Yes, you can form a business in the United States of America as a non-resident alien. And yes, it’s a great business move. The process is easy, and the list of benefits is long.
Keep reading to find out why forming a Limited Liability Company (LLC) in the US as a foreign entrepreneur is a good choice. We’ll also explain how you can have your LLC formed in just days. Without travelling to the US. Without even leaving your house.
What Is An LLC?
Before diving into the article, let’s go over what an LLC is and why people choose to form it in the first place.
An LLC is a business formation. It’s the middle ground between sole proprietorship (self-employment) and a corporation. It offers the best of both worlds, limited liability and pass-through taxation.
In other words, your personal assets are protected, should your business get in financial trouble. And you’re not being double-taxed. The LLC’s income is passed through to you and only taxed at your personal tax rate.
An LLC is the most popular choice for business owners because it offers flexibility. It’s easy to maintain and the administrative costs are low.
There are other business structures in the US. However, as a non-resident alien, you’re limited in your choices. To keep this article simple, we’ll focus on LLC formation for non-resident aliens/ foreigners.
What Does Non-resident Alien Mean?
A non-resident alien is an official term to describe someone who doesn’t reside in the USA and is not a citizen of the USA.
A resident alien is someone who lives in the USA but isn’t a citizen of the USA. This could be someone who migrated to the USA from a different country.
The term alien is used to describe a foreigner.
Benefits of Forming a US LLC as a Foreigner
The USA offers many benefits for foreign entrepreneurs. The best part is that the process of forming your LLC in the US is fast and easy.
Easy Formation Process
LLC formation is just as easy for non-resident aliens as it is for US citizens. There are no complicated and bureaucratic processes involved. Company formation can be done in days. The exact time frame varies by state.
Each State is Different
When you decide to form an LLC in the USA, you get to choose which state you incorporate in. Each state has its laws and regulations. The most significant differences are in the tax rates, privacy, asset protection, and administrative cost.
Choosing the right state for your LLC can save you money and hassle in the long run.
Read the ultimate guide to choosing the best state for LLC formation.
Limited Liability
One of the main reasons you might want to form an LLC is limited liability. It’s the protection you can rely on in case your business has to take a hit.
What could be worse than losing your business, and then your personal possessions? Limited liability protects your home, savings, and other assets. It separates you from your business.
It gives you peace of mind and protection.
Pass-through Taxation
Most big businesses are taxed as separate entities, and then the owners are taxed again as individuals. This is sometimes referred to as double-taxation. What happens is that a corporation is seen as a separate entity. A corporation has to file its tax returns and pay tax on its profits.
The owners are paid by the corporation and have to pay tax on their income. So, in the end, the profits of the corporation are taxed twice.
In the case of an LLC, pass-through taxation applies. An LLC is a transparent business structure. This means that all the profits and losses are passed from the LLC through to the owners. And the owners report the profits on their tax returns.
The profits are only taxed at your personal tax rate.
Non-Resident Alien Tax Rate
As a non-resident alien, you are only taxed on U.S. source income.
U.S. source income is income from activities performed in the USA. So, if you’re working remotely from anywhere outside of the US, your income isn’t considered to be U.S. source income.
Additionally, the IRS sets out that an LLC that meets the following criteria is NOT subject to income tax:
The LLC is 100% owned by non-US tax residents;
The LLC does not have employees (dependent agents) or offices in the US
The LLC must not have Effectively Connected Income (ECI)
To simplify, as long as you work outside of the USA, and your business doesn’t have a physical connection in the states, your LLC is not subject to income tax.
Examples of Businesses That Are Not Subject To US Tax
Here are some quick examples of digital businesses that don’t pay US federal income tax.
Coaches / Consultants
Let’s say you’re a coach. You don’t have a physical office. You don’t have employees. Maybe you hire freelancers or have remote staff somewhere outside of the US. You live between countries or have a base somewhere outside of the USA. You form your LLC to receive payments from your US clients. This income is not subject to US federal income tax.
Fulfilment by Amazon (FBA)
You use Amazon FBA to sell products to the US market (or any other market). You manage the different parts of the business; marketing, administration, and so on. And you live outside of the USA.
Your products are shipped to an Amazon fulfilment center, then mailed to your customers.
Since Amazon is a giant that provides services to millions of other people, it’s not a significant business relationship in terms of taxation. Amazon doesn’t rely on you for the majority of its income. Only if you were Amazon’s main client, then it would be seen as a significant connection. Amazon would be seen as a dependent agent.
Your income is not subject to federal income tax in this scenario.
Digital Product Seller
You have a course, an eBook, or any other digital product that you sell to customers in the US and/or anywhere in the world. Again, as long as you don’t have employees and physical offices in the USA, your LLC is not subject to income tax.
This also applies to selling services/ freelancing, like graphic design, content production, etc.
Access to US Banking & Payment Processing
When you form an LLC you will open a bank account in the US. This makes things easier when receiving payments from your US clients.
Payment gateways have to adhere to the financial regulations imposed by different countries. This can sometimes cause issues when receiving international payments. For example, the exchange rates and transaction fees can be high.
The US banking system is one of the best in the world. The processing of international payments using the US banking system should be easier. And receiving payments from the US will be more cost-effective. You’ll have more control over the fees and exchange rates.
Business Reputation and Credibility
Having your business in the US can give you an advantage over your competitors. Businesses registered in countries with weaker economies can be seen as less credible.
Having a US business address (you can rent a virtual mailbox at low cost) and bank account can add to the credibility of your business.
Low-Effort Administration
An LLC is easy to maintain as a business structure. You don’t have to worry about getting lost in complicated paperwork that’s unfamiliar to you.
US Corporations are usually burdened with requirements like board members and meetings, annual reports, thorough record-keeping, and so on. This is also the case in most other countries of the world.
When you form an LLC in the US you’ll have very little administrative work to do. Some states don’t even require an annual report. It’s a much more flexible and easy-going business structure, even for non-resident aliens.
Summary
Forming an LLC in the US as a foreign entrepreneur is a popular choice. You’ll benefit from tax savings, asset protection, access to the US banking system, additional credibility, and much more.
How to Form an LLC as a Non-Resident Alien?
Company formation in the US as a non-resident alien is best done through a specialist service. For a small fee, you can be sure that all your paperwork is done correctly and in the best interest of your business.
Click here to find out more about company formation for non-resident aliens.
