Tax-Free LLCs in the United States

Disclaimer: The following article does not constitute legal or financial advice. It is based on what we’ve learned over the years from the U.S. accountants and tax advisors with whom we work closely on behalf of our clients. To analyze your specific case, schedule a consultation.

Foreign entrepreneurs and companies can establish a limited liability company (”LLC”) in the United States as a tax-free entity under certain conditions.

If you establish an LLC incorrectly by failing to comply with applicable U.S. laws and regulations, you could face unexpected tax liabilities, expensive penalties, and other unnecessary hassles.

But if you properly establish and support your LLC as a tax-free entity in the United States, you can gain access to a highly efficient banking system, potentially save money in income taxes (depending on the tax rules in your country of residence) and grow your business in new and different ways.

Why should you establish an LLC in the United States?

Access to a US bank account in US Dollars

A foreign owner of a US LLC from a country with a less efficient banking system and/or less stable currency can maintain its funds in a U.S. bank account in US dollars.

Banks in the United States offer excellent payment processing, expedited international transfers, the most modern technology, and in most cases, excellent customer service.

Many US banks also offer business checking and savings accounts free of charge if you maintain a minimum balance. As of April 2020, for example, Wells Fargo Bank requires a minimum balance of only US$500.

Exempt from Withholding Taxes in the US

The US LLC will not be required to withhold income taxes in the United States in connection with the payment of most service providers that perform their services outside of the United States. Some specific types of payments (e.g.,  royalties) may still be subject to US  income tax withholding, however, depending on the situation.

Protection against Personal Liability in the US

The owner of a US LLC, also known as a “member,” is protected from liability for acts and debts of the LLC. Only assets owned in the name of the LLC are subject to the claims of business creditors, including lawsuits against the business. The personal assets of the member cannot be claimed to satisfy business debts.

Flexible Corporate Structure

Transfers of your ownership interest in the US LLC to another person or company can be made easily and a flexible management structure can be created because US LLCs are subject to fewer government regulations than American corporations. The LLC must remain foreign-owned by a single member/owner to qualify for tax-free status in the United States, however (as discussed further below).

How can you establish a tax-free LLC in the United States?

You can establish a tax-free LLC in the United States only if you follow the rules.

First, the entity must be classified as a “single-member” LLC with only one (100%) owner.

Second, the owner must be a non-resident alien (or foreign person) with respect to the US. A non-resident alien is an owner who is not a US citizen, is not a permanent resident in the US (green card holder), and has not stayed in the US long enough to pass the “substantial presence test.”

Third, the LLC must have no US presence or economic substance in the US. Physical presence in the US is defined as having an office in the US or having employees working in the US. Additionally, in the US, business income is subject to US income taxes only if the business is “engaged in a trade or business in the United States.” A business can be engaged in a trade or business in the US if it has a “dependent agent” in the country.  A dependent agent is an employee or company that works almost exclusively for you and performs non-administrative services – that is, they perform services that substantially affect the management of the business.

These are the most important rules of the game, but there are filing and reporting requirements for foreign-owned, single-member LLCs too, as discussed below.

What are the filing and reporting requirements for foreign-owned single-member LLC in the United States?

A foreign-owned, single-member LLC is required to file a Form 5472 with the US Internal Revenue Service (“IRS”) on April 15 of each year and report any reportable transactions that occur during the tax year with a foreign or domestic related party. Related parties can include the owner of the LLC, the owner’s family members and relatives, or other companies owned by the owner of the LLC; and reportable transactions can include investment, sales, rent, purchases, interest, etc. As the definition of a reportable transaction is quite broad, most transactions (i.e. funds transfers) between the US LLC and the foreign owner/foreign business will likely need to be reported. Failing to file the Form 5472 with the IRS will result in a penalty of US$25,000 for each year.

Additionally, the US LLC must file an annual report in the state where it is registered (e.g., Florida, Delaware) and pay the filing fee.

Tax and income reporting may also be necessary in the foreign owner’s country of residence, depending on the tax rules that apply there. For example, fund transfers between the US LLC and the operating business entity in the country of residence may be subject to income taxes in the country of residence.

Example: Colombian Technology Consulting Company Without an Office or Employees in the United States

Julian is a Colombian citizen who owns a technology consulting business in Colombia with employees working in the main office in Medellin. Julian also has a US LLC subsidiary in Miami, Florida with a virtual office and no employees in the US.

Julian’s business operates in Colombia – the employees are physically located and working in Colombia – but his clients are based in countries around the world. Julian bills his clients from the US LLC and the clients make payments to his US LLC’s US bank account by bank (wire) transfers, in return for services performed in Colombia by the Colombian company.

In addition, when Julian’s Colombian company needs funds to pay employees in Colombia, he can transfer funds from the US LLC’s US bank account to Colombia via an international wire transfer on the same (or next) day. He can also use the US bank account of the LLC to pay service providers outside of the US in the same manner.

Julian would need to report the transaction between the US LLC and the Colombian entity on Form 5472 filed with the IRS. Note that the funds transferred from the US LLC to the Colombian entity may be considered income for the Colombian entity for income tax purposes in Colombia. Therefore, Julian should consult with his accountant in Colombia as part of the planning process.

The U.S. Expansion Option

After considering the business opportunities in the US, you may decide to expand your presence physically into the US by adding an office and employees or dependent agents as part of the operations of the US LLC. However, this will result in losing the tax-free status of the LLC.

For example, if you decide to pursue an E-2 investor visa in the United States, you will need to invest a considerable amount of money into the US and eventually arrange for the executive seeking the visa to work as an employee in the US. The result is that the US LLC now has a US presence, which means the US LLC will lose its tax-free status and the income earned by the US LLC would be subject to income taxes in the US, in addition to potential US withholding taxes for the owner/member of the US LLC.

Once you expand your presence in the United States, you may need to convert your LLC into a C-corporation, establish a separate C-corporation to complement the LLC, or simply elect to have your LLC treated as a C-corporation for U.S. tax purposes.

A C-corporation, unlike an LLC, is subject to US income taxes separately from its owners at a flat rate of 21%. However, the earnings of a C-corporation are subject to “double taxation” in that the net income is subject to US income taxes at the flat rate of 21% and, when the  C-corporation pays dividends to the owners/shareholders,  the dividend income is again subject to income taxes at the owner/shareholder level. In the case of a  foreign owner/shareholder,  the subject to income taxes at the owner/shareholder level. In the case of a foreign owner/shareholder, the C-corporation would be required to make a US income tax withholding on the dividend income paid to the foreign owner/shareholder at a rate of 30%.

These and other tax and accounting implications of expanding your operations and/or increasing your presence in the United States should be discussed with a US tax and accounting expert, and we can connect you with some of the best ones, upon request.

Working in the United States as an LLC Owner

As a foreigner, you can own a US LLC and serve as its manager/officer, but you are not permitted to actually work or receive compensation for services physically rendered with the United States unless you have a work permit issued by the US Customs and Immigration Service (“USCIS”) in connection with a relevant visa (such as an E-2 investor visa) or green card.

Do not make the mistake of assuming that you can actually work (that is, do more than network, handle administrative tasks, and attend business meetings) in the United States simply because you were granted a business visitor or tourist visa by the US Embassy abroad. If you’re caught working – that is, exchanging your labor or products for money in the US – during your visit without a proper work permit, you can be deported and denied entry in the future. And don’t be surprised if US agents check your mobile phone and social media accounts to find out what you’ve been doing.

Processing Time to Open an LLC

The amount of time required to register an LLC in the United States varies depending on the state of incorporation, but most states move the process along relatively quickly. Florida, for example, typically processes applications for a new US LLC within 2 to 3 weeks. Delaware is even faster, opening most new US LLCs in about a week and offering expedited processing for an extra fee. Obtaining a tax identification number (also known as an Employer Identification Number or “EIN”) for the US LLC may take 2 to 3 additional weeks.

Opening a US Bank Account

These days, non-resident foreign owners of U.S. LLCs can open a U.S. bank account online in at least a few ways under certain conditions. We have helped our clients to do it successfully, but whether you can do it for your LLC depends on a number of factors, including the type of U.S. business you plan to operate and where it was incorporated. We can help you to increase your likelihood of success in this regard and facilitate the entire online application process for you if you wish to give it a try.

However, most US banks still require non-resident foreigners to travel to the United States and meet with a representative in order to open a US bank account for their business. Therefore, you should plan to meet with representatives of several banks during your trip in case one or more of them decide not to work with you and your company, which is within their discretion. Banks differ greatly in their attitude about working with foreign owners of a US LLC, even from branch to branch within a specific bank. But if you are persistent and allow enough time during your trip for visits to several bank branches, you can usually find the right banking fit.

The Tax-Free LLC Application Process, Step by Step

Here’s how our tax-free LLC application process works, step by step:

  1. We register your LLC in the state of Delaware, Wyoming, Florida, or another state in the United States after soliciting some information from you and helping you to choose a company name and location for your U.S. business. If you decide to register your LLC in the state of Florida, we can serve as your registered agent in Florida upon request. If you choose to register it in another state, we secure a registered agent for you in that state.
  2. We obtain a US tax ID number (or EIN) for your LLC.
  3. Once you have a US LLC and tax ID number, you’re ready to open a business bank account in the United States. We’ll guide you by explaining the best options for setting one up online and/or in-person.
  4. We refer you to a U.S.-based tax and accounting firm specializing in working with foreign owners of LLCs. They will assist you with filing a Form 5472 with the IRS (prior to April 15) and keeping your LLC tax-free in the United States for as long as you want it to be.
  5. We submit an annual report for your LLC in the state where it was registered, which is usually (but not always) Delaware, Wyoming, or Florida.

Contact us today to take the first step toward your new, tax-free LLC in the United States!