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 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.

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.

Sole proprietorship

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.

C corporation

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. 

Bright!Tax CPAs are proud to support foreign entrepreneurs with US businesses.

Whether you’re starting an LLC as a foreigner or need assistance identifying the best business entity for your situation, our US tax experts will ensure you and your business are set up for long-term success.

Meet Your CPA

References

1. Effectively Connected Income – IRS

The post Starting an LLC as a Foreigner: What Non-US Citizens Should Know appeared first on Bright!Tax Expat Tax Services.

We’ve put together a short, plain-spoken guide to green cards to make it easier.

What Is a Green Card?

A Green Card is an immigration document that grants the holder permanent resident status in the US. To be eligible for one, you must belong to at least one of the eligibility categories. 

Generally, you can qualify for a green card through:

• – Family ties
• – Work
• – Humanitarian reasons (e.g. refugee or asylee status)
• – The “diversity lottery”
• – Long-term residency in the US

To get a Green Card, you’ll need to:

• – Have someone sponsor/petition your application (in most cases)
• – File an application
• – Attend a biometrics appointment
• – Attend an interview
• – Have your application approved & receive your card

This process typically takes several years, and after a certain amount of time — usually every 10 years — you’ll need to renew it.

Read more: US Tax Implications: Worldwide Income For Green Card Holders

Green Card vs. Citizenship

Unlike permanent residents, US citizens are granted some additional rights, such as the ability to:

• – Vote in elections
• – Run for office
• – Receive a US passport
• – Work for certain governmental agencies
• – Sponsor visas for all immediate family members & have children qualify as US citizens
• – Avoid deportation

The process for US citizenship is different as well. US citizens are granted citizenship either by birth — being born in the US, or having a US citizen parent — or through a process called naturalization, which permanent residents are eligible for after a certain amount of time (often five years).

Green Card Benefits

While permanent residents don’t have all the same rights as citizens, there are still a number of benefits of having a Green Card, like the ability to:

• – Live & work in the US permanently
• – Receive legal rights & protections
• – Sponsor certain family members for visas, like spouses & unmarried children (although green card holders can not sponsor parents or siblings)
• – Receive certain benefits like social security and in-state tuition
• – Financially contribute to and volunteer for elections
• – Freely travel between other countries & the US for short-term stays

Green Card Drawbacks & Considerations

Along with the advantages of having a green card, there are certain obligations as well.

Green Cards & Travel

Permanent residency status may be threatened by extended trips abroad. Generally, the minimum stay in the US for Green Card holders to maintain permanent residency is 6 months — so keep this in mind if you plan to work abroad or as a digital nomad.

When traveling, always bring your passport from your country of origin and your Green Card. You can travel while your Green Card is being renewed or if it’s lost or stolen — but only if you go to a nearby USCIS office to get an ADIT stamp that proves your permanent residency.

Green Cards & Taxes

As a permanent resident, you’ll have to pay US taxes on your worldwide income, even if you are employed by a non-US company or are currently living abroad. If you have to pay taxes in another country, too, you may be eligible for the Foreign Tax Credit, which essentially allows you to subtract the amount you’ve paid in taxes to a foreign government from what you owe the US. 

Read more: How To Calculate Your Foreign Tax Credits & Carryover (With Examples!)

Separately, applying for the Foreign Earned income Exclusion is generally not recommended for Green Card holders. It can indicate that you don’t intend to make the US your permanent home.

One very important thing to keep in mind is that Green Card holders must continue to pay US taxes even if their card has expired or if they haven’t lived in the US for years. The only way to end your requirement to pay US taxes is to formally abandon your Green Card. However, doing so may subject you to expensive exit taxes and/or make it harder to return to the US. We recommend you always consult with an immigration attorney and tax professional first!

Green Card Taxes Made Simple

If you currently hold a Green Card or are considering applying for one, there can be significant tax implications — so the safest bet is to work with a certified tax professional, like those at Bright!Tax.

With our expertise in Green Card holder and applicant taxes, we can help you stay on top of your taxes and minimize your liability. Reach out today to learn more about us and how we can help!

The post A Brief Guide to Green Cards appeared first on Bright!Tax Expat Tax Services.

The US has a complex tax system that taxes its own citizens even when they are living abroad. Sometimes, the US can also tax non-Americans, depending on how long they spend in the country.

In this article, we go over what a nonresident alien is and how their tax situation differs from resident aliens:

What is a nonresident alien? 

The US classifies anyone that’s not an American citizen as an “alien.” For tax purposes, a nonresident alien is someone who is not a US citizen and doesn’t meet the Green Card Test or the Substantial Presence Test. 

Common examples of nonresident aliens in the US are teachers, students, and researchers on F, J, M, and Q visas. 

Let’s take a look at what the Green Card test and Substantial Presence Test entail:

Green Card Test

You qualify as a resident alien if you’re a lawful permanent US resident, also known as a Green Card holder, at any point in the tax year. Foreigners typically gain this status when they step foot on US soil for the very first time with their Green Card in hand. 

From an immigration perspective (not to be confused with the IRS’s definition of residency), to maintain your Green Card status, you may not spend more than one year outside the US or establish a primary home in another country.

For further recommendations or instructions, it’s recommended that you consult with an immigration attorney on all things Green Card related.

Substantial Presence Test

The Substantial Presence Test is to determine whether you are considered a US tax resident as a result of your physical presence in the US over the past three years. The Substantial Presence Test involves a calculation to determine whether you’ve been in the US for at least 183 days, including:

• – All the days present this year
• – ⅓ of the days present last year
• – ⅙ of the days present two years ago

To be considered a US tax resident for purposes of the Substantial Presence Test, you must have been in the US for at least 31 days in the current year.

Many people in the US with nonimmigrant visas end up passing the Substantial Presence Test. However, the IRS also offers some exceptions, such as for those who can’t leave the US due to medical reasons. Days where you spent less than 24 hours in the US while in transit also don’t count towards meeting the Substantial Presence Test.  

If you don’t pass either one of these two tests, then you are considered by the IRS to be a nonresident alien. 

Nonresident aliens vs resident aliens: What’s the difference? 

The main difference between nonresident aliens versus resident aliens is how the IRS taxes their income.

Resident aliens will report all of their worldwide income to the IRS each year, including dividends, interest, capital gains, and rental income. That’s the case even if they live overseas because of the US’s citizenship-based taxation system.  

A nonresident alien, on the other hand, has reduced tax obligations with the IRS. This is because nonresident aliens only get taxed on their US-sourced income. 

Nonresident aliens may get taxed differently depending on their type of income. Additionally, nonresident aliens use different IRS forms than those US taxpayers are used to, such as Form 1040. Instead, they’ll have to file Form 1040NR, the US Nonresident Alien Income Tax Return, to report any of their US-sourced income. 

*Some examples of US-sourced income include: Rental income from a US-based property, dividends from a US-based company, or pension income from a US-based retirement plan

What’s a dual-status alien? 

Strange as it sounds, it is possible to be both a US resident alien and nonresident alien in the same tax year, which qualifies you as a dual-status alien. This typically happens in the year someone is entering or leaving the US.

As a dual-status alien, the IRS will determine your US tax liability differently – specifically differentiating between the period you were a resident alien of the United States and the period you were a nonresident alien:

• – For the part of the year you are a US resident alien: The IRS will tax all of your worldwide income earned when you were a US resident alien.  
• – For the part of the year you are a nonresident alien: The IRS will tax all US-sourced income during the time you were a nonresident alien.   
• – Not effectively connected income: Any income received during your time as a nonresident alien not linked to a trade or business in the US will not be taxable. 

Dual-status reporting also happens when a US citizen decides to renounce their citizenship part way through the tax year. 

Need help thinking through your next best steps?

The US tax system is hard to navigate, even for American nationals. To determine if you’re a nonresident or a resident alien for tax purposes, run through this quick checklist:

• – Are you a US citizen? If so, you should file Form 1040 each year to the IRS. 
• – If not, evaluate whether you meet the Green Card Test or Substantial Presence Test. If so, you’ll need to file Form 1040 with the IRS. If you don’t qualify for either of these tests, then the IRS will classify you as a nonresident alien. 
• – As a nonresident alien, you’ll need to determine whether you’ve earned any income in the US during the year. Were you in the US for work? Do you have a US-based pension or a rental property? Or perhaps you received dividends from a US company. These would all require reporting on Form 1040NR. 
• – Start preparing the paperwork required to file your US taxes, whether that be Form 1040 or Form 1040NR. You can also hire a specialized US expat tax expert to handle all of your US tax filings for you. 

The post Nonresident Alien vs Resident Alien: Understanding the Basics appeared first on Bright!Tax Expat Tax Services.