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LLC For Non-Residents
After generating income from US clients for a while, non-resident entrepreneurs want to form an LLC in the US.
Due to tax benefits and currency conversion benefits, forming an LLC has become an attractive option to many.
In this guide, we’ll cover how a non US-resident can form and operate an LLC without ever having to visit the US.
Let’s start with the basics.
US Residency
Who Is a US Resident?
If you are not a US citizen, you are a non-resident unless you meet 2 conditions:
- You have a green card.
- You pass the substantial presence test i.e, you are physically present in the US for 31 days of the current calendar year and 183 days during the last 3 years(including the current year).
And this goes without saying: if you have never been to the US, you are a non-resident.
Now that you’ve determined whether you’re a resident or not, let’s understand LLC in depth.
Definition
What Is An LLC?
LLC is a business entity which is like a hybrid between a corporation and a sole proprietorship.
LLC, or a Limited Liability Company, is a business entity which is like a hybrid between a corporation and a sole proprietorship.
It gives business owners protection from personal liability (like a corporation) and is a pass-through entity (like a sole proprietorship).
Limited liability: means the owner’s assets are protected if something goes wrong with the business. People can only sue the LLC, not the owner.
Pass-through entity: means the income generated by the LLC is passed through to the owner. No income tax is levied at the LLC level.
LLC is governed under the state statutes and can be formed in any of the 50 states. LLC, along with C-corp are the 2 entities that can be formed by non-residents in the US.
Ownership of LLC
Who Can Own An LLC?
An LLC can be formed by one or more owners. Those owners are referred to as members of the LLC.
A member can be either an individual, a company, or a partnership. There is no restriction here.
However, an LLC cannot issue stock to its members. It has something called membership units, which is the LLC’s version of stock. It is divided based on what is agreed on in the LLC’s operating agreement.
This is not like a corporation where the number of shares determines the ownership.
And IRS, the tax authority of the US government, considers an LLC as an extension of its owner, not as a separate entity.
That’s why the income is passed through to the members of an LLC.
Advantages
What’s So Special About An LLC?
Limited liability
Limited liability is the protection members get from debts and liabilities of the LLC. It keeps their personal assets safe in case the LLC gets sued or has huge debts. This is important, especially when you’re residing outside the US.
Low formalities
LLCs are relatively easy to form and maintain. There are only a few annual reports(sometimes none) as compared to corporations.
Affordable maintenance costs
Annual fees, state taxes, and other compliance for a US LLC is kinda low. Under most circumstances, you don’t even have to spend a lot on lawyers and CPAs.
Access to banking, payments, etc
Having a US LLC gives a non-resident access to the best of first-world jurisdiction, including business bank accounts from reputable banks, payment processing from Stripe US & PayPal US, Shopify Payment, and other financial perks, etc. You’ll also have access to loans and other grants offered by various international institutions.
Disadvantages
When Is LLC Not Right For Me?
Cannot issue stock
LLC cannot issue stock to its employees, contractors, investors, or anyone else. This could be a bummer since most startups would want to issue shares to attract a talent pool.
Difficulty in raising capital
A lot of startups want to register their business in the US, with the hopes of raising venture capital. But since LLC cannot issue stock, it’s very difficult(almost impossible) to raise venture capital. You could convert to C-corp if you wish to raise capital.
Piercing corporate veil
With an LLC, you’ll have to open a business bank account in the US and have all the business transactions happening through the bank. If you use the business income for your personal expenses, you’ll sort of lose the liability protection and may even be liable for bigger fines.
Types of LLC
Which Type Of LLC Is Ideal For Me?
The LLC you form will typically fall under 3 categories: Single-Member LLC, Multi-Member LLC and LLC elected to be treated as a corporation.
Single-Member LLC
This is also known as a disregarded entity because IRS doesn’t treat the LLC separately from its owner.
Members
Has only a single member
Tax classification
By default, IRS treats an LLC with a single member as a sole proprietorship.
Tax payment
There is no income tax paid by the member for non-US source income.
Multi-Member LLC
Multi-member LLC is like a general partnership but with limited liability. The LLC is not treated as a separate tax entity from the partners.
Members
Has 2 or more members
Tax classification
By default, IRS treats an LLC with 2 or more members as a general partnership
Tax payment
There is no income tax paid by the members for non-US source income.
LLC As a Corporation
An LLC can elect to be treated as a corporation by filing a form with the IRS. Post that, taxes are paid like a corporation.
Members
Has single or multiple members
Tax classification
IRS treats the LLC as a corporation
Tax payment
Income taxes are paid by the LLC at corporate income tax rate and are not passed on to its members. Most non-residents don’t elect their LLC to be treated as a corporation, though.
Taxes
What Are My Tax Obligations?
The US is a very business-friendly country — no surprises there.
They even encourage businesses run by non-residents. Formalities for non-residents are limited.
Before 2017, if a company owned by a non-resident did not have any US-sourced income, it didn’t have to file any forms at all.
Things have changed a bit after that. Now, there are a couple of forms to fill out, even if you don’t have any taxes. But it is not that complex. We’ll see them soon.
Okay. So, when should non-residents pay taxes?
Non-residents pay US income taxes if they have US source income, FDAP, or the US Effectively Connected Income.
Ok, so knowing what US-source income is and what is not is kinda important. There is no one-size-fits-all answer to this. Classifying an income as US-sourced is dependent on the exact business you do.
Let’s take an example. Say you have an LLC that provides IT services to clients in the US and also creates digital products. You don’t have any offices, employees, exclusive contractors, or exclusive agents in the US. Everything is fully operated from your home country, let’s say, Columbia. You may have two streams of income: Software consulting and mobile app revenue.
Software consulting
Since your operations are in Columbia, this income is considered a foreign source and NOT US sourced. No federal taxes here.
Mobile app revenue
Payments from the App Store or Play Store on your apps/games are usually considered royalties, and they are considered a US-source income. Tax on this income is withheld at the LLC and is paid to IRS (usually, royalties are taxed at 30%).
This can get tricky easily, though.
There are other types of taxes as well: Payroll tax, franchise tax & state sales tax.
Payroll tax
If the LLC hires an employee in the US, LLC will have to pay payroll taxes for each employee. Social Security tax, Medicare taxes, and unemployment insurance are commonly referred to as ‘payroll taxes.’ Half of this tax amount is collected from the employee’s paycheck. And the other half is contributed by the LLC.
Franchise & excise taxes
Most states charge an annual fee from LLC, often called “franchise taxes,” “renewal fees,” or “annual registration fees.” In certain states, this is the only state income tax. Different states calculate this in different ways. Most states have a fixed fee between $50 – $800. For example, Delaware charges $300, and Wyoming charges $50 annually.
Excise taxes are typically imposed on manufacturers and retailers based in the US. Not very common; however still important to many types of businesses.
Sales tax
If you are selling physical goods in any of the states (like Amazon FBA) or digital products, then you are liable to collect sales tax from customers and deposit it to respective states. In most cases in an FBA, Amazon collects this from the customers.
When to Pay Taxes?
If there is a US-source income, then you will have to estimate the annual income for each member ahead of time and split it into 4 quarterly payments. This is referred to as estimated taxes.
So, should all members in the LLC pay taxes this way?
Yes. You’ll have to split the total estimated tax into 4 and pay in April, June, September, and January.
IRS is pretty serious about this.
They charge a penalty if you fail to pay an installment or pay it late.
So, keep this in mind.
Forms to File
Even when your LLC may not have taxes to pay, there are some annual forms to be filed.
Here are some of them.
Depending on the source of income, number of members, and other factors, your LLC may have to file some of these:
Single-member
- Form 5472 with pro-forma Form 1120
- Form 1040NR by the individual(if there is a US-source income)
- No need to file if the tax is withheld by the payor and if there is no other income for the individual
Multi-member
- Form 1065
- Form 1040NR by the individual(if there is a US-source income).
- No need to file if the tax is withheld by the payor and if there is no other income for the individual
- Collect Form W8-BEN from each partner (if royalties are withheld)
Elected as a Corporation
- Form 5472 (If 25% ownership is by a single foreign person)
- Form 1120
- Form 1040NR by the individual(if there is a US-source income like dividends)
- No need to file if the tax is withheld by the payor and if there is no other income for the individual
Most of these forms have to be physically mailed to the IRS. Unfortunately, they cannot be electronically filed.
Note
Failure to file Form 5472 or 1120 by the due date(April 15) incurs a penalty of $25,000 unless you have a good reason for not doing so.
Tax Rates
These are some of the most common tax rates applicable to an LLC.
Of course, some of these numbers will vary depending on your situation.
Take this only as an approximate figure.
32 – 37%
Top 3 personal income tax rates
21%
Corporate income tax rate on profits
23.8%
Individual income tax on shareholder’s dividends
30%
Nonresident aliens’ tax rate
2.9-7.25%
State sales tax
6.2%
Employer portion for social security tax
1.45%
Employer portion for Medicare tax
6%
Total FUTA tax, including state credit
Costs
How Much Does An LLC Cost?
Let’s talk about the exact costs of forming and maintaining an LLC.
It depends on a lot of factors: state of formation, nature of business, etc.
One time
Formation fee for the State
$90
Reserve business name
$75
Annually
Registered agent costs
$100 – $300
State franchise tax
$50 – $800
Form mailing charges
$20 – $100
Quarterly
Income tax
21 – 37%
Payroll tax (employer)
7 – 10%
Service charges
Lawyer
$100 – $500/hour
CPA
$100 – $500/hour
Hiring
Can I Hire Employees In An LLC?
You can hire US-based employees in the US in an LLC.
But a lot of things change if you have an employee physically located in the US.
You may find yourself filing more forms and paying more taxes if you hire US residents as employees or full-time contractors.
Most non-residents don’t hire US-based employees because of these reasons:
- A portion of your business income may get classified as US-source income and that leads to individual members having to pay US income tax.
- LLC has to withhold tax from the employee’s wages for Social Security, Medicare, and unemployment insurance, and deposit it with the IRS and state agencies.
- LLC has to file Form W-2 for each employee with the IRS.
- Depending on the state you’re in, LLC has to notify state and local authorities about the new hires.
State of Formation
Which State Should I Form My LLC In?
If you are planning to start an office in the US sometime soon, you could choose that particular state to form your LLC. That’ll be the easiest.
Else if you’re not planning to have any operations in the US, you are better off choosing either Delaware or Wyoming.
Delaware and Wyoming have minimal franchise taxes and are very popular among non-residents and residents.
Delaware is famous worldwide for its friendly business laws and efficient justice and legal system. Wyoming, on the other hand, is favored for its privacy protection policies.
How To Form Your LLC?
Here are 6 steps to forming an LLC by a non-resident:
- Choose a state of formation
- Pick a name and reserve it with your state before filing your LLC (optional)
- Nominate a registered agent
- Decide if the LLC is member-managed or manager-managed
- Draft an operating agreement
- Apply for EIN
- Open a bank account
If you wanna know more about the exact formation steps, read our step-by-step guide below
Form an LLC As a Non-Resident From Anywhere
For more detailed information on forming an LLC from your country, see a relevant page below:
FAQ
Frequently Asked Questions About Forming An LLC
Here are the most commonly asked questions about forming an LLC for non-residents:
No, you don’t need a visa, and you don’t even have to visit the US. While sitting in your home country, you can get it all done. There’s no legal requirement for you to be in the US. The only thing you would need is a registered address to receive notices from your secretary of state. You can get that done from a registered agent without having to visit the US.
It’s a business entity that is not recognized by the IRS as a separate entity from its owner. This is how single-member LLCs are treated by default.
Let’s say you have formed your LLC in a state, but you are doing business in another state as well. In that case, you’ll have to file your LLC as a ‘foreign LLC’ in the second state. For example, let’s say you have initially filed your LLC in Arizona. The business grew, and now you’re selling your goods in California. In this case, you’ll have to file your LLC as a foreign LLC in California.