Starting an LLC as a foreigner in the United States is a complex endeavor with many considerations to keep in mind. In this article, we’ll break down the process for nonresident aliens (NRAs) looking to establish their business presence in the land of opportunity.
We’ll begin by answering a common question, “What is an LLC?” From there, we’ll delve into the best states to open an LLC, shedding light on the US tax implications you can anticipate.
Along the way, we’ll also address potential challenges that foreign entrepreneurs may encounter in their pursuit of starting an LLC on US soil.
Whether you’re a nonresident alien with entrepreneurial aspirations or simply curious about the intricacies of doing business in the US, read on to navigate this nuanced path successfully.
What is an LLC?
A US LLC (Limited Liability Company) is a state-registered business entity. Its owners, known as members, are not personally responsible for the business’s debts.
In short, an LLC combines the simplicity and flexibility of a sole proprietorship with the liability protection offered to corporations. LLCs can have one or multiple members.
For federal tax purposes, the tax code treats LLCs as flow-through entities. This means whatever profits an LLC earns flows directly to the owners, who include them on their tax returns.
This flow-through concept ensures that LLCs are taxed only once on their profits, avoiding double taxation. The profits are taxed on the member’s income tax return.
Can a non-US citizen start an LLC?
Yes. A non-US citizen can start a US LLC. Some reasons why include:
- Access to the US market: Having an LLC lets a non-citizen sell and provide services to the US market.
- Credibility: Owning a US-based business can provide credibility in the eyes of customers and suppliers.
- Asset protection: As an owner of an LLC, your personal assets are safe from the company’s debts or legal judgments.
- Financial advantages: It may be easier for non-citizen LLC members to open US bank accounts.
The benefits non-US citizens receive from forming an LLC may also depend on the state where they register the LLC.
The best states for a non-resident LLC
While your target market might influence where you register your LLC, many non-citizens prefer the following states:
- Delaware: Most founders prefer Delaware because it offers ultimate privacy. LLC members’ names aren’t required to be disclosed.
- Wyoming: Wyoming offers similar privacy protection as Delaware. But Wyoming is also attractive for LLC registration because it has no state personal income tax.
- Nevada: Some LLC founders prefer The Silver State because it has no state income tax, and its annual reporting requirements are minimal.
How a foreigner can open a US LLC
“Starting an LLC as a foreigner in the United States may seem daunting, but it’s achievable by following these key steps.
Choose your state of formation
As noted above, there are a few states that are especially accommodating for LLCs and tend to be more business-friendly and tax-efficient than others. However, the best choice may vary, so research your options carefully and consult with an expert who can assist you in navigating deciding factors such as tax laws, regulations, and the ease of doing business in one location versus another.
Appoint a registered agent
You’ll need a registered agent with a physical address in the state where you’re forming your LLC. This agent will receive legal documents and official notices on behalf of your company.
While it is not typically required for the registered agent to be a US citizen, they must have a physical address within the state where the LLC is registered. This address is used for receiving legal notices and official correspondence.
Many businesses, especially those operated by non-resident aliens or located in multiple states, opt to use professional registered agent services. These services provide a registered agent with a physical address in the state and handle the receipt and forwarding of legal documents. This can be particularly useful for non-US residents who may not have a physical presence in the US.
Name your LLC
Pick a unique and distinguishable name for your LLC. Ensure it complies with the naming rules of the state you’ve chosen, which often require the inclusion of “LLC” or “Limited Liability Company” in the name.
File articles of organization
Prepare and file the Articles of Organization with the Secretary of State in your chosen state. This document officially establishes your LLC, and you’ll need to provide details like your LLC’s name, address, and the purpose of your business.
Nonresident aliens (NRAs) can usually file the Articles of Organization themselves or seek assistance from a variety of sources, including attorneys and business formation companies.
Create an operating agreement
While not always legally required, drafting an operating agreement is highly recommended. This internal document outlines the ownership structure and operational rules of your LLC, helping to protect your business interests.
Obtain an Employer Identification Number (EIN)
Apply for an EIN from the IRS, even if you don’t plan to hire employees immediately. This unique identifier is essential for tax purposes and banking transactions.
Review state and local regulations to ensure you are in compliance
Be aware of any state-specific requirements or local business permits and licenses necessary to operate legally in your chosen location.
Open a US business bank account
Separate your personal and business finances by opening a US business bank account. This step is essential for managing your LLC’s financial affairs effectively.
It is not uncommon for foreigners to encounter challenges when opening a US business bank account, including documentation requirements and potential hurdles related to international transactions. Typically, however, when you have registered your business, you will be able to open a business account using your EIN.
By following the above steps, you can navigate the process of starting an LLC as a foreigner and establish your business presence in the United States with confidence.
In the following sections, we’ll delve deeper into each step, addressing potential challenges and offering tips to ensure a smooth journey.
US tax implications of starting an LLC as a foreigner
As a non-resident LLC founder, you’ll want to have an idea of the tax implications that come with forming an LLC. The following are some LLC tax implications you should consider.
- US tax reporting requirements: By default, your LLC is not a separate taxable entity. But as an owner, you’ll need to file your Form 1040-NR every year and declare the profits you earned from the LLC.
- Withholding tax: The US tax code imposes a 30% withholding tax on non-residents who receive certain types of passive US-sourced income, such as interest and rent.
- Effectively Connected Income: Typically, non-residents only pay tax on income that is “effectively connected” to a US trade or business. This includes gains from the sale of real property. These are generally treated as effectively connected income and come with capital gains tax obligations.¹
- Related Party Disclosure Requirements: Some LLCs may have additional reporting requirements, including those with at least one foreign owner who owns at least 25%.
Common tax forms for an LLC owned by a non-US citizen
While the tax forms filed by foreign business owners differ slightly from those filed by citizens or permanent residents, the following are some forms foreign-owned LLCs might file.
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Form 1040-NR, U.S. Nonresident Alien Income Tax Return
- Form 8804, Annual Return for Partnership Withholding Tax & Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax
- Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
- Form 8288, U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons
- Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
Challenges of being a foreign owner of a US LLC
While forming an LLC allows non-US residents to tap into the US market, foreign owners of LLCs may still face certain challenges.
Some of these challenges include:
- Complying with US tax laws
- Banking difficulties partly because of the difficulty of verifying their identity
- Obtaining an Employer Identification Number (EIN) if you don’t have a Social Security number or Individual Taxpayer ID number
- Understanding immigration rules if you plan to visit or work in the US
- Understanding US employment law, if you plan to hire US workers
Is an LLC the best choice for your US company?
While the LLC is a common business structure for foreigners seeking to do business in the US, there are other options for non-US citizens.
Limited liability partnership (LLP)
Like an LLC, an LLP is a flow-through entity where only partners bear tax responsibility on their share of business profits.
Unlike LLCs, not all states allow the formation of LLPs.
A sole proprietorship, also called a sole prop, is a business formed by one person and where the founder is personally liable for the debts of his company because the person and the business are considered the same legal entity.
Like an LLC, a sole prop is also a flow-through entity, and all business profits are taxed on the owner’s personal income tax return.
Sole proprietorships are generally easier and cheaper to operate than an LLC.
The main difference between a corporation and an LLC is how each is taxed.
Unlike LLCs, where company profits flow through to the owners and get taxed once, corporation profits are double taxed. The corporation will pay tax on profits, and then when the profits are distributed to shareholders as dividends, the individual shareholder also pays personal income tax.