Is there any disadvantage of having a U.S. partner in the company owned by non-resident aliens?

Not that we know of. The rules of taxation apply first on the entity, and only then on each individual partner, based on each partner’s individual tax situation.

Since we have a U.S. partner in our corporation, can we elect it to be S Corporation?

No. S Corporations cannot have non-U.S. owners.

I am US citizen and I want to open a business with a 50% partner who is a non-resident alien living abroad. What type of taxes will my partner pay if we form a C Corporation?

There are pros and cons to both structures for a non-resident. A C-Corp would mean your partner is not necessarily required to file a US tax return. He can be paid dividends from the C-Corp, but as with any C-Corp there is no tax deduction for dividends paid out so the earnings are likely to be double taxed, once by the corporation and then by the owners - in the US for you and in your partner’s country for him - as dividend income.

Double taxation doesn’t sound like a good idea. What if we choose LLC (taxed as partnership) instead?

An LLC taxed as partnership would eliminate the double taxation, but definitely subjects the non-US partner to U.S. taxation for his share of earnings and profits from the business. The partner would then have to file a 1040NR and report his share of profits and pay US tax on those profits. The partnership would also need to withhold tax at 30% for the foreign partner. Depending on his earnings the withheld tax would be credited and potentially refunded against what he may owe when he files his individual non-resident tax return.

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