[4 Minute Read]
Did you know that the United States can be a tax haven for Canadians? Most people don’t.
As a non-resident alien (a person who isn’t a US citizen AND doesn’t reside in the USA) you can form a business in the USA under the Limited Liability Structure (LLC). Having an LLC in the US has many benefits, but the tax free income is definitely the biggest and most interesting advantage.
Keep reading to find out more.
How Can an LLC Avoid Taxes?
First of all, an LLC doesn’t avoid taxes.
What happens is that the profits and losses of the LLC are passed onto you, the owner. This pass-through tax structure of an LLC means that all its profits are taxed only at the personal income level.
‘What’s the use of that, if I have to pay the tax as my personal income anyway?’ – You might ask.
The thing is, that the US doesn’t tax foreigners unless they’re engaged in a trade or business in the United States (ETOB).
What Does ETOB Mean?
You’re engaged in trade or business in the US if you’re regularly doing a big proportion of your business in the USA.
You’re also engaged in trade or business in the US if you have employees (that work almost exclusively for you) and perform substantial tasks for your business, not just administration, for example.
So if you’re providing a service like web design or coaching. If you’re selling a digital product. If you’re selling products that are shipped from outside the US. Then you’re not considered taxable by the US.
Offices and Employees in the USA
If, on the other hand, you have offices in the USA. Or maybe just one employee who is doing serious work for you and no one else, then your income would be taxed by the USA.
Fulfilment by Amazon (FBA)
There’s a debate around Fulfilment by Amazon (FBA) and whether that counts as ETOB. Generally speaking, Amazon is an independent agent that provides services to thousands of people, so it doesn’t mean you’re ETOB.
The definition of the term ETOB doesn’t provide a clear cut answer to FBA business owners though. Since the products are in the USA at the time of the purchase, it could be seen as the actual business transaction taking place inside the USA. However, the business is managed from outside of the USA and there are no dependent agents inside the US.
So far, there have not been any official court proceedings to rule in either direction. In this situation, it’s a potential risk for FBA business owners.
Why Form an LLC in the USA?
Why do so many Canadians choose to form an LLC in the USA? You might be surprised, but it isn’t just because of the tax benefits.
Here are the additional advantages of forming an LLC in the United States for Canadian citizens.
US Business Bank Account
Here’s the thing; if you’re getting paid in U.S. dollars for your product/ services, then you’re also paying extortionate exchange and transfer fees.
This can either come from your bank or your payment gateway. Sometimes both. That’s compounded rates and fees that you don’t want to be paying in the long term.
It’s estimated that you can end up paying as much as 6% when exchanging money. Think about that on the 12 month scale, or longer. It adds up to a substantial amount, doesn’t it?
Wouldn’t it be nice if you had more control over how much you pay in fees?
That’s why you want a US business bank account. You can receive payments in U.S dollars and choose how you exchange your money. If you go for a bank that has competitive foreign transaction fees and wire transfer rates, you’ll save a substantial amount.
This is our guide to the best US banks and wire transfers. Make sure to check it out.
Of course, you can’t just have a business bank account without having a business in the US. That’s why you want to incorporate in the US.
The good news is that you don’t have to live in the US, you don’t have to be a citizen, and you can incorporate in the US even if you’ve never visited.
An LLC is a Flexible Business Structure
When you open your business, you invest time, money, and a lot of effort into it. Usually, businesses start small then grow. Some aren’t made to grow into huge corporations, but they are made to make a lot of profit and scale that way.
The most recent business models that are being adopted by digital nomads, freelancers, and digital entrepreneurs are on the smaller side. They can involve employees or contractors, but in general, they’re focused on keeping things simple while maximizing profit.
These businesses are not quite corporations, but they’re not at the level of a sole proprietorship either.
If you run this type of business, you want flexibility. Flexibility to sell your business, flexibility to scale down or up, flexibility to change business structure. That’s what an LLC essentially is.
An LLC allows your business to keep many doors open. For example, you can transfer the ownership of an LLC. You can change to a corporation later on. You can decide how your LLC will be managed and adapt the operating agreements as time goes on.
A corporation requires much more headache when it comes to filing, paperwork, and so on. A sole proprietorship, on the other hand, doesn’t give you limited liability protection.
Limited Liability Protection
An LLC is a unique combination of a sole proprietorship and a corporation. Most countries, including Canada, don’t offer this luxury.
You see, back home you either have to be self-employed or a corporation. What about small businesses? There’s no room for that.
An LLC is a perfect solution. It offers you limited liability, just like a corporation would, but at the same time, the tax passes through to you.
Limited liability is crucial. Starting a business is a risk, it’s hard work, but it offers the potential of huge rewards for you but also the economy in general. We need new businesses.
More often than not, you’ll want some form of financing. You’ll also have regular expenses which add up as your business grows. What happens when you can’t pay for whatever reasons? In the case of a sole proprietorship, your business’ debts will be satisfied with your personal assets.
In other words, if your business gets shut down. It doesn’t matter why. Accidents and mistakes happen. Economic crises happen. Pandemics happen. If it does get shut down, all the outstanding debts and payments will be your responsibility.
If you incorporate an LLC, that won’t be the case because your business is seen as a separate entity. So, the creditors will not come after your home, car, or crypto. They’ll go after the business.
How to Incorporate in the USA?
There are two ways you can incorporate in the U.S.
Do It Yourself
You can DIY it, and hope for the best.
This is what a lot of people set out to do and then give up halfway through the process. It isn’t an overly complex process, it’s just that there’s a lot of variability between the states.
Unless you’re familiar with all 50 states, the IRS, and the general law of the US, you’ll probably find the process and decision making overwhelming.
We have broken down which states are best for incorporation for non-resident aliens. Read the guide here.
The post gives a general overview of the differences you can expect between the states. The best state for your business will depend on who you are and what your business is.
That’s why we recommend the second route to forming an LLC.
Hire a Professional Business Registration Service
The second route is hiring a professional service that will incorporate on your behalf. This is the safest and the logical way of doing things, at a small cost.
We’ve been in this business for a while. We’ll give you sound advice on your state of incorporation, structure, and anything else. Also, at least you have a guarantee that things will be done correctly. We all know how DIY jobs usually end.
How Long Does it Take to Incorporate an LLC in the USA?
Incorporating with us is 100% online and remote. It doesn’t matter where you are in the world. All you have to do is sign up through our website here. You’ll fill in a simple form and pay the formation fee.
In most cases, your LLC will be officially registered within a few business days.
Applying for a Business Tax Number in the USA
After formation, you’ll need a tax identification number in the US. This is what will help you open a business bank account and file with the IRS.
In the case of a foreign-owned LLC, the tax number is called the Employer Identification Number (EIN). Yes. This is what you need, even if you’re not planning on employing anybody.
If you incorporate with us, we can get this number for you. Just choose the right incorporation package. Alternatively, you can read this article to find out how to do it yourself.
Opening a US Business Bank Account
Once you have your EIN you can open a business bank account in the USA. Unless you’re planning a visit to the US, we recommend that you open a business account with Wise because you can do it remotely.
Forming an LLC in the USA is a popular choice for Canadian citizens as it gives them a more flexible option. An LLC gives you favourable tax conditions, flexibility, and liability protection.
Incorporate Your LLC Today!
Get started with our simple online form and have your LLC officially incorporated in just days.