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US LLC: Taxes and Incorporation Costs

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I’m sure that if you’ve heard of tax avoidance and international taxation, you’ve heard something about US LLCs!

And for good reason. They are very famous because they are very useful for paying fewer taxes (even none) in many cases.

However, their fame has led them to become a wholesale product sold by multiple “management and tax advisory firms” who seem to care little about whom they sell to… BIG MISTAKE!

US LLCs are not for everyone. For many people and business models, they not only won’t help reduce taxes but will also cause problems with the tax authorities and legal issues for operating through a company they shouldn’t be using.

My goal with this article is to help you understand simply in which cases you WILL save taxes with an LLC and avoid opening one without proper justification.

To do this, I will explain the main characteristics of US LLCs, their advantages, primary use cases, and even the cost/timeframes for having one fully operational through our company formation service!

What is a US LLC? Key features

US Limited Liability Companies (LLCs) are, as their name suggests, a type of limited liability company.

So, is it like the traditional Limited Company? Here’s where it gets interesting:

US LLCs are recognized in most countries as “transparent” or pass-through entities.

These companies have peculiar characteristics that place them somewhere between the classic Limited Company and a freelancer.

Let me explain with an example:

Imagine you billed a marketing service personally as a freelancer. Where would you pay taxes? In your personal income tax.

Now, imagine you billed it from a Limited Company. Which tax would apply? The corporate tax, since the company is a separate legal entity from your physical person.

When you open an LLC, you are indeed registering a company and could invoice from it…

But in most countries it’s your physical person that will have to pay taxes personally, not the company!

That’s precisely why they are called pass-through: The profit generated from their activity flows through to their owner, and for tax purposes, you have to think “as if you were a freelancer.”

This is where it becomes crucial to be well-advised, as decisions like the tax residency of the person opening the LLC, the creation of a holding company that owns the LLC, or the activity attributed to it can change everything.

Now that you understand the pass-through factor, let’s look at the other key features that have earned LLCs their good reputation.

US LLC taxes and benefits

As you can imagine, companies based in the United States DO have to pay corporate tax.

However, LLCs registered in the US that also meet the requirement of not being ETBUS (“engaged in a trade or business in the United States”) enjoy a 0% tax rate.

But what is ETBUS and how can you avoid it?

You could be considered ETBUS if you have permanent establishments (warehouses, offices, etc.) on US territory or have dependent agents in the country (people/companies that work exclusively for you).

In short, as long as you do not set up a presence within the United States that could classify you as ETBUS, you can invoice your services worldwide without paying taxes in the USA.

Additionally, another great advantage of LLCs is a 0% VAT applicable to the sale of digital services.

That means if you sell online services like programming, digital marketing, sports coaching, consulting, etc., and invoice from an LLC to, for example, Europe, it will be considered an export of services and NO VAT will apply.

LLC’s cost of establishment, management, and bookkeeping.

Few companies in the world are as inexpensive and straightforward to establish/manage as LLCs.

You can have your LLC fully operational in a matter of days. Later in this article, I’ll detail the opening timelines and associated costs.

Furthermore, something that drastically reduces the costs and bureaucracy associated with maintaining your LLC is the absence of BOOKKEEPING as long as it is registered in the states of Wyoming, New Mexico, or Delaware.

LLC for Digital Nomads / Perpetual Traveler

If you’re that type of Tax Nomad who prefers to live traveling without a fixed tax base or tax residency… LLCs are a great option!

Through your LLC, you can invoice international clients without taxes in the United States while also not paying taxes in your personal tax residency.

It is possible to register the company and open a bank account without a fixed place of residence, but it’s important to be well-advised with these procedures.

LLC for Dropshipping, Amazon FBA, Digital Services…

As I mentioned earlier, LLCs are particularly beneficial for invoicing digital services due to their lack of VAT.

But they not only offer advantages if you sell services; other trending business models like Dropshipping and Amazon FBA can also benefit from them.

For instance, LLCs are common in Dropshipping due to the low fees charged by payment service providers in the US.

The good reputation and lack of restrictions of LLCs allow selling with Amazon FBA in all countries.

LLC with a favorable tax residency

LLCs are always a good option when you have a favorable tax residency.

There are numerous tax residencies that either have a 0% taxation rate for individuals or very low personal taxes.

LLCs, being transparent entities, will be taxed based on where you are located.

So, if you are considering relocating or already reside in such a tax-friendly jurisdiction, you should consider LLCs as they can fit well into your tax planning strategy.

LLC as Holding company to protect your assets

The use of a US LLC can be highly attractive for global real estate investment, as LLCs have full legal capacity in most countries worldwide.

Moreover, the flexibility of the US commercial legal framework facilitates uncomplicated modification of LLC ownership structure, allowing for anonymity of the members.

By selecting the appropriate state, even the managers of the company can remain anonymous. Without altering the public record, the LLC’s internal contract (Operating Agreement) allows for free assignment of property rights.

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Best state to open an LLC

LLC in Wyoming

Wyoming, a pioneer in implementing LLCs in the USA, is renowned for its legal expertise and efficiency. With no prerequisites, not even a minimum age requirement, its appeal lies in:

  • Legal protection: While all LLCs offer this, Wyoming goes further by providing additional protection against charging orders. In case of debt, the debtor can choose not to withdraw LLC profits, safeguarding their assets.
  • Low renewal costs: Annual renewal in Wyoming is among the lowest, at just $60 or 0.02% of assets over $300,000. There are no late penalties, with a 60-day grace period for compliance.
  • Streamlined processes: Wyoming is known for its efficient approach and simplified processes in LLC formation and maintenance. It eliminates unnecessary bureaucracy, providing a flexible framework that facilitates business management.

LLC in New Mexico

New Mexico, like other LLCs, offers simplicity and privacy but stands out for its low registration cost.

Its main advantages include:

  • Simplicity: Establishing an LLC in New Mexico is a straightforward process, even for non-residents, taking just three business days. Only an articles of organization needs to be filed with the Secretary of State, and any authorized person can do so.
  • Privacy: New Mexico also allows for the formation of anonymous LLCs. This means the LLC does not need to disclose personal information about members, except to the IRS and Secretary of State.
  • Low registration cost: It offers one of the lowest fees for LLC incorporation in the USA. The cost for filing articles of organization is only $50, with a maximum additional charge of $4 for electronic filings.

LLC in Delaware

Although Delaware has the highest cost for establishing an LLC, it is one of the most famous states for registration due to its robust legislation that ensures protection and privacy for business owners.

Its main advantages include:

  • Confidentiality and privacy: Delaware offers a higher degree of confidentiality and privacy compared to other states.
  • Asset protection: Delaware ensures strong protection for assets, which are kept separate from the LLC’s potential debts.
  • Robust legal framework: The state has a well-structured legal system and courts specialized in commercial matters.

Illegal uses of an LLC

As we warned at the beginning of this article, LLCs are becoming increasingly popular among residents of tax hells like Germany or Spain.

While in many cases they are a great tool, in many others they are not, yet the mistake is made of using them following the advice of greedy tax advisors (who seek a commission for the opening at all costs) or by imitating a friend who has also opened one…

Some 100% illegal practices and behaviors to avoid are:

  • Thinking you are not obligated to declare the money from the LLC. Completely false. In fact, in most cases you will need to disclose that you have an LLC and declare any profits (if any) in your tax residency.
  • To think that no one can know what you are doing. There are increasingly ways through which you could be investigated and found out. New regulations like the Corporate Transparency Act and the CESOP Law specifically aim to investigate such acts.
  • Using the LLC for personal expenses to avoid declaring them. This is a blatant strategy that is obviously illegal.
  • Issuing fake invoices to reduce the tax burden of other companies. Once again… be prepared if you get caught because it is illegal.

Annual reports of US LLCs

Although you register your LLC in a state where you can dispense with bookkeeping, there are still reporting responsibilities for the company.

At the end of the fiscal year, two brief forms must be completed: Form 5472 and Form 1120.

These forms cover the amounts with which the company ends the year, the investment contributed by the partner to the LLC, and the amount that the LLC has distributed to the partner.

Failure to file or inadequate records can result in fines of $25,000, increasing if the issue persists. Providing false information can lead to criminal consequences.

Additionally, if you have more than $10,000 in a foreign account at any time during the year, another form (FBAR) must be completed, although this can be easily managed by using the correct account and currency for yourLLC (for example, Wise in dollars).

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Registering an LLC in the USA: prices and timelines.

It’s time for you to discover why LLCs are known for being affordable and quick to establish.

The cost of forming an LLC (depending on the state) can be as low as €300-€500.

However, these prices assume that you handle all the procedures yourself and are capable of getting it up and running on your own.

If you’re not familiar with company formation or simply don’t have the time or inclination to learn how to do it… We can help you!

With us you can register your LLC and have it fully operational in just 15 days for a price ranging between $600 and $900 (depending on the state and other business variables).

Our fee will include all necessary services such as document preparation, registered agent, operating agreements, obtaining EINs, among others.

We hope the information in this article has been helpful to you and that you can enhance your relationship with LLCs on your journey as a Tax Nomad!

If you want to set up an LLC or wish to receive a comprehensive analysis of your situation to discover your best options, simply fill out the form below and let us know your case and needs.

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A USA Limited Liability Company (LLC) is a form of business entity that combines the flexibility and simplicity of a limited liability partnership with specific tax benefits.
 

LLCs are (in most countries) pass-through entities meaning that income and losses are attributed to the individual owners.

They allow owners to limit their personal liability by separating their personal assets from those of the company.

Moreover, LLCs offer tax advantages, such as the possibility to avoid corporate taxes in certain cases.

They can be used for various purposes, from digital services to real estate investments.

It is essential to understand the implications and fulfill legal obligations to fully leverage this type of business structure.

A transparent or “pass-through” entity is one where its income and losses are directly attributed to the owners and reflected in their personal tax returns.

In the context of a Limited Liability Company (LLC) in the United States, this term implies that the LLC does not directly pay corporate taxes (when it is a Non-Resident LLC), but rather income and losses flow through the entity and are taxed at the individual level for each owner.

This approach provides flexibility and can be advantageous in tax terms, but it requires careful management of the structure and the tax residency of the owners.

A Limited Liability Company (LLC) in the United States, being a pass-through entity, does not pay taxes at the entity level.

Instead, the income and losses of the LLC flow through the business and are directly attributed to the owners.

These profits or losses are reported and taxed on the owners’ personal tax returns.

The tax rate that each owner pays depends on their personal income and the tax structure of the country where they reside.

Therefore, the LLC itself does not pay direct corporate taxes at the federal level (assuming it is a Non-Resident LLC and does not constitute an ETBUS), although individual owners are responsible for meeting personal tax obligations related to the LLC’s income.

A US LLC offers multiple advantages.

Firstly, it limits the liability of owners, protecting personal assets.

Additionally, being a pass-through entity, income and losses flow through to owners, avoiding direct corporate taxes. If the LLC is not “engaged in a trade or business in the United States,” it can benefit from a 0% tax rate.

Incorporation and maintenance are affordable and straightforward, especially in states like Wyoming or New Mexico.

Its flexibility makes it suitable for various business models, from digital services to investments.

It also provides privacy, particularly in states like Delaware.

For tax nomads, it offers the option to operate globally without a fixed tax residence.

In summary, the US LLC combines legal protection, tax benefits, and adaptability to different business needs.

Opening an LLC may interest entrepreneurs looking to limit their liability and optimize their tax structure, as well as digital service businesses, online merchants, real estate investors, and Tax Nomads.

It is a versatile option that adapts to various business needs and profiles.

Yes, it is possible to set up an LLC as a non-resident of the US.

Many people choose to open an LLC for various purposes such as international business, digital services, or investments.

However, it is crucial to understand the tax and legal implications both in the United States and in your country of residence.

The choice of state to register the LLC, proper management of tax residency, and the structure under which the LLC operates are important aspects.

Additionally, it is essential to comply with obligations and reporting requirements both in the United States and in the country of residence to avoid legal and tax issues.

Seeking advice from professionals in both countries can be crucial in these cases.

The cost of setting up an LLC varies depending on several factors, including the state where you register your LLC and whether you handle the process yourself or use a service.

Generally, the costs can range from around $500 to $900.

It typically includes state filing fees, which vary by state, and any additional fees for services like preparing operating agreements or obtaining an Employer Identification Number (EIN).

For a precise quote, it’s advisable to check the specific requirements and fees of the state where you plan to establish your LLC.

The time required to open an LLC can vary depending on the state where it is registered and other factors.

In the case of services offered by us, the process of opening an LLC generally takes 2 days for the initial setup and an additional 15 days to obtain the EIN (Employer Identification Number).

It’s important to note that some states have faster and more efficient processes than others.

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