This article discusses LLC taxation for non-US residents, how non-US residents can benefit by forming a US LLC business, and its costs.
Despite its tax burdens and other stringent business regulations, the US can still be a favorable jurisdiction for many foreign entrepreneurs.
You’ll need a multi-layered corporate offshore strategy to plan each aspect, but it can be done with the right team by your side.
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Who is a US Non-Resident?
You are considered a US non-resident or non-resident alien if you fulfill all of the following three conditions:
- You’re not a US citizen.
- You’re not a US permanent resident (green card holder)
- You haven’t lived in the US long enough to pass the substantial presence test.
We will discuss the tax consequences regarding LLCs for US non-residents shortly. However, generally, if you’re not a US non-resident (per the conditions mentioned), any income generated by an LLC you own will be subjected to US taxes.
What is Meant by US Presence or US Economic Substance?
The US levies citizenship-based taxation, and that’s why the country has quite unique presence requirements for tax purposes.
The following points can give you a good idea about when NRAs may be subjected to US taxes:
- Non-resident aliens are subjected to US taxes on business income if they’re engaged in a trade or business in the United States (ETBUS)
- You’re ETBUS only if:
- You have at least one dependent agent in the US. Employees or companies that work almost exclusively for you are considered dependent agents.
- Your dependent agent is tasked with substantially expanding your US business. Jobs that are purely administrative in nature are not included under this rule.
- In addition to being ETBUS, if you can benefit from an applicable tax treaty, you’re subjected to US tax if you operate in the US through a “permanent establishment” (like an office or a fixed business location).
What is a Limited Liability Company (LLC)?
A limited liability company is a legal entity that protects business owners’ personal assets from creditors and plaintiffs in the event of bankruptcy or a lawsuit. An LLC owner is not personally liable for business debts or other such obligations.
An LLC is hybrid in nature. It offers personal liability protection like a corporation and the ease of formation of a sole proprietorship. It also acts as a pass-through entity.
An LLC is considered a pass-through entity since the income generated by an LLC is passed through to the owner without double taxation, i.e., no income tax is paid at the LLC level.
An LLC can be formed in any of the US states. Four states, Wyoming, Delaware, Nevada, and New Mexico, also allow the formation of anonymous LLCs. An anonymous LLC doesn’t disclose information about LLC owners, members, shareholders, etc.
Types of Limited Liability Companies
The best thing about the LLC structure is its flexibility. You can create your LLC in the following manners to get the most out of it.
Single member LLC, also known as a disregarded entity, has only one member. It’s called a disregarded entity because the Internal Revenue Service (IRS) doesn’t consider this LLC separate from its owner. A single-member LLC is similar to a sole proprietorship in various way. For tax purposes, the IRS treats an LLC as a sole proprietorship (since both have a single owner). If the LLC generates non-US sourced income, the LLC owner pays no income tax, LLC members pay no income tax.
Unlike single-member LLCs, a multi-member LLC can have multiple owners (two or more). It also offers limited liability to LLC members. For tax purposes, a multi-member LLC, by default, is treated as a general partnership. LLC members pay no income tax if the LLC generates non-US sourced income.
LLC as a Corporation
One of the most significant advantages of an LLC is that it can choose to be taxed as a corporation, making it one of the most tax-effective and flexible business structures. You have to fill out certain IRS forms to change the tax status of your LLC.
Once your LLC elects to be taxed as a corporation, income taxes will be paid at the corporate income tax rate and not passed on to the LLC members. Most non-residents don’t adopt this route, though.
Who Can Own an LLC?
The owners of an LLC are referred to as members. Moreover, an LLC can have one or more owners. An LLC member can be a person or a legal entity (like a company or a partnership).
An LLC has membership units, which are divided according to the LLC’s operating agreement. Foreign individuals (non-resident aliens) can own and operate a US-based LLC.
A C Corp can also have foreign investors, but an S Corp doesn’t allow foreign investors or owners.
Benefits of the US as a Corporate Jurisdiction
Advantages of an LLC
Of course, the most significant advantage of an LLC is in its name – limited liability. An LLC offers personal assets protection from lawsuits and creditors. Simply put, a plaintiff can only sue an LLC, not its owner. An LLC protects LLC members get from business debts and liabilities. In a highly litigious environment like the US, the protection offered by an LLC makes all the difference.
Easy to Form and Manage
Forget about tons of paperwork and complicated annual reporting requirements. Forming an LLC is very straightforward and only comprises a few significant steps. LLC formation is also very affordable, making it a cost-effective alternative to a corporation.
Access to US Banking System
Opening a business bank account is a significant part of offshore company formation. You will likely have to open a US business bank account for your LLC matters and transactions. A US bank account can give you access to the US banking system, which, despite its flaws, is still considered a pretty solid and credible banking option worldwide.
In addition to reputable banks, as a non-resident alien, you will also get access to payment processing from platforms like Stripe, PayPal, Shopify Payment, etc., among several other financial perks. You may also qualify for loans and other grants (debt financing, etc.) from various international institutions.
Disadvantages of an LLC
LLCs Can’t Issue Stock
LLCs can’t issue stock to their employees, investors, or anyone else. This could be an issue for some businesses, like startups, that may want to issue shares to attract individuals.
Difficulty in Raising Capital
The US is considered one of the most revered startup hubs in the world. With regions like Silicon Valley, startups worldwide want to enter the US startup community, especially to seek funding (raising venture capital). However, since LLCs can’t issue stock, it’s challenging for startups to do so. That’s why most startups are forced to convert to a C Corp to grow and receive capital.
Piercing The Corporate Veil
An LLC doesn’t offer absolute limited liability in all circumstances. There are several situations where you’d lose the limited liability. One of them is piercing the corporate veil. If you were found to transgress the limits of an LLC or indulge in activities that aren’t allowed under an LLC structure (like suing business income for personal reasons), you could lose the liability protection.
Tax Obligations as Non-US Resident
Despite the rising inflation, taxes, consumer prices, and renewed concerns about its banking system, the US may still be a favorable corporate jurisdiction for many foreign investors and entrepreneurs.
Since 2017, reporting requirements and paperwork for non-resident business owners have increased considerably. Before that, if a foreign-owned company didn’t have any US-sourced income, it wasn’t required to fill out any forms at all. Now you must fill out forms even if you don’t have to pay taxes.
Depending on your business, you may have to pay the following taxes in the US.
Non-residents pay US income taxes if they have US-sourced-income, Fixed, Determinable, Annual, or Periodical (FDAP) income, or US Effectively Connected Income.
In the US, taxes are levied at the federal, state, and local levels. So, in addition to the federal taxes, you must be mindful of the state in which to run your business activities because that can heavily impact your tax liability.
The nature of your income, and whether it’s US-sourced or not, depends on your business.
If your LLC hires one or more US employees, it’ll have to pay payroll taxes for each employee. Social Security tax, Medicare taxes, and unemployment insurance are commonly called payroll taxes. The employee pays half the tax amount (retrieved from their salary), while the LLC pays the other half.
If you’re in the Amazon FBA/Dropshipping business, selling physical goods, or digital products, then you will be liable to collect sales tax from your customers and submit it to the respective states.
Franchise tax, renewal, or annual registration fees is something that you need to be familiar with on the state level. It’s an LLC fee that most states charge annually. Different states may charge different franchise taxes.
Excise taxes are typically levied on US-based manufacturers and retailers.
LLC Taxation – When to Pay Taxes?
If you must pay tax (since you have a US-sourced income), four months are crucial for you – April, June, September, and January.
You’ll have to estimate each member’s annual income in advance, calculate a total estimated tax, and split it into four quarterly payments. Late payments get penalized.
LLC Tax Forms for US Non-Residents
Paying taxes or not, you must fill out a few forms as a US non-resident owning a US trade or business.
Depending on your business, income, number of members, and other factors, you may have to fill out the following forms:
Tax Forms for Single-Member LLCs
- Form 5472 with pro-forma Form 1120
- (If LLC generates US-sourced income) Form 1040NR by the individual. You don’t need to file this form if the payor has withheld the tax and the individual has no other income.
Tax Forms for Multi-Member LLCs
- Form 1065
- (If LLC generates US-sourced income)Form 1040NR by the individual. You don’t need to file this form if the payor has withheld the tax and the individual has no other income.
- ( In the case of withheld royalties) Form W8-BEN (collected from each partner)
Tax Form for LLCs that Elected to be Taxed as a Corporation
- (If 25% ownership is by a single foreign person) Form 5472
- Form 1120
- (In the case of the US-sourced income like dividends) Form 1040NR by the individual. You don’t need to file this form if the payor has withheld the tax and the individual has no other income.
Tax Rates for Foreign-Owned LLC Owners
As an NRA running a US-based LLC, you need to know some of the following tax rates in the US:
- Income Tax Rate: 10% to 37%
- Corporate Income Tax Rate: 21%
- State Sales Tax: 2.9% to 7.5%
- Non-Resident Alien tax rate: 30%
Depending on your situation, you may also be liable for other taxes.
How to Form a US LLC as a Non-Resident
There are four significant steps in the formation of an LLC.
Choose a US State
Most people ignore the importance of this step. However, selecting a state whose regulations are friendly toward your business and its needs is crucial. Four US states are very popular with locals and foreigners due to their business-friendly regulations – Wyoming, Delaware, Nevada, and New Mexico.
These states are also known as anonymous LLC states since they allow the formation of anonymous LLCs. An anonymous LLC is similar to a regular LLC. However, the information about an anonymous LLC’s owners, shareholders, etc., is not disclosed in public records.
Forming an LLC in one of these states enable excellent privacy and aids asset protection.
Choose a Business Name
You must choose a unique business name for the LLC. Ideally, it should be descriptive and catchy.
Choose a Registered Agent
A registered agent (person or a legal entity) is tasked with receiving formal business mail and legal documents on your behalf. They provide an additional layer of privacy for LLC owners. The registered agent must typically be in the jurisdiction where you formed your business.
Fill Articles of Organization
Articles of Organization or Association contain information regarding your business name, registered agent, and other critical corporate details.
In addition to the steps mentioned above, you will need to decide if your LLC will be member-managed or manager-managed. Moreover, you must draft an operating agreement, apply for EIN, and open a bank account.
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Benefits of the US as a Corporate Jurisdiction
The following are some reasons to form an LLC in the US:
- The US enjoys an excellent reputation as a credible corporate jurisdiction.
- International business climate
- Diverse business community
- Access to the world’s largest economy
Should You Choose the US to Form an LLC?
Despite the rising inflation and the less-than-ideal banking system, the US is still considered a pretty solid corporate option by some foreign investors and entrepreneurs.
However, even with the relaxation provided by tax treaties, taxes in the US can get pretty high compared to other far-better offshore jurisdictions.
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Our experienced team of strategy developers, vendors, and other professionals study each jurisdiction’s personal, corporate, and tax consequences before selecting one for you.
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LLC Taxation for Non-US Residents in 2023: The Ultimate Guide FAQ
You are considered a US non-resident or non-resident alien (NRA) if you fulfill all of the following three conditions:
You’re not a US citizen.
You’re not a US permanent resident (green card holder)
You haven’t lived in the US long enough to pass the substantial presence test.
An LLC is a legal entity that protects business owners’ personal assets from creditors and plaintiffs in the event of bankruptcy or a lawsuit. An LLC owner is not personally liable for business debts or other such obligations.
The following are the most common types of LLCs:
LLC as a corporation