Understanding US LLC as a Non-US Resident

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Forming a limited liability company (LLC)—a popular choice amongst entrepreneurs—is not restricted to U.S. residents.

Be it saving on corporate taxes, shielding personal assets, or gaining credibility, the advantages of having a US-based LLC are understood globally.

For non-US residents contemplating establishing an LLC, it's important to understand the process involved.

Since too many building blocks are involved in this complex process, we have simplified it into digestible points.

Why Opt for a US LLC?

When you are setting up an LLC in the U.S. as a non-U.S resident, several advantages come into play.

Pass-through entity

One of the major benefits of having a US LLC is that it is considered a pass-through entity. This means the LLC does not pay taxes; instead, the profits from an LLC pass through to its members or owners, who then report this on their individual tax returns. This approach sticks out the burden of double taxation.

Estate planning

As a non-US resident, setting up a US LLC can serve as an effective tool in estate planning. The LLC, rightfully owned by current estate owners, transparently transitions assets to heirs without the compulsion of probate court proceedings.

Credibility

Being a part of a US-based LLC increases your credibility in dealings with local or international markets due to stringent governance regulations. Brand reputation is oftentimes augmented due to a better reassuring loanability quotient of US entities.

Asset protection

Through LLC, it gives an added layer of protection to the personal assets of the member against business liabilities. In the event of a lawsuit or claims against the LLC, the assets of the individual owners aren't directly at risk.

Lower tax rates

When compared to corporate income tax rates, LLCs enjoy significantly lower rates, which is an integral advantage for Non-US residents.

Fewer ownership restrictions

US LLCs provide flexibility in ownership with no limit to the number of allowed members and permit non-US residents as owners – a significant edge over corporate counterparts.

Filing convenience

Less stringent reporting and compliance requirements make handling mandatory governmental procedures of these entities easier, compared to US corporations.

Increased autonomy

LLC owners, known as members, have more autonomy to run the company according to their whim, are not obligated to hold annual meetings or create bylaws, more freedom compared to shareholders of US corporations. Hence, managing an LLC becomes much more streamlined.

Privacy

Through an LLC, a non-US resident can uphold privacy as, unlike some counties, US jurisdiction doesn't publicly disclose the LLC owners' names, ensuring a protective guard over the identities of its members.

Attracting Investors

Lastly, US LLCs attract more potential investors due to the perceived stability of the US business environment and a wide array of investment provisions and benefits. This increased interest from investors directly impacts the growth and expansion of the company.

How To Set up a US LLC as a Non-US Resident?

The process of setting up an LLC in the U.S. can be a detailed and, at times, complex task to fit into the varied federal, state, and local compliance requirements which vary by state. However, generally, you’ll need to follow these steps:

Selection of state

Purposefully navigate where to establish your LLC in a state that aligns best with your business needs. Each state in the U.S. offers different advantages and legal/state fee nuances.

Business naming and registering

  • Select a commerce-friendly business name and keep it distinctive yet identifiable. It needs to comply with the specific LLC naming requirements of the state.
  • Post this, and submit your desired LLC’s name online to check for availability and prevent duplication.
  • Finally, registration comes into play which usually requires submitting your name and business-specific documents via the Secretary of State’s website of the intended state.

Designate a registered agent

A registered agent is necessary on your LLC formation papers. They are typically an individual or business entity authorized to do business in your chosen state of formation, who agrees to accept official mail and legal papers on behalf of your LLC.

Obtain an Employer Identification Number (EIN)

An EIN is also known as a Federal Tax Identification Number and is needed for tax purposes. Non-US residents can obtain an EIN from the IRS by submitting Form SS-4.

Develop an operating agreement

Though not every state requires an LLC operating agreement, it is a critical document that outlines the ownership and member duties of your LLC. It essentially acts as a roadmap for how the LLC is to be managed, and concisely breaks down what to do in case of disputes, member exits, addition of new members, and so on. Having no such agreement could lead to operational issues down the line.

Open a U.S. bank account and capitalize the LLC

Next, you'll need to open a bank account in the U.S., making management of your finances easier, keeping your company funds separate and well organized. To open an account, you'll require your EIN, a copy of the LLC formation documents, and a resolution identifying authorized signers if those names are not specified in the articles of organization.

Apply for any necessary business licenses and permits

It's important not to overlook the step of acquiring relevant business licenses and permits for operating your LLC in the United States.

This could refer to a general business report (typically annually), professional licensing; this depends on your business nature and varies drastically by state — and properly set up sales tax collection if appropriate.

Annual report submission

Most states require an annual report submission from LLCs operating there, to keep their information updated in the state's records for public use. Understand the due dates and filing procedures as per the state your LLC is registered in.

Types of LLCs for Non-US Residents

Based on its structure and function, an LLC can differ in numerous ways. This makes it essential to understand the type of LLC that's best suited to your needs.

Single-member LLC

The simplest structure, a single-member LLC is perfect for an individual seeking to start a business size-affordably and efficiently.

Single-member LLCs ensure protection and separation on a personal liability level, creating a distinction between personal and business assets.

Multi-member LLC

Multi-member LLCs contain more than one owner and provide a useful operative business setup where several players can come together to pool their skills and resources. While it offers the same inherent benefits of protection and flexibility, the administration of a multi-member LLC can be more intricate due to the management of more relationships and dynamic roles.

Effective communication and coordination play a critical role in such configurations.

Managed LLC

In a managed LLC, the members appoint a management team or managers who run the day-to-day operations. The members primarily act as owners or investors, while the responsibility of active management rests with the designated managers. This arrangement allows the owners to focus on strategic business aspects and shifts the operational execution to the management team.

Member-managed LLC

Contrary to managed LLC, in a member-managed LLC, the accountability of running day-to-day operations lies on the owners themselves. This structure is more common in small businesses or single-member LLCs where the owner prefers a hands-on approach to managing the company.

The owners, in this configuration, have the power over routine business decisions, which bypasses the need for a dedicated management team.

Series LLC

The series LLC structure is unique by offering the possibility to create “child” LLCs under one “Parent” LLC for the business intending to operate separate divisions or enterprises.

Each child LLC operates as a separate entity, having its unique members, managers, and assets, offering that siloed liability protection while maintaining centralized governance.

Which Type of US LLC Is Best Suited for You?

The decision to select what kind of LLC structure suits best highly depends on your business needs and your management structure. Be it you're an investor who prefers the hands-off approach, leaving the operations to a skilled team, you would lean towards a managed LLC.

On the other hand, if you are a small business owner or a solopreneur who prefers to have greater control over daily business activities, a member-managed LLC or single-member LLC may work better for you.

Additionally, if you plan to operate multiple separate sectors of a business while enjoying a centralized administration, a series LLC could be your ideal option.

Remember, while choosing, your focus should lie not only on your present requirements but also on your future growth expectations.

What Forms Are Required To Establish an LLC?

There are several forms required to create an LLC, largely dependent on the specifics of your business and the state in which you choose to form your LLC. However, some universal forms exist:

  • Articles of organization: This document is filed with the state to officially establish your LLC. It typically requires your business name, address, and owner information.
  • EIN application (Form SS-4): To receive your EIN for tax purposes, this form must be filed with the IRS.
  • Operating agreement: Most states don't require these to be filed, but they set an indispensable precedent for managing the internal operations of your LLC.
  • Business license/permits: Depending on your LLC's activities and the location of your business, different licenses and permits might be needed.
  • Annual reports: In most states, an annual report must be filed detailing your LLC's finances and updating any changes in membership or business activities.
  • Foreign qualification (if applicable): Businesses that operate across state lines may need to file a foreign qualification in each state they conduct business.
  • Sales tax permit: If your LLC sells taxable goods or services, you are typically required to obtain a sales tax permit.

US-source income vs foreign source income

US-source income and foreign-source income are two major classifications used for specifying the locality of an individual's or a corporation's derivative income. Understanding the nature of these types of incomes is critical for taxation purposes.

US-source income

This refers to earnings made within the bounds of the United States. It typically includes salaries, wages, services performed, capital gains made on US property, dividends, royalties, and rent from properties within the United States among others.

Taxation policies vary for US citizens residing within or outside the US, permanent residents, as well as foreign entities earning from US-source income.

Foreign source income

Contrarily, foreign source income is money earned from conducting business activities or services outside of the United States. These earnings can include international investments, business operations, and services performed outside the territorial perimeters of the US.

The US taxes its citizens, permanent residents, and even some businesses on their aggregated earnings, including both US and foreign source income. However, mechanisms like foreign earned income exclusion, foreign housing exclusion or deduction, and foreign tax credits offer relief and prevent double taxation on foreign income.

As someone investing or conducting business both domestically and internationally, it's important to consult with a tax advisor well-versed in international taxation matters to maximize your earnings and operate within compliance with all taxation laws.

Frequently Asked Questions

What is the best state to form my LLC in?

The best state to form an LLC greatly depends on your specific circumstances. However, Delaware, Wyoming, and Nevada are often favored due to their business-friendly laws and regulations. For many businesses, it's most practical to form an LLC in the state where they conduct the most business.

How much does it cost to form an LLC?

The costs to form an LLC vary significantly from state to state and would also depend on any applicable filing fees, annual report fees, and perhaps the cost of assistance from a lawyer or a professional filing service.

What qualifies as US-source income?

US-source income refers to all income earned within the United States. This typically includes salaries, wages, rental income from US properties, dividends, royalties from US copyrights or patents, income from businesses operating in the US, and capital gains on US property.

What is considered a foreign source of income?

Foreign source income means any income generated outside of the consequences of the United States. It ensues from business operations, investments, and services performed overseas.

Can I convert my existing business into an LLC?

Yes, businesses can typically be converted into LLCs regardless of their former structure. The process involves a few steps such as drafting and filing a 'Certificate of Conversion' with your State's Secretary of State, along with Articles of Organization for the new LLC. Additionally, you'll need to cancel licenses and permits issued to your previous business and apply for new ones for the LLC.

Are LLCs subject to double taxation?

Typically, LLCs are “pass-through” entities for tax purposes. This means that their profits are only taxed once, with the income passing through to members who report it on their individual tax returns.

Therefore, LLCs usually avoid the double taxation that's common with corporations, where profits are taxed at both the corporation level and again when distributed to shareholders.

How can US taxable income include foreign source income?

The United States taxes its citizens, permanent residents, and some businesses on their worldwide income, regardless of where they reside or where their income is sourced. Therefore, any income earned overseas is also subject to US taxation. However, numerous tax provisions and treaty agreements exist to prevent double taxation on this overseas income.

Various exclusions, deductions, and foreign tax credits are available to minimize or eliminate any additional US tax liability on foreign source income, with common aids including the:

  • Foreign earned income exclusion
  • Foreign housing exclusion or deduction, and
  • Foreign tax credit

Is it necessary to have a physical office for my LLC?

Having a physical office space is not usually a mandatory requirement for an LLC. However, you'll need a registered agent with a physical street address in the state of your formation or qualification.

This agent serves as the recipient of official paperwork related to the business. Some states and circumstances may necessitate a physical office.

For instance, if your LLC had employees working in a different state, you might need to register for a foreign qualification in that state, which typically requires a physical address.

What kind of liabilities are LLC members exposed to?

Limited liability companies (LLCs) are structured to protect members from personal liability for the company's debts or obligations. This means that members' personal assets, like houses or personal savings, are generally protected if the business fails or faces legal troubles. However, this protection isn't absolute and doesn't cover personal wrongdoing, such as fraudulent activities.

What is considered a “US-resident alien” for tax purposes?

A “US-resident alien” is usually an individual who is not a US citizen, but has passed the substantial presence test, or holds a green card. Such individuals are treated as residents for tax purposes and are typically taxed on their worldwide income, similar to US citizens. However, they may also take advantage of certain international tax treaties or exemptions akin to those offered for foreign source income.

How does a tax treaty affect my income taxation?

Tax treaties are agreements between two countries designed to avoid double taxation of income earned in both countries. If such a treaty exists between the United States and another country, it may significantly impact how your income is taxed. Such treaties typically prescribe reduced rates of tax for various types of income, the process for claiming benefits under the treaty, prevention of discrimination based on nationality, or mechanisms for the resolution of tax-related disputes. Navigating tax treaty provisions can often be complex and professional advice is generally recommended.

What is considered a “single-member” LLC and a “multi-member” LLC?**

A “single-member” LLC is a Limited Liability Company with one owner, while a “multi-member” LLC refers to an LLC with two or more owners. These distinctions primarily affect the tax status of the LLC.

A single-member LLC is typically treated as a “disregarded entity” for tax purposes, like a sole proprietorship, while a multi-member LLC is treated as a partnership unless it elects to be taxed as a corporation.

All members of multi-member LLCs share in the profits, losses, and liabilities in accordance with their agreed-upon percentages in the company's operating agreement.

Can I have LLCs in multiple states?

Yes, you can establish LLCs in multiple states often by registering for “foreign qualification” in each additional state where you want to do business. It generally makes sense to form an LLC in a state where your business is physically located or where it conducts significant business activity.

When an LLC operates in states other than the state of its formation, it must typically register as a “foreign” LLC in those states and comply with the individual reporting and taxation requirements of each state.

It's crucial to note that establishing LLCs in multiple states might increase administrative responsibilities, require additional fees, or subject you to multifarious taxation.