With the freedom to choose their work location and working hours, many digital nomads naturally gravitate towards self-employment. While a significant number of self-employed individuals begin as sole proprietors, they often opt for incorporation along their journey. Among digital nomads, one prevalent choice for business structure is the Limited Liability Company (LLC).
So, what precisely is an LLC, how does one establish it, and what are the compelling reasons for doing so? In the following sections, we provide comprehensive answers to these inquiries, specifically tailored for self-employed digital nomads.
What is an LLC?
A Limited Liability Company (LLC) is a type of business entity that offers owners (also called members) a degree of personal protection against business liabilities. It also allows owners to choose whether they want to file taxes as a sole proprietor/general partnership or corporation.
LLC pros and cons
There are several distinct advantages and disadvantages to opening an LLC as a digital nomad. Let’s take a look first at the benefits.
Benefits of starting an LLC as a digital nomad
Some of the pros of starting an LLC as a digital nomad include:1
Limited liability protection
Your personal assets are considered separate from those of your business, and generally cannot be seized if your business incurs any debts or other liabilities.
For federal income tax purposes, you can choose to be taxed as a sole proprietorship/general partnership, S-Corp, or C-Corp.
Registering as an LLC can lend your business an air of legitimacy.
Low barrier to entry
Starting an LLC requires relatively little paperwork and money.
Drawbacks of starting an LLC as a digital nomad
Some of the cons of starting an LLC as a digital nomad include:2
You’ll have to invest time and money into starting an LLC.
You typically need to file additional documents or pay additional taxes/fees annually to continue to run your business on an ongoing basis as an LLC.
An LLC may not be the right fit for you if you plan to significantly grow your business in the near future. Additionally, if your business plan includes attracting investors, a corporate structure may be more fitting.
Types of LLCs
There are eight different types of LLCs:3
- Domestic LLCs operate in the same state they were registered in
- Foreign LLCs operate in a different state than the one they were registered in
- Series LLCs own and operate one or more LLCs
- Nonprofit LLCs focus on purpose rather than profit
- Low-Profit LLCs are also purpose-driven, but retain & distribute small amounts of profit
- Anonymous LLCs can be formed without having to publicly disclose members’ information
- Restricted LLCs are exempt from taxes for 10 years, but also can’t make distributions for 10 years
- Professional LLCs are for licensed professionals
Depending on how they’re owned and managed, these LLCs will also fall into one of four categories:
- Single-Member LLCs are owned and operated by one member (also called a disregarded entity)
- Multi-Member LLCs are owned and operated by two or more members
- Member-Managed LLCs have members make business decisions
- Manager-Managed LLCs have a third party make business decisions
How to open an LLC while living abroad
While you’ll need to register your LLC in at least one US state, you don’t have to live there. Different states have different registration requirements, but the process of opening an LLC generally includes:4
Choosing & registering a name
Make sure that the name complies with the state’s rules and doesn’t infringe on any trademarked names.
Designating a registered agent
You’ll need to choose a registered agent, or someone to file and receive your business’s legal documents. You can typically name yourself, another individual, or a business — or hire a company that provides registered agent services.
Filing articles of organization
Filing this series of documents — which contain information on your business’s name, address, members, LLC type, etc. — with the state will officially establish your LLC.
Depending on your location, profession, and business type, you may need to secure additional licenses and/or permits.
Other potential steps could include:
- Applying for an employer identification number (EIN)
- Opening a business bank account
- Drafting an operating agreement
Services like ZenBusiness, Rocket Lawyer, and LegalZoom make it easy for digital nomads to create and maintain their LLC status while abroad. That said, it may be a good idea to consult an expert in US expat taxes to select the best type of LLC for your business, as well as identify the best state in which to register.
How much does it cost to start an LLC?
The cost of creating an LLC varies by state and circumstances, but you can use this rough breakdown for reference:5
Online filing/legal service: ~$39-$79 (If your business is particularly complex, you may want to hire an attorney (~$1,000-$1,500))
Registered agent fees: ~$0-$300
EIN Application: ~$0-$99
State filing fees: $35-$500
Name reservation: ~$10-140 (only mandatory in Alabama)
Publication fees: ~$40-$2,000 (only mandatory in Arizona, Nebraska, and New York)6
You may incur additional fees if you choose to draft an operating agreement (~$200),7 establish a DBA name (~$10-$100),8 or apply for a business permit/license (~$50-$300).9
Best states to open an LLC from overseas
It’s typically easiest and most affordable for Americans abroad to register an LLC in their home state.10 If you do choose to open an LLC in another state, however, here are a few factors to consider:
- State income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington & Wyoming all have no state personal income tax.
- LLC filing fees: The states with the lowest filing fees are Montana ($35); Kentucky ($40); and Colorado, Iowa, Michigan, Mississippi, & New Mexico (all $50).
- LLC maintenance fees: Arizona, Idaho, Mississippi, Missouri, New Mexico, Pennsylvania, & South Carolina all have no additional annual fee for LLCs.
How is an LLC taxed (for digital nomads)
LLC tax rates depend on which of three ways you choose to be taxed:
Sole proprietorship/general partnership
LLCs are taxed as a pass-through entity by default. This means that rather than paying taxes as a business, members report their share of profits and losses on Form 1040 for individuals or Form 1065 and Schedule K-1 for multi-member LLCs.
Tax authorities apply standard personal income tax rates of 10% to 37% to tax net earnings. Additionally, you must pay a self-employment tax of 15.3% on your net earnings to cover Social Security and Medicare.11
LLCs eligible for the choice can elect to be taxed as C-Corporations by submitting Form 8832 (Entity Classification Election). This choice necessitates that they file a corporate tax return (Form 1120) and pay the corporate income tax rate of 21%. Subsequently, they distribute dividends to shareholders, which are subject to taxation at personal income tax rates. This is essentially a “double tax,” but there are ways to avoid it.12
Finally, other LLCs choose to file Form 2553 and opt for taxation as S-Corporations, which also obliges them to submit a corporate tax return. They then pay shareholders a “reasonable” salary, some of which can be classified as dividends rather than earnings — but unlike a C-Corp, dividends from an S-Corp are not subject to Social Security and Medicare taxes. S-Corps may also be eligible for a 20% qualified business income deduction until 2025.13
Note: Neither S-Corp nor C-Corp dividends are subject to Social Security or Medicare taxes.
Tax write-offs for an LLC
Some people choose to form LLCs because they mistakenly believe that they can write everything, including personal expenses, off as a tax deduction. While there are quite a few things you can write off as business expenses, they must all directly help you do your job and be ordinary and necessary in the course of your business.
This includes things such as software & services, education & training, equipment & supplies, advertising & marketing costs, business insurance, and certain startup costs.
Understanding how to file LLC business taxes from abroad
To stay tax compliant with taxes as an LLC owner abroad, you’ll want to research your business’s tax and reporting obligations and fill out the corresponding forms, which may include:
- Form 1040
- Form 1065 & Schedule K-1 (for LLCs being taxed as general partnerships)
- Form 8832 & Form 1120 (for C-Corps)
- Form 2553 & Form 1120-S (for S-corps)
It’s worth noting that living abroad may change your personal tax and reporting obligations, as well as the credits and deductions available to you. Scheduling a consultation prior to registering your business with an expert in US expat taxes can help you get familiar with this information.
Your conversation will likely cover topics such as the Foreign Bank Account Report (FBAR), the Foreign Tax Credit (FTC), the Foreign Earned Income Exclusion (FEIE), and the Statement of Specified Foreign Financial Assets.
- Pros and Cons of Sole Proprietorship, LLC and More
- Pros and Cons of Owning an LLC
- Different Types of LLCs: Which One Is Best for You?
- How Much Does it Cost to Start an LLC?
- How to start an LLC in 7 steps
- HOW MUCH DOES IT COST TO START AN LLC?
- How Much Does It Cost To Start An LLC?
- How Much is a DBA: Everything You Need to Know
- How much is a business license?
- Best States To Form An LLC In 2023
- How Limited Liability Companies (LLCs) Are Taxed
- LLC electing S corporation tax status: An option you may not know you have
- Should You Choose S Corp Tax Status for your LLC?