LLC Taxation for Non-US Residents in 2024: The Ultimate Guide

The United States has a bad rep with many non-US residents when it comes to setting up a business there, with many entrepreneurs criticising what they see as heavy tax burdens and overly stringent business regulations.

But that doesn’t paint the whole picture of business in the US. North America can still be a favourable jurisdiction for many foreign investors and, with a little know-how, there are ways around much of the bureaucracy and problems facing non-residents.

When exploring the benefits of US Limited Liability Companies (LLCs ), the first and most important caveat to take on board is that any tax advantages can only be realised if the company is structured properly. 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.

The details of how everything should be structured are listed below but, in short, there can be benefits to forming a company in high-tax jurisdictions for the purposes of holding assets. In the past, there was a flight to establish these vehicles in low-tax financial centres like the British Virgin Islands and the Cayman Islands. 

Unfortunately, following international pressure, many of these jurisdictions are rethinking their strategy in this area. As a result some are introducing burdensome ‘know your clients’ (KYC) requirements, economic substance regulations, the need to have local directors and administrators and the dilution of any privacy benefits. All of which adds up to some of those countries losing the thing that attracted many to their shores in the first place.

So, many entrepreneurs are looking again at their options in relation to the United States and finding that part of the solution can be a US LLC, which offers foreign owners the stability of a more traditional financial centre, as well as lower costs and less administrative burden.

But first, it’s important to clear up a few definitions so we know exactly what we’re dealing with.

Who is a US Non-Resident?

You are considered a US non-resident or non-resident alien if you:

• Are not a US citizen or green card holder
• Haven’t lived in the US long enough to pass the substantial presence test.

Essentially, if you spend more than 183 days in the US, you are considered a resident.

Are Non-Residents Subject to US Business Taxes?

The US levies citizenship-based taxation which is why the country has quite unique presence requirements for tax purposes.

As far as non-resident aliens (NRAs) are concerned, they can expect to be subjected to US taxes on business income if they’re engaged in a trade or business in the United States (ETBUS).

An individual is considered to be ETBUS if they have at least one dependent agent in the US and employees or companies that work almost exclusively for you are considered dependent agents. It also applies if 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 the US has with another country, you’re subjected to US tax if you operate in the United States through a ‘permanent establishment’, such as 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. As such, an LLC owner is not personally liable for business debts or other such obligations.

This company formation type is hybrid. It offers personal liability protection like a corporation with the ease of formation of a sole proprietorship. It also acts as a pass-through entity (a legal business entity that passes any income it makes straight to its owners). For example, an LLC is considered a pass-through entity if the income generated is passed through to the owner without double taxation. In other words, no income tax is paid at the LLC level.

You can form an LLC in any US state and four states (Wyoming, Delaware, Nevada and New Mexico) also allow the formation of anonymous LLCs. An anonymous LLC doesn’t disclose information about the owners, members and shareholders.

Types of Limited Liability Companies

One of the most significant advantages of an LLC structure is its flexibility. Several variations of this company type exist that can be used to suit your requirements. These are: 

Single-Member LLC

A single-member LLC, also known as a disregarded entity, has only one member. It’s called a disregarded entity because the IRS doesn’t consider the company separate from its owner. Therefore, a single-member LLC is similar to a sole proprietorship.

For tax purposes, the IRS treats an LLC as a sole proprietorship since both have a single owner. If the LLC generates income from outside the US, the owner pays no income tax.

Multi-Member LLC

In contrast to a single-member LLC, a multi-member LLC can have multiple owners (two or more). It also offers limited liability to all LLC members. For tax purposes, a multi-member LLC, by default, is treated as a general partnership and members pay no income tax if the company generates non-US sourced income.

LLC as a Corporation

Another advantage of an LLC is that, if necessary, it can choose to be taxed as a corporation. Once an LLC elects to be taxed as a corporation, income taxes are paid at the corporate income tax rate and not passed on to the LLC members. However, most non-residents don’t adopt this route, particularly if their business income is non-US sourced. 

Who Can Own an LLC?

The owners of an LLC are referred to as members. An LLC can have one or more owners, who can be a person or a legal entity (like a company or a partnership).

An LLC has membership units, which are divided according to its operating agreement. Under these terms, foreign individuals (non-resident aliens) can own and operate a US-based LLC.

Advantages of an LLC

Of course, the most significant advantage of an LLC, as the name suggests, is limited liability. 

An LLC offers personal assets protection from lawsuits and creditors. Simply put, a plaintiff can sue an LLC but not its owner. An LLC protects its members from being personally liable for business debts and liabilities. In a highly litigious environment like the US, the protection offered by an LLC is a significant form of protection.

Forming an LLC is relatively easy. It requires less paperwork and less complicated annual reporting requirements than other types of entities. LLC formation is also very affordable, making it a cost-effective alternative to a corporation.

You will likely have to open a US business bank account for your LLC. In doing so, a US bank account gives you access to the country’s banking system, which, despite its flaws, is considered a pretty solid and credible banking option.

Disadvantages of an LLC

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.

The US is considered one of the most revered startup hubs in the world, especially for those seeking funding by raising venture capital. However, since LLCs can’t issue stock, it’s more challenging for them to raise investment. That’s why most startups are forced to convert to a C Corp to grow and receive capital.

It’s also worth noting that an LLC doesn’t offer absolute limited liability in all circumstances. There are several situations where limited liability does not apply. One is if you were found to transgress the limits of an LLC or indulge in activities that aren’t allowed under an LLC structure, like using business income for personal reasons.

Tax Obligations as Non-US Resident

Despite inflationary pressures, taxes, rising consumer prices and renewed concerns about its banking system, the US can still be a favourable corporate jurisdiction for foreign investors and entrepreneurs.

In recent years, the reporting requirements for non-resident business owners have increased considerably. In the past, if a foreign-owned company had no US-sourced income, it wasn’t required to report its activities to the tax authorities. However, now you must file a return even if you are a non-resident alien engaged or considered to be engaged in a trade or business in the United States during the tax year. Depending on your business, you may have to pay the following taxes in the US:

Income Tax

Non-residents pay US income taxes if they have US-sourced income or Fixed, Determinable, Annual, Periodical (FDAP) income or US Effectively Connected Income (ECI).

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 where you run your business activities because this can impact your tax liability.

The nature of your income, and whether it’s US-sourced or not, depends on your business.

Payroll Tax

If your LLC hires one or more US employees, it must discharge payroll taxes for each employee. The employee pays half the tax amount (retrieved from their salary), while the LLC pays the other half. Social Security tax, Medicare tax and unemployment insurance are commonly called payroll taxes.

Sales Tax

If you’re in the ‘Fulfilment by Amazon’ (FBA) or drop-shipping business, selling physical goods or digital products, then you’ll be liable to collect sales tax from your customers and submit it to the respective state.

Franchise and Excise Taxes

You’ll need to be familiar with franchise tax, renewal or annual registration fees at the state level. Most states charge an LLC fee annually and each state has its own variations on franchise taxes.

As well as this, excise taxes are typically levied on US-based manufacturers and retailers.

LLC Taxation – When to Pay Taxes?

If your LLC has US-sourced income, you must pay tax. To comply, you have to estimate each member’s annual income in advance, calculate a total estimated tax and split it into four quarterly payments due in January, April, June and September. Late payments are penalised, so this will require some planning. 

LLC Tax Forms for US Non-Residents

Whether paying taxes or not, you are required to file certain tax 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 complete the following:

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 (person who pays) 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 such as 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 a non-resident individual running a US-based LLC, you should be aware of the following US tax rates:

• 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:

1. Choose a US State

Some people ignore the importance of this step. However, selecting a state with regulations that are friendly toward your business and its needs is crucial. Four US states are popular due to their business-friendly regulations: Wyoming, Delaware, Nevada and New Mexico.

These states are also known as anonymous LLC states since they allow anonymous formation. With an anonymous LLC, the information about an LLC’s owners and shareholders is not disclosed in public records.

2. Choose a Registered Agent

Once you’ve chosen a business name, a registered agent (person or a legal entity) must be 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. 

3. Fill Articles of Organisation

Articles of Organisation or Association contain information regarding your business name, registered agent and other critical details.

4. Who Manages the LLC?

In addition to the steps mentioned above, you must decide if your LLC will be member-managed or manager-managed. Moreover, you must draft an operating agreement, apply for an Employee Identification Number (EIN) and open a bank account.

Nomad Capitalist’s experienced team can handle any company formation matters, from selecting the best jurisdiction to assisting in completing the necessary paperwork. Reach out to our team, and we’ll take care of the rest.

LLC Taxation for Non-US Residents: FAQs

Access a World of Opportunities

Foreign owners or non-resident aliens are not liable for US income tax unless they have US-sourced-income, Fixed, Determinable, Annual, or Periodical (FDAP) income, or US Effectively Connected Income.

So, income from business services is sourced where the service is performed. Take the theoretical example of an entrepreneur who is providing a service from Italy; even if the money is paid from the United States, it’s not US-sourced income because the service was performed outside of the United States. 

Income from the sale of personal property is generally sourced where the seller is resident. So, let’s say you’re running an e-commerce business from the UK and selling goods from there through a US LLC – that income is not US-sourced income. 

Even if the money comes from the US, as long as the services you provide are performed outside of the US, the income is non-US sourced and not subject to US tax. That means you could live in a low-tax country, have an LLC in the United States and provide all the services from where you live through this US entity without being taxed there.  

You could even have your banking facilities and clients in the US, and because the service was performed elsewhere, it is not subject to US tax. A US LLC can open up a world of possibilities for owning assets and doing business while reducing your tax burden and maximising your lifestyle options. 

In our experience, those who benefit most tend to be seven- and eight-figure investors who have worked hard and want to grow their wealth and plan for future generations. They also want to benefit from their wealth in the here and now by living a beneficial lifestyle. 

That is our Nomad Capitalist philosophy: go where you are treated best by exploring the best combination of tax planning, dual citizenship and asset protection strategies. Nomad Capitalist has helped 1,500+ high-net-worth clients from around the world. Find out how here.