US LLCs can be among the best company forms for non-US citizens, to enjoy all the benefits of a first world jurisdiction, with the tax-rate and low level of the bureaucracy of offshore companies in tax havens.
Table of contents
- Benefits of choosing the USA for your business
- Tax obligations for US LLCs with non-resident owners
- New filing requirements for your LLC
- What is the best state to open my LLC?
- Step by step guide to form your LLC
- Setting up banking for your LLC
- Need help setting up your LLC?
- Frequently Asked Questions
Benefits of choosing the USA for your business
⭐️ Low set up and maintenance costs
⭐️ Zero-tax possible
⭐️ Good banking & payment processing
⭐️ Good reputation
It’s pretty amusing to think, that a US LLC actually makes more sense if you are NOT a US citizen, than if you are. This might actually one of the best examples of how the flag theory can be used to full effect.
LLCs are easy and cost-effective to incorporate. You can have everything set up and running within a week, and for less than 500$, if you choose to some of the work yourself. A similar setup in Canada will cost you about 2000$ to get going.
Tax obligations for US LLCs with non-resident owners
The tax implications of owning and operating a US LLC are clearly one of the most important questions that we have to shed light on. This is also one of the most often misunderstood questions in all of US international tax.
The USA can be one of the biggest tax havens in the world. A US-based LLC opened by a non-US citizen or non-resident can allow for earnings, that are completely tax-free.
The setup will work for all sorts of different business models:
- Selling digital products
- Amazon FBA
An LLC is a pass-through or tax-transparent entity. That means the LLC is not being taxed directly. Instead, the tax obligations of the business pass through to the owners. They then report them on their personal tax returns.
If the owner is a tax resident of nowhere or a resident of a country with a territorial taxation system, there won’t be any tax to pay at all.
There are of course certain rules that need to be followed, in order to achieve this.
A US LLC has to meet three criteria, in order to be 100% tax-free (at least on the US side):
- Be 100% owned by a single natural or legal person (a single-member LLC, SMLLC)
- The owner is a non-resident alien
- You must have no US presence or economic substance
When are you a non-resident alien (NRA)?
You are a non-resident alien if you are not any of the following:
- A US citizen
- A US permanent resident (i.e. “green card holder”), or
- You have lived in the US enough time to pass the “substantial presence test.”
What constitutes US presence or economic substance?
Here is how it works:
- As an NRA, you are subject to US tax on business income only if you are “engaged in a trade or business in the United States“, short “ETBUS”.
- You are ETBUS only if two things are true: (i) You have at least one “dependent agent” in the US. Dependent agents are employees or companies that work almost exclusively for you. And (ii) that dependent agent does something substantial to further your business in the US. Purely administrative jobs are not included under this rule.
- Finally, if you can benefit from an applicable tax treaty, then you’re only subject to US tax if (in addition to being ETBUS) you operate in the US through a “permanent establishment” (e.g. an office or other fixed place of business).
If you don’t meet those conditions, you are not subject to US tax on your business.
Even if the LLC generates income in the US, through offering services or selling products into the US, that income is not taxed in the US.
Example #1: Consulting agency without offices or employees in the US
A social media marketing agency is performing work for US clients. The owner is located in Panama, with a few additional employees in the Philippines. It has no US office or sales agents. All sales are done via phone or automated sales systems.
The company opens a US LLC to bill their clients, and to receive payments in USD in a US bank account. The US clients have no issues claiming the services as business expenses. Since the work is performed abroad, and the owners are non-US citizens/residents the income is not taxed in the US.
Example #2: Foreign Fulfillment by Amazon (FBA) seller
A foreign entrepreneur uses Amazons marketplace to sell products into the US. He is using Amazon’s “Fulfillment by Amazon” service to fulfill his orders. All marketing and procurement are managed online by the non-US citizen, who divides his time between Thailand, Bali, and Colombia.
His supplier ships the products directly to Amazon’s warehouses, where Amazon employees repackage and ship them to customers all over the US.
Amazon acts as an independent agent with millions of other clients. Amazon is not primarily working for the foreign entrepreneur. Therefore the foreign entrepreneur is not “engaged in a trade or business in the US”. He is therefore not subject to income from selling products into the US.
New filing requirements for your LLC
In 2017 the United States underwent a major tax reform. It significantly expanded the filing requirements, and also increased the penalties for not filing or filing incorrectly.
Before the tax reform, (only) US corporations with at least one 25% non-US owner or foreign corporations with US trade were required to file the IRS form 5472. Foreign-owned, single-member, disregarded LLCs were exempt from this requirement.
This all changed, and as of 2018, non-US owners of a US LLC will have to file the IRS form 5472 as well.
Technically, a US LLC only has to file this form if it has engaged in “reportable transactions.” Unfortunately, the tax laws define this term very broadly, and therefore in most cases, it’s better to still file the form. Especially since failing to file, or filing incorrectly, carries a potential fine of up to 25.000$.
Since the form 5472 was used only for US corporations before, the IRS had to make changes to make it useful for LLCs. They took a shortcut, however, and did not change the form completely. Instead, you have to attach it to a pro-forma form 1120, that serves as a cover page.
Your LLC must have an EIN in order to file Form 5472 and Form 1120.
The due date for form 5472 is April 15th.
The Form 1120 will be only partially completed and includes only basic identifying information, not income and tax deductions like on a complete tax return.
On the Form 5472 you will report only three basic financial information:
- The value of the LLC as of the 31st of December of the tax year.
- The amount of money moved from the non-US owner to the LLC in the tax year.
- The amount of money moved from the LLC to the non-US owner in the tax year.
Additionally, the form must also include a non-US taxpayer identification number for the 25% owner of the LLC.
Unfortunately, it’s not possible to e-file this form. You must either mail it or fax it to the IRS, using the following address:
Internal Revenue Service
1973 Rulon White Blvd.
M/S 6112, Attn: PIN Unit
Ogden, Utah 84201
Accounting for a US LLC
There are no requirements to submit the accounting of your LLC.
So you won’t have to
- ask for and store receipts
- present bills and receipts from restaurants and other places
- complete monthly VAT reports
All you need is a simple profit and loss account, that shows incoming and outgoing payments. You can accomplish that by having simple account statements and screenshots of Payment platforms like Paypal, Stripe, Clickbank, Digistore, and others.
Since you won’t have any tax obligation, when you operate your LLC as a disregarded entity, you won’t have to deal with tax inspectors or audits.
What is the best state to open my LLC?
When it comes to registering your LLC, you have the choice between any of the 50 states of the US. Some of the individual differences become less important when you operate your LLC as a disregarded entity. Differences in state tax rates won’t matter for example, as you will most likely not be liable to pay them.
There are however still a number of criteria that you can consider.
- LLC formation cost: A one-time fee paid to the state to form your LLC.
- Annual franchise tax: An ongoing fee paid to the state to keep your LLC in compliance and good standing. Failure to pay this fee will usually result in the state resolving your LLC.
- Anonymity: A small number of states offer anonymous LLCs. Here the owners of the LLC are not publicly disclosed.
- Other laws and regulations: Some states have more beneficial laws regarding business than others. Wyoming makes it very difficult for example to sue companies, which makes it a very attractive location for a non-resident LLC.
What is the best state for an anonymous LLC?
There are only four states that allow anonymous LLCs. Therefore your options for these are limited. However, these states are also among the states with the easiest and most-cost efficient incorporation processes.
Wyoming, Delaware and New Mexico allow you to form LLCs, while keeping your name out of public records. Be advised that these LLCs are not 100% anonymous of course. The state will still know the owner of the company.
- Delaware does not require listing the names of members and managers of LLCs. It does require a Registered Agent to be listed, as well as the incorporator/organizer. To maintain complete privacy it is required to hire third-party providers for those services.
- New Mexico does not collect any information about members/managers of LLCs. There is also a complete lack of annual reports, fees or taxes. Similar to Delaware, to maintain complete privacy you will need third-party providers.
- Nevada & Wyoming both allow “nominee services.” When you use those services, a nominee will appear in the public records, instead of the real owners.
Side-note: No matter what state or setup you use to incorporate your LLC. When you want to register for an EIN, which you will need to get banking and payment processing, you will have to disclose all of your information to the IRS. This information is not being made public though.
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Step by step guide to form your LLC
- Decide on the state for your LLC
- Choose a name and compare it with your state’s database
- Use a service provider to open your LLC and serve as your Registered Agent
- Apply for an EIN
- Open bank accounts and apply with payment processors
Requirements to form and operate an LLC
Tax-ID for your company – EIN: Employer Identification Number
The EIN (Employer Identification Number) is a unique 9-digit number assigned to your business by the IRS.
The EIN is used to identify a business for tax purposes with the IRS. Think of it as a Social Security Number for your business.
You will need this number in order to fulfill the filing requirements for your LLC. Having an EIN is pretty much also a non-negotiable when opening a bank account, or applying for merchant accounts with payment processors like Stripe or Paypal.
How to get an EIN as a non-resident without SSN or ITIN
To apply for an EIN you will need to fill out Form SS-4 “Application for Employer Identification Number”.
To obtain an EIN, you need three things:
- a business name
- a US business address
- a brief explanation of the principal business activity and principal product or service the business will offer or sell.
Setting up banking for your LLC
A company without a bank account is no real company. Aside from receiving wire transfers, paying bills and invoices, you will also need a bank account to use for your merchant accounts and payment processors.
So one of the most important questions to ask is, where and how to get good bank accounts.
There are two categories:
- Traditional banks, like Bank of America, Chase and so on
- Neo-Banks, like TransferWise
The traditional banks generally have higher requirements and internal compliance guidelines. It’s generally not possible to open those accounts remotely. The owner or company manager has to appear in person.
Opening an account with fintechs and neobanks is usually simpler. Their KYC requirements are lower, and there are several options that can be done remotely. Since the available options change regularly, we haven’t included them here. Feel free to reach out, if you need help.
Need help setting up your LLC?
At Globalization Guide we offer the full spectrum of LLC formations and management.
✅ LLC formation in Wyoming, Delaware, New Mexico and Florida
✅ Obtaining an EIN
✅ Filing and bookkeeping
✅ Banking & Payment Processing
Frequently Asked Questions
What if, I sell products online, and my web hoster is located in the US?
No problem. Since you’re renting the server from an independent agent (the hosting provider), you are not ETBUS.
What if I sell physical products into the US?
Having US source income doesn’t make you subject to US tax by itself. Only when you are ETBUS is your US source income “effectively connected” with your US business.
Do I need a US address to incorporate a business in the US?
No, you don’t. You can use Registered Agent services, to meet the state requirements related to a physical address. In order to open a bank account or to obtain an EIN (tax ID), you will need a US mailing address.