate income tax at 25%. This is the most underestimated risk in these structures.
Form 720 Reporting Obligation
Spanish tax residents holding interests in LLCs valued above €50,000 (Block 2) must report them on Form 720 by March 31. Since the reform introduced by Law 5/2022 — following the ECJ’s condemnation in case C-788/19 — the confiscatory penalty regime has been eliminated, but the reporting obligation itself remains fully in force.
At BMC we explain this to clients as follows: if you have a US LLC and have moved to Spain, step one is determining whether the AEAT will classify it as transparent or opaque. That classification drives both the timing and the magnitude of your Spanish tax exposure. Getting it right from the first fiscal year avoids costly audits and back-payments.