US LLCs can be one of the best legal entities for non-US entrepreneurs. They enable access to all the benefits of a first world jurisdiction, such as banking, payment processing, and good reputation, while maintaining a relatively low tax rate and manageable levels of compliance requirements.
The following article will tell you everything you need to know, to decide if an LLC is a good option for you, how you can open it fast and compliant, and everything else you need to pay attention to when running it.
The Benefits of the USA as Jurisdiction
There are many good reasons for operating through a business registered in the USA.
Among them are:
⭐️ Very good reputation
⭐️ Internationally competitive set-up and maintenance costs
⭐️ Low barriers to entry
⭐️ Reliable access to good banking & payment processing
⭐️ A favorable tax system
LLCs are easy and straight-forward to incorporate (it’s actually called ‘organizing’ in this case). You do not require a lawyer and therefore setup costs are well within range for founders all over the world. You can have everything set up and running within a week, and for less than 500$, if you choose to do some of the work yourself. A similar company form in Canada will cost you about 2000$ to get going.
The USA continues to be one of the leading economies in the world. As such, companies registered here enjoy a high level of trust around the world. Your customers will have no issues deducting invoices coming from your company.
Set-Up and Maintenance Costs
Thousands of LLCs are being organized all across the USA on a daily basis. As such, there is a competitive industry aiming to acquire your business, and most services related to LLCs can be obtained at very affordable rates.
Tax Obligations for 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 can work for all sorts of different business models:
- Consulting & other personal services
- Selling digital products
- Amazon FBA
The Single-Member LLC
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 (members) of the LLC. They then report them on their personal tax returns.
In cases where there are no tax obligations on the US side, and where 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.
In order to determine the appropriate taxation on the US side, we look at the IRS Taxation of Nonresident Aliens
A US LLC has to meet three criteria, in order to not be subject to US federal income tax
- Be 100% owned by non-US tax residents (either natural or legal persons)
- Have no US presence or economic substance
- The income must not be “effectively connected”
Who Is Considered 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.”
If any of the above three categories is true for you, then any income generated through an LLC owned by you, will automatically be subject to US tax.
What Constitutes US Presence or Economic Substance (Nexus)?
Here is how it works:
- As an NRA, you are subject to US tax on business income 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 (automatically) subject to US tax on your business.
Even if the LLC generates income in the US, by offering services or selling products into the US, that income is not taxed in the US.
Determining Source of Income
|Nonresident Aliens – Source of Income|
|Where services performed|
Sale of inventory -purchased
|Interest||Residence of payer|
|Dividends||Whether a U.S. or foreign corporation*|
|Rents||Location of property|
Patents, copyrights, etc.
|Where property is used|
|Sale of real property||Location of property|
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.
Filing & Reporting Requirements For Foreign-Owned LLCs
There are three primary filing requirements that affect foreign-owned, single-member LLCs.
- Form 5472 + 1120
In 2017 the United States underwent a major tax reform. It significantly expanded filing requirements, and also increased 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$.
IRS Form 5472
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 & Bookkeeping For US LLCs
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.
Best US State to File LLC
You have the choice between any of the 50 US states, when registering your LLC. As a non-resident with an LLC treated as a disregarded entity, some of the differences between the states become less important. Differences in state tax rates won’t matter for example, as you will aim to be not 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 registered agent always has to know who is behind an LLC, and disclose this information to the state upon request.
- 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.
|State||Filing fee||Annual fee||Anonymity|
ULTIMATE GUIDE TO OPEN YOUR OWN LLC
In the following section, I am going to show you step-by-step, how to set up your own LLC, receive your EIN from the IRS in record time, open bank accounts fully remotely, and finally how to get payment processing (Stripe) and Paypal, so you can start billing your clients.
- 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.
Bank Accounts for a Foreign-Owned 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.
Opening Accounts Remotely
As part of their KYC (Know-Your-Customer) guidelines, traditional banks will require a representative of the company to personally appear at a branch.
There are however some fintechs and neobanks that will allow you to do the verification without having to be physically present.
As of December 2020, there are three neobanks or fintechs that will open accounts with US banking details for non-resident owners of LLCs, fully remotely.
These three options are:
Opening Accounts in the USA in Person
When you actually step foot into the US, opening accounts for your LLC becomes quite easy. There are literally a hundred options available, including many of the big banks like Chase, Wells Fargo, Bank of America, TD Bank and many others.
Remote Account Opening through Service Providers
There is the option to open accounts without initially having to travel to the US. Through intermediaries that are given power of attorney, you can also open accounts. Often the banks will require a personal visit at some point however.
Need Help Setting-Up Your LLC
At Globalization Guide, we offer the full spectrum of LLC formations and management.
✅ LLC Formation in all states, incl. Wyoming, Delaware, New Mexico, and Florida
✅ Expedited EIN application
✅ Banking & payment processing support
✅ Filing and bookkeeping
Alternatively, follow my guide, on how to open your own LLC fast, easy, and cost-effective with Incfile:
The Most Common Misconceptions I see
The most common
Frequently Asked Questions
Some of the most commonly asked questions about using a US LLC as a non-resident.
No problem. Since you’re renting the server from an independent agent (the hosting provider), you are not ETBUS.
LLCs are required to have a registered business address. This does not have to be an actual physical address. I recommend using a virtual address service for your business address. This is very useful when applying for your EIN or opening bank accounts.
Even if you do not have any US income tax obligations, and do not file a 1040-NR, there are still record maintenance requirements for your LLC. Since you will be required to file Form 5472, you are required to keep permanent books of account or records sufficient to establish the correct of the filed information (Section 6001).