How can incorporating in the United States help you reduce your tax rate, open better bank accounts, and provide protection and anonymity for you as a business owner?
While there are many places where you can incorporate, some are better than others. This is going to depend entirely on your unique situation.
In this article, we are going to discuss US LLCs and how they can work into your tax structure as a non-US citizen. We’re going to explain what you need to know to establish a non-resident LLC.
In this article, we’ll discuss:
- What is an LLC?
- Benefits of Incorporating in the US
- How does non-resident alien LLC tax work?
- Getting Caught in the US Tax Net
- Lowering Your Tax Rate
- Where to Set up an LLC
- Reporting Requirements
WHAT IS AN LLC?
An LLC is a Limited Liability Company. This is a type of business structure in the United States. It makes it so the owners are not personally liable for the company’s liabilities or debts in an attempt to protect the owner and their assets.
LLCs are tax transparent and are not taxed directly. The tax obligations are passed through to the owner.
BENEFITS OF INCORPORATING IN THE US
Most people are trying to escape from the United States and its high taxes. However, there are many benefits for non-US citizens who create an LLC. For non-citizens and non-residents of the United States, incorporating using a US LLC can actually help you lower your tax rate and provide other benefits.
Having an LLC in the United States can help you get access to good banking options for your company. The US has a decent reputation around the world and will help with your corporation’s reputation.
LLCs are easy to set up and maintain. They are also cost-effective.
HOW DOES NON-RESIDENT ALIEN LLC TAX WORK?
How do LLC taxes for non-residents work?
An LLC is considered a transparent vehicle or passthrough entity in the United States. This means that the LLC itself isn’t taxed, but the tax obligations are passed through to the owner.
If you are a non-resident of the United States, you can incorporate through an LLC in the US and not be obligated to pay US tax. Because the tax is transferred to you, the owner, who is not in the United States, you will pay tax based on the country in which you reside and their tax laws.
There are no extra LLC taxes for non-residents.
This will only work if you’ve structured your company properly. You can incorporate with an LLC in the United States, but you can’t actually operate within the country.
GETTING CAUGHT IN THE US TAX NET
If any part of your business operations actually takes place in the United States, you’ll end up caught in the US tax net.
US LLCs that are owned by a single non-resident of the United States are considered disregarded entities.
You won’t be taxed if you don’t have any assets or economic substance within the US. If you aren’t trading or doing business in the United States, aren’t living in the US, and aren’t a US person, you can have your US LLC without being obligated to pay any sort of US tax — including federal income tax, state tax, sales tax or corporate tax.
What would get you caught in the US tax net?
First, your company cannot be owned by any US tax residents. If any part of the ownership is owned by someone who is a US citizen or obligated to pay US tax, all the owners of the US LLC will be pulled into the US tax net.
This will only work if the company is completely owned by non-resident aliens of the US. A non-resident alien is anyone who is not a US citizen, a US green card holder, or does not pass the US substantial presence test — which is based on the assets and amount of time spent in the US.
You will also get pulled into the US tax net if you are engaged in trade or business in the United States. This is sometimes referred to as the ETBUS test. ETBUS is determined based on whether or not your business has a dependent agent located in the United States.
If your company has a dependent agent in the US, you will be obligated to pay US tax. A dependent agent is someone who works exclusively or primarily for you. That person performs a task that is considered substantial and furthers your business within the United States.
This doesn’t consider administrative positions. If you are employing someone within the United States who is doing administrative tasks, that person does not count as a dependent agent.
Does this mean you can’t use Amazon? No. You can still run an FBA (Foreign Fulfillment by Amazon) business. Working with Amazon wouldn’t pull you into the tax net because Amazon has many different customers; therefore, you are not the only person employing or doing business with Amazon.
LOWERING YOUR TAX RATE
After you’ve incorporated with a US LLC, you can lower your tax rate to as low as zero. How do you go about this?
The first step is to make sure you are not doing any business in the US that will get you caught in the US tax net, as we discussed above. The second step is to live in a low-tax country, zero-tax country, or territorial tax country.
Because the tax obligations are going to pass through your LLC to the owner, your tax obligation is based on where you live. If you live in a country with a low tax rate on income, then you’ll pay a low income tax. Similarly, living in a zero-tax country can lower your tax rate to zero.
Territorial tax countries are countries that only tax you on the money you make in the country. The money that you make through your US LLC won’t be taxed by your territorial tax country as long as you aren’t conducting your business within the territorial country.
WHERE TO SET UP AN LLC
Your LLC is going to be incorporated within a specific state within the United States. Different states have differences in their LLCs. So how do you decide which state to incorporate in?
Some of these differences include the cost for forming your LLC, annual franchise taxes, anonymity, as well as other laws and regulations the state places on LLCs.
You are going to have to pay a one-time fee for the formation of your LLC.
Filing fee cost examples:
- Florida – $125
- Wyoming – $100
- Delaware – $90
- New Mexico – $50
To keep your LLC in good standing and in compliance with the law, you’ll also have to pay an annual franchise tax.
Annual franchise tax examples:
- New Mexico – $0
- Wyoming – $50
- Florida – $138.75
- Delaware – $300
Only four states will let you form an LLC anonymously. An anonymous LLC will allow you to keep your name out of the public records. Now, these aren’t completely anonymous because whoever registered you and your business will know and may be asked to share this information with the state if it’s requested.
Delaware doesn’t require the members and managers of an LLC to list their names. The state does require the Registered Agent to be listed along with the incorporator or organizer. If you want to stay completely private, you’ll have to hire a third-party provider to complete these services.
If you incorporate your LLC in New Mexico, the state won’t collect any information about the members and managers of the LLC. New Mexico doesn’t have any annual reports, taxes, or fees. However, again you will need a third-party provider if you want complete privacy.
Wyoming and Nevada allow nominee services. This means you can use a nominee to appear on public records, rather than listing the names of the real owners, providing anonymity.
A Wyoming LLC is a very common type of LLC used by offshore entrepreneurs, but you’ll want to do your research to find out which state will work best for you.
HOW TO SET UP YOUR LLC
After you’ve chosen where you want to incorporate your non-resident LLC, the next step is you need to choose a name for your company. That name can’t be the same as any name that is already registered in the state’s database. After this, you’ll use a service provider to register your LLC and serve as the Registered Agent.
Next, you’ll apply for an EIN. An EIN is an Employer Identification Number. This is a 9-digit number that is assigned to your business by the IRS. This is your business’ Tax-ID and is used to help identify your business for tax purposes.
To get an EIN as a non-resident, you have to fill out Form SS-4 which is an Application for Employer Identification Number. You’ll need to fill out your business name, US business address, and explain briefly what your business’ activities and main product or service will be.
After you’ve applied for your EIN, you need to open up a bank account and apply with payment processors. Your company will need a bank account in order to operate.
Non-US residents can open bank accounts in the United States. Opening a bank account is fairly easy. Due to Know Your Customer (KYC) standards, it works best when you open your account in person. However, it is possible to open an account online.
Foreign-owned LLCs have three filing requirements: Forms 5472 and 1120, the Foreign Bank Account Report (FBAR), and a 1040-NR.
Form 5472 used to be used only by US corporations, but in recent years the filing laws have changed. Form 1120 is now attached to Form 5472. The proforma form serves as a cover page. Form 5472 has you report three things from that tax year, including the value of your LLC, the amount of money moved from the non-US owner to the LLC, and the money moved from the LLC to the non-US owner.
You’ll need to include your EIN on the forms. These forms are going to be due yearly on April 15th.
If you are trying to decide where to register your business as a non-US citizen and non-US tax resident, consider registering an LLC in the United States. This can help you to lower your tax obligations, open a bank account, and protect your business.
You won’t get pulled into the US tax net by establishing an LLC as long as you don’t actively engage with or trade within the United States.
Once you decide in which state you want to incorporate, setting up your LLC is easy and can be done pretty much anonymously.
Overall, an LLC for non-US persons is a great option that you might want to include in your tax plan.