Setting Up a UK Business as a US Person: Legal Entity Pitfalls
June 11, 2025
For US citizens looking to launch or expand a business in the UK, the country’s ease of doing business, familiar legal system, and strong service economy make it an attractive destination. But while setting up a UK entity can appear straightforward, the tax implications for US persons are anything but.
Hidden within the structure of what seems like a standard UK business are complex traps—particularly for those unaware of the long reach of US international tax law.
Why Structure Matters More Than You Think
When US citizens form a business overseas, the decision isn’t just about UK tax rates or limited liability. It’s also about how the entity is treated under the Internal Revenue Code back home. The US taxes its citizens on worldwide income, and that means even profits retained in a UK business can become immediately taxable in the US—depending on how the entity is structured.
The most commonly used UK business structures—private limited companies (Ltds), limited liability partnerships (LLPs), and sole proprietorships—are treated very differently under US tax law.
The “Invisible Taxes”: GILTI, Subpart F, PFICs
Several key provisions in US tax law are especially important for Americans operating UK businesses:
GILTI (Global Intangible Low-Taxed Income)
GILTI is a US tax on the profits of foreign corporations owned by US persons—even if those profits are not distributed. A single-member UK Ltd company almost always qualifies as a Controlled Foreign Corporation (CFC), which triggers GILTI exposure. This means you could owe tax in the US even if you haven’t taken a penny out of the business.
Subpart F Income
Similar in effect to GILTI, Subpart F rules apply primarily to passive income (e.g., interest, dividends, royalties) earned by foreign corporations controlled by US shareholders. If your UK business includes intellectual property, investment income, or licensing arrangements, this is a key risk area.
PFIC (Passive Foreign Investment Company) Rules
Often triggered by UK investment funds or companies that generate a significant portion of their income from passive sources. These rules are notoriously punitive and can apply in unexpected ways—even to seemingly benign UK investments.
Entity Choices: A UK Decision With US Consequences
While the UK may not differentiate sharply between certain business structures, the US does.
- A UK Ltd offers limited liability and professionalism, but also makes you vulnerable to GILTI and Subpart F if you’re the sole owner.
- A UK LLP, particularly with more than one member, may avoid these issues by being treated as a flow-through entity for US tax purposes.
- Operating as a sole trader is the simplest route from a tax perspective but offers no liability protection and may not be practical for all business models.
The implications of your choice can be profound—and often irreversible without triggering additional tax costs.
The LLP Loophole (or Lifeline)?
One often overlooked structure is the UK LLP, which offers both limited liability in the UK and (if properly structured) pass-through treatment in the US. This can be especially attractive for small businesses, consultants, and digital nomads. However, LLPs must have at least two members to qualify for partnership treatment under US rules—something many don’t realise until it’s too late.
Professional Perils: Overlooking Compliance
Beyond tax, there are compliance layers to manage:
- Reporting obligations such as Form 5471 (for Ltds), Form 8865 (for LLPs), and FBAR/FinCEN filings for foreign bank accounts
- Dual accounting systems, since UK and US financial years and depreciation rules differ
- Misaligned profit timing, where income is recognised in the UK and US in different periods
These aren’t minor issues—they can result in penalties, double taxation, and lost deductions.
Conclusion: Proceed with Eyes Open
Setting up a UK business as a US person can be a smart strategic move—but it’s rarely as simple as registering an entity online. The structure you choose will dictate your reporting burden, tax exposure, and even how much profit you get to keep.
The UK doesn’t require you to think like an American. But the IRS does.
If you’re a US citizen considering doing business in the UK, understanding these risks before you form a company could save you thousands—and hours of backtracking. And that’s where expert guidance becomes essential.
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