In this complete guide to owning U.S. companies while not living in the U.S. you’ll learn:
There are three main reasons that our current customers start U.S. companies:
The United States has a reputation of having one of the best economies in the world with companies registered here holding a high level of trust globally.
Additionally, access to business services offered in the U.S. are essential to any company looking to grow their business. All businesses, and especially online businesses, need access to services like Stripe, PayPal, and U.S. banking to send and receive payments from customers.
What are my tax obligations? Do I even need to pay taxes in the U.S.?
Foreign-owned companies only pay tax on work performed in the United States. This is called Effectively Connected Income.
For example, a British individual with a U.S. LLC providing software development services to a client in New York would not have to pay income taxes for the income he earns as the work is performed by engineers in Britain.
If, the engineer was located in the U.S., the U.S. company would be liable for taxes. As long as you are not engaged in trade or business in the United States you don’t have to pay taxes in the US.
Your US LLC has to meet three criteria to be exempt from federal tax in the US:
What is considered a Non-Resident?
You ARE subject to taxes in the U.S if you are one of the following:
If none of the above apply to you, you are a non-resident alien (NRA) according to the IRS definition.
Form 5472 + 1120, FBAR, and the 1040-NR are the three primary filing requirements for foreign-owned LLCs.
IRS Form 5472
Originally Form 5472 was meant only for United States corporations, however, as of 2017, the IRS adjusted the form to make it usable for LLCs. You also have to attach a pro-forma 1120, which is a cover page to your 5472 form.
Your LLC MUST have an EIN to be able to file both these forms.
If you need help getting your EIN, you can reach out to us here regarding our EIN service.
To fill out this form, you’ll need to provide the following information:
You must mail or fax this form to the IRS as you cannot file it electronically. If you need assistance filing this, we recommend Bookmate who specializes in filing non-resident tax returns.
Bookkeeping and Accounting for United States LLCs
For LLCs, To fill out a tax return, you need to have clean books. You'll need a profit and loss statement showing the incoming and outgoing payments from your LLC.
This task is made easy with the business services offered in the US. Quickbooks does and a bookkeeper needs to do the bookkeeping work before generating the report.
Incorporating or forming an LLC in your home state is usually the easiest and best option. This is because almost every state has laws that require you to “re-register” (Foreign Qualification) a Delaware or Nevada company in the state where it is doing business. You need to re-register only if you have a physical presence such as opening an office, store, or warehouse in that State.
If you form a Delaware corporation but your physical business is located in Colorado, the state of Colorado will want you to “re-register”. This is especially true if you intend to get a physical bank account and business license or rent office space in your home state or in this example, Colorado.
In most cases, registering as a “foreign corporation” or LLC will subject you to all the same taxes and fees as an in-state company. So you will have not avoided any taxes or fees, plus there is the added expense of registering as a “foreign corporation” in your home state and any annual fees in both states.
This is not to say there are not valid reasons for choosing another State, we just like our potential clients to be aware of the additional steps required when choosing a state outside of their home state.
Criteria to consider when deciding where to form
What is the Best State for an Anonymous LLC?
With only 4 states offering this, your options are a bit limited. However, These 4 states (Delaware, New Mexico, Nevada, & Wyoming) have the incorporation process that is the easiest while being the most cost-efficient.
Delaware does not require the owner to list any of the names of managers or members of the LLC. If you want to maintain full anonymity we recommend that you hire a third-party provider like Jumpstart.
New Mexico also does not require any information to be shared about the members or managers. There are also no annual taxes, fees, or reports. Again, it is recommended that if you want full privacy to hire a third party service.
Nevada and Wyoming are a bit different in the fact that they allow for nominee services. This service allows for a nominee to be listed on the public records in place of the actual owner or owners.
Here I will guide you through setting up your LLC, receiving your EIN quickly, fully opening your bank account, and getting payment processing tools.
First, you must choose a state to file your LLC. Then select a name for your company and make sure no other companies in your state have the same name by performing a name check against the state’s business register.
Next, choose an incorporator to open your LLC and provide you with a Registered Agent. If you live in your home state, you can be your registered agent, however, we don’t recommend it unless you know what you’re doing.
Lastly, you’ll need to apply for an EIN and open your bank account.
Formation and Operation Requirements for an LLC
The Employer Identification Number ( EIN) is a 9 digit number that the IRS assigns to your business. This is used for tax reasons so the IRS can easily identify your business.
Every business has a unique EIN. This is required to open a bank account and pay taxes in the U.S. It is also necessary to have an EIN to be able to apply for payment processors like Stripe.
How can I get an EIN as a Non-Resident?
You can still get an EIN without having a US Social Security number or an ITIN. You must fill out and fax form SS-4 to apply for an EIN. You need three things to be able to obtain an EIN: A business name, A business address in the United State, and an explanation of the main activity or service that your business will provide or sell.
If you are a non-resident, there is a special fax number to use if you want to apply for your business EIN by fax. Send the relevant IRS form to this fax number: 304-707-9471. If you apply by fax, you will generally receive your business EIN within 2-4 weeks.
The next step after getting your company and EIN is getting your company bank account. You must have a bank account to be a successful business. To start accepting payments from customers and set up a merchant account you'll need an official business bank account - a personal account won't work!
There are two main types of bank accounts to consider - a traditional bank account or a bank account with a neobank.
Traditional accounts are usually opened in person (although most are moving online now) at a major bank like Chase, Bank of America, Wells Fargo, and require an SSN or ITIN to get started.
Neobanks are typically newer companies that work with an existing bank provider to issue you an account. Neobanks typically have a much better user experience and most banking services are handled online. These banks often require an SSN or ITIN to open an account but some will accept an EIN.
The main neobank that supports non-residents is Mercury. However, there are many other options for individuals with an SSN or ITIN.
Remotely Opening Your Accounts
Because traditional banks have more stringent ‘Know Your Customer’ guidelines, they do require you to go into the bank. Some neobanks do allow you to open without being present.
Two neobanks as of December 2020 allow for fully opening accounts with non-resident owners of LLCs are Mercury.com and Payoneer.
Opening Accounts in the USA in Person
Being in person in the US makes opening accounts for your LLC a lot easier, because it opens the doors to hundreds of different banks across the country.
If you are applying in person, reach out to our sales team at firstname.lastname@example.org and we'd be happy to guide you through the process.
Using Service Providers to Open Remote Accounts
Through third parties, it becomes easier to open accounts remotely that are given power of attorney. However, some banks will still require a personal visit at some point.
Need Help Setting Up an LLC?
Visit https://www.jumpstartfilings.com/services for help and consultation on opening an LLC today.
I am a single owner of a U.S. LLC, a non-U.S. person and my company provides remote services. Do I need to file a tax return and pay income tax?
A single-member LLC that has chosen to be recognized as a disregarded entity will pay tax based on the tax status of the owner of the LLC. Because the LLC is providing services remotely, there's no income connected to the US as the owner of the LLC is not physically present in the US. This means that the LLC would owe no US tax, except for the annual registration fee in the state of LLC registration, and there is no requirement to file income tax either. But keep in mind, though you might not be producing your income in the U.S., you still could be liable to income tax on this income in your home country.
What if I import and sell goods in the U.S.? Does anything change?
If you are selling goods in the US, you are required to report your business’s income to the IRS. If you are a non-resident, you report your US income on the 1040NR form which is then sent to the IRS. This form can be difficult to understand so we recommend hiring a CPA to manage your tax issues. You will also need to obtain ITIN, something Jumpstart can assist you with.
What if the LLC has multiple owners?
Any LLC that has more than one owner (partnership or S or C Corporation), must file a federal tax return, even if it has zero income.
What if my company is a corporation, not an LLC?
A corporation files its tax return and pays its tax liability because it is a separate tax entity from its owners. One cannot freely transfer money between the owners or shareholders and the corporation. The corporation can pay the owners for expenses they pay on behalf of the business, and the corporation can pay owners for services they provide to the corporation. The only way for the shareholders to gain funds from the business is if the corporation pays them dividends. Dividends are not a tax deduction and are taxable income to shareholders.
What is the most effective way to reduce the amount of taxable income?
Most businesses have both revenues and expenses. The IRS keeps a list of eligible business expenses, and expenses that can be clearly related to maintaining and running the business are considered deductible expenses. Often it is best to have your CPA handle the question of which of your expenses are deductible.
To reduce your tax obligation you would want to report as many eligible expenses as possible, however, you should make sure you can prove these expenses were legitimate, so keeping receipts, bank statements, and credit card statements is a must.
Can I pay myself a salary as a corporate officer, avoiding double taxation?
If you are a non-resident you might not have a work permit, which means you cannot receive a salary as a resident alien or U.S. citizen would.
You could, however, provide services, such as management services, to the U.S. company, and receive payment in the form of consulting fees. You will then be required to report this income following your country’s tax rules.
If we spend a majority of the income of the U.S. company on services provided by our other company, registered in our country?
You can do that, just make sure you can prove services were indeed provided and properly documented. You also want to make sure these services are provided outside of the U.S., in order not to be classified as U.S. sourced, and as such subject to the 30% withholding requirement.
What if we retain all the corporate profits in the U.S., pay the corporate income tax, and not distribute it to shareholders? Can we reinvest this money into the business?
Yes, you can.
Given all the owners are non-U.S. persons, from an income tax point of view is it more beneficial to register LLC or Corporation?
This depends on lots of factors.
Both entities have their pros and cons, so before concluding, you should analyze your specific situation, make some forecasts on how your business will grow and change. We also recommend consulting a CPA as they can help you out a lot. There is never a clear yes or no, oftentimes either entity that you would form for your business would work just fine.
How and when do I file a tax return?
By hiring a knowledgeable U.S. CPA to file your tax return. The deadline in most cases is or around April 15. You can file an extension by that date, and the new extended due date becomes September 15 for companies and October 15 for individuals. Remember, corporations have to file quarterly reports, and LLCs taxed as partnerships file once a year.
Do I need an ITIN to file taxes? How can I get it?
Whether you need to obtain an ITIN will depend on if you have US tax reporting obligations due to your US business interests. You may need an ITIN if you have membership interest in an LLC, but most probably you won’t need one as a shareholder of a corporation.
Remember, Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.
Get your ITIN for PayPal here: https://www.jumpstartfilings.com/itin-application
What about state income tax?
This tax is only applicable to C Corporations, not LLCs. It applies to income earned by the corporation in the state, unlike federal income that applies to all U.S. sourced income.
Though LLCs don’t pay income tax, it is always smart to check with your CPA if there are any filing requirements for the LLC in the state of registration.
Should I register my company in the state that has no income tax?
It doesn’t matter if you choose LLC.
For corporations, it matters, but only if you will have lots of income in the state of registration. For example, if you have a Delaware Corporation and your business has no income coming from Delaware then you will have no corporate tax to pay to the state of Delaware, only the federal corporate tax.
As a non-resident do I need to pay 30% income tax on my U.S. income?
It depends on the situation. It is called NRA (non-resident alien) withholding, meaning your payer keeps 30% of the amount they are paying you, and sends this sum to the IRS.
According to IRS rules “in order for a payment to be subject to NRA withholding, it must be a payment of FDAP income. FDAP is an acronym for Fixed or Determinable, Annual or Periodic. Some of the more common expenses paid by US withholding agents which would result in FDAP income to their vendors and other service providers are interest, royalties, compensation for personal services, rents, pensions or annuities and gains from the sale or exchange of the patents, copyrights, and similar intangibles...”
For FDAP income paid to a foreign person to be subject to NRA reporting and withholding, the payment must be U.S. sourced.
How do you know if your FDAP income is U.S. sourced?
Interest: If the debtor is a U.S. resident, the interest is generally U.S. sourced.
Royalties: If the property is used in the U.S., the royalty payment is U.S. sourced.
Payments made with the sale of certain intangible assets, like copyrights and patents, are generally sourced similar to royalties when the payments are contingent on the productivity, use, or disposition of the intangible.
Rent: If the rental property is in the U.S., the payment is U.S. sourced.
Personal Services: If the services are performed in the U.S., the payment for those services is most often U.S. sourced.
What is form W-8BEN? When do I need to file it?
Form W-8BEN is Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. You fill this form out and give it to the withholding agent if you are a foreign person and you are the owner of an amount subject to withholding. Meaning, if you have U.S. source FDAP income your payer will be responsible to withhold the 30% tax based on the information listed on the W-8BEN. Remember, you need to submit Form W-8BEN when requested by the withholding agent or the payer whether or not you are claiming a reduced rate of, or exemption from, withholding.
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