Get your business up and running in the US in a matter of days.
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.
If you are not a US citizen, you are a non-resident unless you meet 2 conditions:
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.
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.
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.
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.
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.
Since your operations are in Columbia, this income is considered foreign source and NOT US sourced. No federal taxes here.
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.
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.
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.
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.
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.
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:
Most of these forms have to be physically mailed to the IRS. Unfortunately, they cannot be electronically filed.
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.
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.
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.
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.
Here are 6 steps to forming an LLC by a non-resident
If you wanna know more about the exact formation steps, read our step-by-step guide below
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