MXS Launchpad guide to US LLC for international founders

United States are the real American dream for every entrepreneur: thousands of products, services and solutions to choose from, ease of doing business, fast track processes and an immense internal market to target.

But all that glitters ain’t gold, though: the IRS is a pretty aggressive entity and don’t allow for mistakes, until you want to pay costly fines. In addition, US taxes can be completely overwhelming. As a foreign business owner, you may be wondering how to legally sell in the US and what the implications will be for your taxes.

Although taxes are admittedly complicated, LLCs make things simpler than you might think. That’s one reason LLCs make up more than 70% of new businesses in Delaware and in other states.

Forming an LLC can be just as valuable for foreign businesses as it is for American businesses. Let us take a look at some important tax LLC details for international founders interested in expanding to the US.

Is an LLC the right structure for my business?

 While this article focuses on taxes for LLCs, there are good reasons to consider forming a C Corp instead. Unlike LLCs, C Corps can offer stock to shareholders. Click here to learn about other important differences between LLCs and C-Corps.

 

How do LLC taxes work for foreign businesses?

Being pass-through entities, LLCs have a number of important tax advantages. This indicates that regular corporate taxes are not applied to business income. Instead, every penny of income is considered to represent the members of that LLC’s own income.

You won’t have to be concerned with any corporate taxes, either at the state or federal level, if you establish an LLC. When compared to other business arrangements, this makes filing simpler and may result in a lower tax burden.

You might or might not need to pay taxes in the US as the owner of a foreign LLC. Foreign LLC owners frequently have the option of paying full taxes in their native nation. We’ll then go over how to figure out whether your LLC will have to pay US taxes.

 

Do I need to pay US taxes for my LLC?

The majority of the time, foreign residents are nonetheless liable for paying US taxes on income earned in the US. However, you typically don’t have to pay taxes on income that is considered passive foreign-sourced. To comprehend your tax obligations, you must first determine whether your income is foreign-sourced.
Payments for services rendered in the US, dividends earned from a US corporation, or interest earned from a US resident are examples of US-sourced income. Any income earned in the United States is generally subject to US taxation. Fortunately, you can often avoid double taxation
 to American tax treaties with many other countries. These treaties define the tax rules that apply to income earned in one country by a resident of the other.

Foreign-sourced income encompasses all income earned outside of the United States that meets the same criteria. Foreign-sourced income will not be taxed in the United States, allowing you to continue paying taxes in your home country.

What counts as US-sourced income?

In the case of services, the location where the work was performed takes precedence over the buyer’s location. According to the IRS:

“The general rule for sourcing wages and personal service income is controlled by where the service is performed. The residence of the recipient of the service, the place of contracting, and the time and place of payment are irrelevant.”

Income from goods is a little trickier. If your company manufactured the goods, taxes are typically levied based on the location of manufacture. When a vendor resells products purchased from someone else, the income is usually taxed based on the sale location.

While every situation is different, you probably have US-sourced income if you meet any of these criteria:

  • You live or work in the United States
  • You have full-time employees in the United States
  • You own or rent real estate in the United States

If none of these apply, your company is unlikely to have any income from the United States.

Keeping this in mind, your income will be taxed either outside the United States (foreign-sourced) or in accordance with the terms of the applicable treaty (US-sourced).

 

What about state taxes?

The tax laws in each state differ dramatically. This is especially difficult for foreign entrepreneurs who are unfamiliar with US taxes.

Fortunately, unless you physically reside in that state, you will not be required to pay state taxes on your LLC. Furthermore, neither Wyoming nor Delaware impose state corporate income taxes on foreign-owned businesses. If you do not pay state income taxes, you will never have to incorporate your business with MXS Launchpad from outside the US.

 

What if I don’t have any US tax obligations?

Even if you have no US-sourced income, you must still file some documents as a US LLC. Many states demand annual reports and/or franchise taxes from any company that operates under their control. There could be serious repercussions if these conditions are not met. Businesses without US taxable income can simply file a pro forma 1120 and Form 5472 as a foreign-owned Disregarded Entity. Companies with US-sourced income will likely face additional filing requirements depending on their tax obligations.

Final thoughts

Foreign business owners frequently believe that if they incorporate in the United States, they will be required to pay US taxes. Many foreign-owned LLCs, on the other hand, operate outside the US and are able to pay all taxes in their home country.

Because US taxes are notoriously complicated, it’s a good idea to consult with a tax professional if you’re unsure about your responsibilities. Schedule a consultation today with our expert tax partners to discuss your company’s tax situation and ensure you’re compliant with state and federal regulations.

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