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:

  • 01You have a green card.
  • 02You pass substantial presence test i.e, you are physically present in the US for 31 days of current calendar year and 183 days during the last 3 years(including 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 LLC?

LLC is a business entity which is like a hybrid between a corporation and a sole proprietorship.

LLC, 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 number of shares determine the ownership.

And IRS, the tax authority of US government, considers LLC as an extension of its owner. Not as a separate entity.

That's why the income is passed through to the members in an LLC.

Advantages

What's so special about an LLC?

01

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 have huge debts. This is important especially when you're residing outside US.
02

Low formalities

LLCs are relatively easy to form and maintain. There are only a few annual reports(sometimes none) as compared to corporations.
03

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.
04

Access to banking, payment, 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?

01

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 talent pool.
02

Difficulty in raising capital

A lot of startups want to register their business in 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.
03

Piercing corporate veil

With an LLC, you'll have to open a business bank account in US and have all the business transactions happening through the bank. If you use 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 disregarded entity, because IRS doesn't treat the LLC separate from its the 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 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.
finder

For various businesses

If you’re doing Amazon FBA/Dropshipping to US, then a single member LLC or a multi-member LLC would be the best bet. If you’re looking for venture funding soon enough, it’s better to register as a corporation instead of an LLC, because all VCs require corporation as the standard business entity.
If you're providing consulting or working on a project (designer, developer, marketing, etc), single member LLC would be ideal.
Since an agency is unlikely to look for venture funding, single or multi member LLC would be a wise choice
For a high growth SaaS company, C-corporation is usually the better business entity. Only a corporation can issue stock to your employees, contractors or investors. On the contrary, if you are not looking for venture funding soon, LLC would do just fine.
Taxes

What are my tax obligations?

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, 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 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 US and also create 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.
01

Software consulting

Since your operations are in Columbia, this income is considered foreign source and NOT US sourced. No federal taxes here.

02

Mobile app revenue

Payments from 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 are 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.

01

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.

02

Franchise & Excise taxes

Most states charge an annual fee from LLC, often called as "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 US. Not very common, however still important to many types of businesses.

03

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 of the 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 instalment 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 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 for 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 US in an LLC.

But 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, 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 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 favoured for its privacy protection policies.

How to form your LLC?

Here are 6 steps to forming an LLC by a non-resident

  • 01Choose a state of formation
  • 02Pick a name and reserve it with your state before filing your LLC (optional)
  • 03Nominate a registered agent
  • 04Decide if the LLC is member-managed or manager-managed
  • 05Draft an operating agreement
  • 06Apply for EIN
  • 07Open a bank account

If you wanna know more about the exact formation steps, read our step-by-step guide below


FAQ

No, you don’t need a visa and you don’t even have to visit US. While sitting in your home country, you can get it all done. There’s no legal requirement for you to be in US. 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 US.

It's a business entity which 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. 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.

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