21%. This is the percentage you could save on taxes on your online business profits, if you form a US LLC for your online business as a non-US resident . If you make a pure profit of $50,000 after a year of hard work, you can sleep easy at night knowing you do not have to pay Uncle Sam (US government) $10,500 in taxes at the end of the year, legally. Whether you want to travel to exotic places like a digital nomad or invest the $10,500 back into your business is up to you. The decision is in your hands.
Setting up a foreign company may sound daunting and complex at first, but not if you read this guide.
In fact:
The strategies in this post have helped dozens of our clients run their online businesses with a US LLC from their home country, generating millions in revenue, tax-free!
Registering an LLC in the US if you are a Non-US Person is the first option you should consider before looking at other popular options like Hong Kong, Estonia, Singapore or United Kingdom. If you ignore the US LLC, you are missing a great opportunity as an entrepreneur to create a low-maintenance, tax-free business structure in a first-world jurisdiction.
At the same time, you are missing out on the advantages of doing business as a US LLC would bring, such as superb banking options, vast payment processing selection, good reputation, access to the US market, solid legal system, to name a few.
If you are still not convinced about the benefits of a US LLC, please read The 9 Benefits of a US LLC for Non-US Residents
From a foreign entrepreneur's perspective, there are two business structures in the US. that you should be aware of: the Corporation and the Limited Liability Company. Before you start a business in the US., it is essential that you know the difference between these two forms.
In US. law, a corporation is a legal entity separate from the natural persons who own or manage it. A corporation comes into being when a state issues a certificate of incorporation to the entity, giving it the power to sue and be sued, sign contracts, and other legal documents.
The shareholders of a corporation are generally exempt from liability for the debts of the corporation as long as they perform their duties as directors or officers under the corporation's bylaws, this protection is known as the "limited liability". The corporation is virtually the same as similar company structures you see in other countries, such as the Ltd in United Kingdom, SARL in France and PT in Indonesia.
The current federal corporate income tax rate for a US corporation is 21%, and state corporate income tax rates vary from state to state. You pay the state corporate tax in the state where the corporation is incorporated. After paying the corporate income tax, if you want to distribute the profits after taxation to yourself as a shareholder, you declare dividends, which may or may not be taxable depending on where you live.
Before we go into the main star of the show, the LLC, let us do a detour to the partnership structure, as this will help you better understand the LLC structure in the next section. A partnership is another type of legal entity that is formed by two or more people, called "partners," who establish and agree to share profits and losses while dividing management of the company. A partnership exists as a legal entity, but it is not a separate tax-paying entity and is not taxed under the law. Instead, it is treated as a pass-through entity where the profit or loss is passed through to the partners and each partner is taxed under the individual income tax.
To recap, as a pass-through entity, partnerships are not taxed as a business, but their owners are taxed on their income from the business.
Most countries have the equivalents of "Corporation" and "Partnership" in their territories. But most of them lack an equivalent to the US Limited Liability Company (LLC). If you take the word, "limited liability company" literally, it is easy to equate it with a similar "limited company" structure in your own country.
As with football in the US, the LLC in the US is not what you think it is, and requires you to exercise some closer scrutiny.
In the US, the "limited liability company" (LLC) is a legal form similar to a corporation and a partnership. The LLC is a hybrid structure that combines features of partnerships and corporations with the limited liability protections of a corporation and the flexibility and tax efficiency of a partnership. The owners of an LLC are called members. Members of the US LLC can be either individuals or organizations.
From a tax perspective, it is essentially a pass-through entity. This means that an LLC is not taxed in the US like a corporation, but rather the members of the LLC are taxed individually, like a partnership. Also, it is important to note that a US LLC can be formed and owned by a single member, unlike partnerships, which must be owned by at least two members. LLCs formed by a single person are referred to as Single-Member LLCs. If there are more than one member in the LLC, it is commonly referred as a Multi-Member LLC.
What is the tax advantage for you as a foreigner? As mentioned above, US LLCs do not pay corporate income tax. Instead, profits and losses are passed through to the owners, and each owner reports his or her share of the company's profits on his or her personal tax return. This seemingly unremarkable feature of pass-through taxation is a great advantage for foreigners not living in the US.
By forming a US LLC, the Internal Revenue Service (US Tax Authority), see your US LLC as a transparent entity (Disregarded Entity) and does not tax it. Instead, the IRS will basically look through the company and try to determine if you, as the member are taxable.
From the IRS point of view, if you
you are regarded as a Non-Resident Alien. Yes, this term is archaic, but you don't get the opportunity to be an Alien every day.
As a Non-Resident Alien, you will only be taxable on US-Source income effectively connected to a US Trade or Business. There is also the tax on FDAP income that applies to passive income, but we will leave that for another day as we are assuming you are starting a US company to build an active business.
To explain it further, first we need to dissect two technical terms, namely “engaging in a US Trade or Business” and “US-Source Income”.
The general consensus is that your US LLC is engaged in a trade or business in the U.S. (ETBUS for short) if the following conditions are met:
Unfortunately, what is considered "substantial, continuous, and regular" is not precisely defined in US law. However, it should not be taken literally, as a look at a document from the Treasury Dept. Office of Tax Policy on the attitude of the US trade and business community toward e-commerce will shed some light on this issue:
Electronic commerce permits a foreign person to engage in extensive transactions with U.S. customers without entering the United States. Although such a person is clearly engaged in a trade or business, questions will arise as to whether he is engaged in a trade or business in the United States or has a permanent establishment in the United States. Therefore, it is necessary to clarify the application of the U.S. trade or business and permanent establishment concepts to persons engaged in electronic commerce. In developing principles to classify these activities, it will be important to consider the extent to which electronic commerce simply represents an extension of current means of doing business, the tax consequences of which are understood. For example, to the extent that the activities of a person engaged in electronic commerce are equivalent to the mere solicitation of orders from U.S. customers, without any other U.S. activity, it may not be appropriate to treat such activities as a U.S. trade or business. It will also be necessary to consider whether it is appropriate or practical to treat foreign persons engaged in electronic commerce with U.S. customers as being engaged in a U.S. trade or business if they are physically located outside the United States.
Your US LLC has to be deemed as a business engaging in a Trade or Business in the US (ETBUS) and the US Source Income (more on this below) that are effectively connected to this US Trade or Business are subject to tax. Being ETBUS is your first line of defense, if you are not ETBUS, you are not subject to US Federal taxes.
Other than the ETBUS concept, there is the Source of Income concept that you need to you need to understand. In taxation, Source of Income is the location (or country) where a specific item of income is deemed to have originated or is deemed to have been generated.
From the US Taxation point of view, a nonresident alien (NRA) is usually only taxed on US-sourced income but not Foreign-Sourced Income. The following are the general rules for determining US source income that apply to most nonresident aliens:
Let's use the table above and use a concrete example: If you provide internet marketing services to a US client through your US LLC and you do not employ any employees/exclusive agents in the US, your income is considered income sourced outside the United States and therefore not subject to tax.
In most cases, the United States does not tax income sourced outside the United States. However, there is a caveat: if your Foreign Source Income is attributed through a physical office of yours in the US, that income is taxable if you are deemed ETBUS, according to IRC §864(c)(4). However, if you hire an agent who is not exclusive and does not negotiate and close sales in the US, even if he/she performs the work through his/her own office, your Foreign Source Income would not be considered Effectively Connected Income to a US trade or business.
One important point that even confuses the most experienced accountants is that the assessment as " Engaging in Trade or Business in the US" (ETBUS) comes first and the income from US sources that's actually connected to that " US Trade or Business" comes second.
In other words, you have to check if you're ETBUS, and only then check if you have US source income; if both criteria are met, then only you're liable for US Federal taxes. But, if you are not ETBUS, you are not taxable even if you have US source income.
As we see above, once you become ETBUS, you will require to inspect your Source Income to determine if they are foreign or US sourced. Another way to avoid the trouble of determining if you are ETBUS and have generated US Source Income is to use the Permanent Establishment concept found in tax treaties.
If your country of residence has a double taxation avoidance agreement or so-called tax treaty with the United States, you can take advantage on the Permanent Establishment concept instead of relying solely on the US Trade or Business concept. In international taxation, the concept of "permanent establishment" refers to a company that has a fixed place of business (and other criteria specified in the tax treaty) in another country and is subject to income tax there.
When there is a tax treaty between your country and the United States, IRS allows the definition of Permanent Establishment to take precedence over the definition of the US Trade or Business in the Internal Revenue code. So even if you are engaging in a US trade or business but do not have Permanent Establishment in the United States, you will not be subject to federal taxes on your active business income. To see if your country has a tax treaty with the United States, please refer to this list at the IRS
We hope we have not lost you already with our boring monologue. If you are still stumped after reading, we can suggest some shortcut hacks to make your US LLC tax-free.
Below are some things you need to keep in mind to avoid triggering US federal tax obligations:
Disclaimer: As with all shortcuts, these are general guidelines that will suffice in most cases. For very complicated situation, it is best to consult a US accountant or attorney familiar with international taxation.
As you can see, the Non-US Resident US LLC is a very powerful company structure for non-US entrepreneurs and founders. You can use the knowledge of ETBUS, Permanent Establishment, Source Income to structure your US LLC wisely and minimize your tax burden in the United States. On the other hand, if you form a US Corporation instead of an LLC, you will be subject to US federal taxes automatically, so it is really important to consider whether you need a Corporation at all.
Of course, the LLC structure should not be used as a blanket solution for all cases. There are instances where a US LLC may NOT be appropriate for you as a non-US business owner looking to minimize your tax burden:
Delaware is often considered the best state for non-US citizens to form an LLC due to its business-friendly laws, low taxes, and ease of management for foreign owners. Other options include Nevada and Wyoming, which also have favorable business climates for non-US citizens. At StartFleet, we recommend Wyoming for non-US residents; to comprehend our reasoning, we have penned an insightful article: Best US States for Foreigners.
Yes, you can name your foreign company as the owner of your new American business. The foreign company would become a member of the US LLC, allowing for consolidated ownership and management.
Yes, you typically need an Individual Taxpayer Identification Number (ITIN) to open an LLC bank account if you are a non-US citizen without a Social Security Number (SSN). However, some banks do not impose this requirement, which may differ depending on the bank. As our customers, we refer you to banks that do not require an ITIN for a hassle-free experience.
Non-US citizens typically do not need an SSN to open an LLC bank account. If you do not have an SSN, you can use your ITIN instead. However, if you are eligible for and obtain an SSN, you can use it instead of the ITIN when opening a bank account for your LLC. Check out our detailed guide on ITIN vs. SSN differences
Yes, a non-resident can open a bank account for their LLC in the US. However, finding a bank that accepts non-resident LLCs can be challenging. It is recommended to research banks that cater to non-residents and to have all the necessary documents for the bank account opening process. Check out our detailed guide to opening a US bank account as a non-resident.
The annual compliance requirements for an LLC owned by a non-resident vary depending on the state where the LLC is registered. In general, non-resident LLC owners must file an annual report with the state and pay any required fees. Additionally, the LLC may be required to file federal and state tax returns and maintain records of financial transactions.
Yes, a non-resident can sell products or services in the US through their LLC. However, they may need to comply with state and federal laws and regulations related to business licensing, sales tax, and import/export requirements. Utilizing a sales tax calculator can help non-residents accurately determine the appropriate sales tax for different states, ensuring compliance with various tax regulations.
The requirements for opening a business bank account for an LLC owned by a non-resident vary depending on the bank. Generally, the non-resident LLC owner needs to provide proof of identity, proof of address, a copy of the LLC's formation documents, and an EIN. Uncover all the essential requirements for opening a business bank account for non-US residents by exploring our comprehensive guide.
The time and cost to form an LLC as a non-resident depends on the state where the LLC is registered. Generally, the process takes from days to weeks and involves paying formation fees and other expenses such as legal and filing fees.
Ready to take your business to the next level? Don't let pricing hold you back! Visit our pricing page to unlock the perfect package for your needs and start achieving your goals today.
Limited Liability Companies (LLCs) do not issue shares of stock like corporations. Instead, LLCs have members who own a percentage interest in the business. This ownership interest is often referred to as "membership interest" or "membership units," and it represents the member's proportionate share of ownership in the LLC.
Unlike corporations, which have a standardized structure with shares of stock that can be easily bought and sold, LLCs are more flexible in how ownership interests are distributed and transferred. The details of how these interests are managed, including how they are allocated, transferred, or can change over time, are typically outlined in the LLC's Operating Agreement. This agreement also covers how profits are distributed, which in LLCs is not necessarily based on the proportion of ownership interest but can be decided upon by the members as per the agreement.
Looking to succeed as a non-US resident in the US business world? Our US LLC series guide has got you covered.
It can be a daunting task, but fear not! Our comprehensive guide will walk you through the entire process step-by-step, including what documents you'll need and which banks are best suited for your needs.
Click now to learn how to navigate the complex world of US business banking and start growing your business today!
Our guide breaks down the top states for non-US residents to form an LLC, considering factors such as taxes, legal requirements, and ease of formation. From Delaware to Wyoming, we've got you covered.
Click now to learn which state best fits your business and start building your American dream!
Our guide on how to register a US company from abroad as a non-resident is here to help. We walk you through the entire process, from selecting a business structure to obtaining an EIN and registering your business with the appropriate state agencies. Our guide also covers important legal considerations and tax implications, ensuring you are well-informed before taking the leap.
As the owner of a US LLC as a non-resident, it's essential to stay on top of your annual compliance requirements to avoid legal and financial penalties.
Our guide on annual compliance requirements for a US LLC owned by non-residents covers everything you need to know to keep your business in good standing. From filing annual reports, paying taxes, maintaining accurate records, and renewing licenses, we break down the essential compliance obligations you must fulfill. Don't risk the health of your business by falling behind on your compliance requirements.
Opening a US business bank account as a non-US resident can be daunting, but fear not!
Our comprehensive guide has got you covered. From which documents you'll need to the best banks for your needs, we take you through the entire process step-by-step. With our help, you can navigate the complex world of US business banking and start growing your business today.
Don't let the challenges of opening a US bank account hold you back from reaching your goals.
Naming your LLC is crucial in establishing your business's identity and brand. But where do you even begin with so many options to choose from?
Our ultimate guides to naming your Delaware, Wyoming, and Florida LLCs have got you covered. Each guide takes you through the process step-by-step, from brainstorming ideas to checking availability and registering your chosen name. Whether you're looking for a creative and memorable name or a straightforward and professional one, our guides offer tips and best practices for naming your LLC in each state.
Click now to learn how to choose the perfect name for your Wyoming LLC.
Click now to learn how to choose the perfect name for your Delaware LLC.
Click now to learn how to choose the perfect name for your Florida LLC.
Discover the many benefits of forming a US company, from limited liability protection to access to the world's largest consumer market. Our guide outlines nine key advantages of setting up a US company as a non-resident, including simplified taxation and increased credibility with American customers.
Click now to learn how a US company can help take your business to the next level.
StartFleet helps you with your US Company formation. Apart from helping you to register a US company we offer a lot more:
Kathleen Schweitzer is an international taxation expert, providing strategic counsel to businesses with complex compliance, tax and financial issues in an effort to help them grow their business globally. She often gives lecture on U.S. tax developments, transfer pricing, taxes on the sale of goods and services, U.S. tax policy development, taxation of internet commerce and multi-jurisdictional global tax planning. Kathleen enjoys reading, photography, cooking and spending time with her husband and eleven-year-old daughter.
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