Non-US citizens looking to enjoy all the benefits of a first-world jurisdiction coupled with a low level of bureaucracy and a tax-rate typically associated with offshore companies in tax havens should consider using US LLCs as their preferred company forms.
Benefits of Choosing the United States to Set Up Your Business
If you choose the United States as the preferred base to set up your business, you will enjoy the following benefits:
– Excellent Reputation
– Good Banking and Payment Processing
– Possibility of Zero-Tax
– Low Set Up and Maintenance Costs
It is quite amusing to think that a US LLC actually makes more sense for non-US citizens than it does actual US citizens. It is quite possibly one of the best examples of how to use the flag theory to full effect.
It is incredibly easy and cost-effective to incorporate an LLC. It is actually possible to have everything up and running within as little as 1 week and for less than $500, if you are willing to do some of the work yourself. In comparison, a similar setup in Canada can cost about $2,000 to get going.
Tax Obligations for US LLCs Whose Owners Are Non-Residents
One of the most important questions that has to be shed light on has to do with the tax implications associated with the owning and operating a US LLC. It is also one of the most frequently misunderstood questions when it comes to US international tax.
The United States can potentially be one of the greatest tax heavens in the world. If a non-resident or non-US citizen sets up a US-based LLC, it can allow for completely tax-free earnings. The setup works for business models of all kinds, including:
– Freelancing
– Amazon FBA
– Dropshipping
– Consulting
– The Sale of Digital Products
LLCs are tax-transparent or pass-through entities. It means that LLCs are typically not taxed directly. Rather, the business’s tax obligations are passed through to owners. It is then up to the owners to report such on their individual tax returns.
If the owner is a resident of a country that doesn’t have a territorial taxation system or is a tax resident of nowhere, there will not actually be any tax to be paid at all. Obviously, there are some rules that have to be followed to achieve this.
To be 100 percent tax-free (at least when it comes to the US), the US LLC must meet 3 criteria:
– The owner of the LLC must be a non-resident alien
– The LLC must be 100 percent owned by a single legal or natural person
– You must not have any economic substance or presence in the United States
Who is a Non-Resident Alien?
If you aren’t any of the following, you are a non-resident alien:
– A permanent resident of the United States (i.e. Green Card Holder)
– A citizen of the United States
– You have lived in the United States for such a long time that you pass the “Substantial Presence Test.”
What Constitutes US Economic Substance or Presence?
The following is a brief breakdown of how it works:
A Non-Resident Alien is only subject to US tax on business if they are “engaged in business or trade in the US”.
You are engaged in business or trade in the US only when 2 things are true:
– You have not less than 1 “Dependent Agent” in the United States. A Dependent Agent is a company or employee that works almost exclusively for you.
– The Dependent Agent does something significant to further your business in the United States. The rule excludes purely administrative jobs.
Finally, if you are the beneficiary of an applicable tax treaty, then you will only be subject to US taxes (besides being engaged in business and trade as described above) if you operate in the United States through a “permanent establishment” such as an office or any other fixed place of business.
You are not subject to US tax on your business if you don’t meet the conditions described above. Even if the LLC sells products or offers services in the United States and earns an income, that income is never taxed in the United States.
Example #1: Consulting Agency Without Employees or Offices in the United States
A social media marketing agency provides services to US clients. The agency’s owner is based in Panama with several more employees in the Philippines. It does not have any sales agents or office in the United States. All sales are completed via automated sales systems or via phone.
The company sets up a US LLC for the purpose of billing clients and receiving payments in US Dollars in a US bank account. US clients don’t have any issues claiming the services as business expenses. The income is not taxed in the United States because the work is done abroad and the owners are non-US residents/citizens.
Example #2: Foreign Fulfillment by Amazon (FBA) Seller
A foreign entrepreneur sells products in the United States using the Amazon marketplace. He is fulfilling his orders using Amazon’s “Fulfillment by Amazon” service. All procurement and marketing are managed online by the non-US citizen, who divides his time between Colombia, Bali, and Thailand.
The products are shipped to Amazon’s warehouses directly by his suppliers and Amazon’s employees repackage and ship them to customers across the United States.
Amazon acts as an independent agent with numerous other clients. It is not working primarily for the foreign entrepreneur, which means that the foreign entrepreneur is actually not engaged in business or trade in the United States. He thus isn’t subject to income earned by selling products in the United States.
Filing Requirements for Non-US Owners of US LLCs
Non-US owners of US LLCs are required to file IRS form 5472 as of 2018. Prior to 2018, only US corporations with at least one 25 percent non-US owner were required to file the form 5472. The IRS has since then expanded the requirements. US LLC with at least one 25 percent non-US owners are now also required to file the form too.
Technically, a US LLC is only required to file form 5472 after engaging on “reportable transactions.” However, the term is defined very broadly under the law, and in most cases, it is, therefore, preferable to still file the form. After all, failure to file or incorrect filing carries a potential fine of as much as $10,000.
The Filing Procedure for Form 5472
The IRS had to make changes to form 5472 to make it useful for LLCs since it was originally used exclusively by US corporations. However, they took a shortcut and didn’t change it completely. Instead, you must attach it to form 1120, which also serves as the cover page.
To file both Form 5472 and Form 1120, your LLC must have an EIN. The Form 1120 is only to be completed partially and includes just basic identifying information and not income and tax deductions like on a complete tax return.
You will be required to report just 3 basic pieces of financial information:
– The amount of money moved from the LLC to the non-US owner in that tax year
– The amount of money moved from the non-US owner to the LLC in that tax year
– The LLC’s value as of 31st December that tax year
The form should also include a non-US taxpayer identification number for the 25 percent owner of the LLC.
Forms should be mailed to the address below:
Internal Revenue Service
1973 Rulon White Blvd.
Ogden, Utah 84201
US LLC Accounting Requirements
There aren’t any requirements when it comes to submitting the accounting of your LLC. It means that you never have to:
– Complete monthly VAT reports
– Present receipts and bills from restaurants among other places
– Ask for and store receipts.
A simple profit and loss account showing the incoming and outgoing payments is all you need. You can simply do that by having simple account statements as well as screenshots of payment platforms such as Digistore, Clickbank, Stripe, and PayPal.
You will not have to deal with tax audits or inspectors because you will not have any tax obligation when you operate the LLC as a disregarded entity.
What’s the Best State When It Comes to Opening Your LLC?
You have the choice between any of the 50 US states when it comes to registering the LLC. When you operate the LLC as a disregarded entity some of the individual differences start becoming less important. For instance, differences in the state tax rates will no longer matter, since you probably won’t be liable to pay them.
Still, there are several criteria that you can consider:
LLC Formation Cost: It is a one-time fee that you pay the state to form the LLC.
Annual Franchise Tax: It is an ongoing fee you pay to the state to ensure the compliance and good standing of the LLC. If you don’t pay the fee, you face resolution of the LLC by the state.
Anonymity: A handful of states offer anonymous LLCs. Here, the LLC’s owners are not disclosed publicly.
Other Regulations and Rules: Some of the states have more laws that benefit businesses than others. For example, Wyoming makes it very challenging to sue companies, which makes it a very appealing location for the non-resident LLC.
What’s the Best State When It Comes to Anonymous LLCs?
Only 4 states currently allow anonymous LLCs. Your options are thus limited when it comes to these. However, the states are also some of the ones with the easiest and most cost-efficient processes of incorporating LLCs.
New Mexico, Delaware, and Wyoming all let you form LLCs while ensuring that your name stays out of public records. However, you should be advised that such LLCs are obviously not 100 percent anonymous. The state will still know who owns the company.
In Delaware, you are not required to list names of managers and members of LLCs. It requires a Registered Agent to be listed, along with the organizer/incorporator. You can hire third-party providers for the services to ensure total privacy.
In New Mexico, no information about managers/members of LLCs is collected. There’s also a complete lack of annual taxes, fees, or even reports. Just like in Delaware, you will require third party providers to maintain total privacy.
Wyoming and Nevada both allow “nominee services.” If you use such services, a nominee appears in the public records as opposed to the real owners.
Side Note: No matter what setup or state is used for incorporating the LLC. If you want to register for the EIN, which is required before you get access to payment processing and banking, you will be required to disclose all your information to the IRS. However, the information isn’t being made public.
Start Filing Fee Annual Fee Anonymity
Delaware $90 $300 Yes
Wyoming $100 $ 50 Yes
New Mexico $50 $0 Yes
Florida $125 $138.75 No
A Step-By-Step Guide to Opening Your LLC
– Decide on the state where you wish to set up the LLC
– Find a suitable name for the business and compare it with your state’s database
– Find a suitable service provider for opening the LLC and serving as the Registered Agent
– Apply for your EIN
– Open bank accounts and apply with payment processors.
How Can a Non-Resident Get an EIN Without SSN?
The Employer Identification Number (EIN) is a 9-digit number that the IRS assigns to your business. It is used for identifying businesses with the IRS for tax purposes. You can think about it as a Social Security Number for the business.
It is also basically non-negotiable to have the EIN if you wish to open bank accounts and apply for merchant accounts with payment processing platforms such as PayPal and Stripe.
Banking in the United States
A company that does not have a bank account is not a real one. So, one of the key questions you should ask is how and where to get a good bank account.
There are 2 main categories:
– Traditional Banks
– Neo-Banks
To open an account with a traditional bank, the manager of the company must appear in person.
Frequently Asked Questions
What happens if you sell products online but your web host is located in the United States?
Not a problem. You are not engaged in business or trade in the United States since you are simply renting a server from the hosting provider who is an independent agent.
What If You Sell Physical Products in the United States?
Having US source income does not make you subject to US tax automatically. It is only when you are engaged in business or trade in the United States is the US source income “connected effectively” with the US business.
Is a US Address Necessary to Incorporate a Business in the United States?
No, you do not. You can use Registered Agent services to meet the requirements in your state regarding the physical address. To obtain your EIN or open a bank account, you will require a US mailing address.