The Firstbase guide to US LLC taxes for international founders
The American market offers an audience for nearly every product and service, but 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.
While taxes are admittedly complicated, LLCs make things easier than you might think. That’s one reason why LLCs make up more than 70% of new Delaware businesses.
Incorporating as an LLC can be just as valuable for foreign businesses as it is for American companies. Let’s take a look at some key LLC tax details for international founders who are interested in expanding to the US.
Is an LLC the right structure for my business?
While this article will focus on LLC taxes, there are good reasons to consider incorporating as a C Corp instead.
Unlike LLCs, C Corps can offer stock to shareholders. This makes them a better option for companies that plan to seek outside funding from American investors.
On the other hand, C Corps are also required to pay corporate taxes on profits, making their tax considerations much different from those of a typical LLC.
Click here to learn more about other key differences between LLCs and C Corps.
How do LLC taxes work for foreign businesses?
One key tax advantage of LLCs is that they are pass-through entities. This means that business income is exempt from conventional corporate taxes.
In other words, the income you generate through the business is the same as any other income you create on a personal level. The members of the LLC pay personal income tax on their share of the revenue, while the LLC itself doesn't pay any income tax at all. Of course, LLCs are still responsible for other taxes (e.g. sales tax, franchise tax, payroll tax, et cetera).
With an LLC, you won’t have to worry about any corporate taxes at either the state or federal level. This makes filing easier and can lead to a lower tax burden compared to other business structures.
As the owner of a foreign LLC, you may or may not need to pay taxes in the United States. In many cases, foreign LLC owners can pay all taxes in their home country. Next, we’ll explain how to determine whether your LLC will be responsible for US taxes.
Do I need to pay US taxes for my LLC?
If you live outside the US, you are generally responsible for US tax on US-sourced income. In contrast, you usually don’t need to pay taxes on income that’s considered foreign-sourced. To understand your tax obligations, you first need to determine whether your income qualifies as foreign-sourced.
US-sourced income could include payments for services rendered in the US, dividends earned from a US corporation, or interest earned by a US resident.
You will generally have to pay US taxes on any US-sourced income. Fortunately, you can usually avoid double taxation due to American tax treaties with many other countries. These treaties clarify tax rules for income earned in one country by a resident of the other.
Foreign-sourced income includes all income generated outside the United States under the same criteria. Foreign-sourced income won’t be subject to US taxes, enabling you to continue paying taxes in your home country.
What counts as US-sourced income?
For services, the location where the work was performed takes priority over the location of the buyer. 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 can be a little more tricky. If your company produced the goods, then taxes are typically based on the location of production. On the other hand, income is usually taxed based on the sale location when a vendor resells products that they purchased from someone else.
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 those apply, then there’s a good chance that your business doesn’t have any US-sourced income.
With that in mind, your income will either be taxed outside the US (foreign-sourced), or according to the terms of the applicable treaty (US-sourced).
What about state taxes?
Tax laws are dramatically different in different states. This presents a particularly tough challenge for foreign entrepreneurs who aren’t familiar with US taxes.
Fortunately, you won’t have to pay state taxes for your LLC unless you physically live in that state. Furthermore, there are no state corporate income taxes for foreign-owned companies in either Wyoming or Delaware. You’ll never have to worry about state income taxes if you incorporate your business with Firstbase from outside the US.
What if I don’t have any US tax obligations?
Even if you don’t have any US-sourced income, you still need to file some documents as a US LLC. Many states require annual reports and/or franchise taxes from all businesses that operate in their jurisdiction. Failing to meet these requirements could lead to significant consequences.
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. Companies that incorporate through Firstbase get built-in compliance reminders and even automated filings with Firstbase Agent.
Foreign business owners often think that they’ll have to pay US taxes if they incorporate their companies here. However, many foreign-owned LLCs operate outside the US and are able to pay all taxes in their home country. As mentioned above, your tax obligations will largely depend on whether your LLC's income is US-sourced or foreign-sourced.
US taxes are notoriously complicated, so it’s a good idea to talk to a tax professional if you’re unsure about anything. Schedule a consultation today with our expert tax partner Bookmate to discuss your company’s tax situation and ensure you’re compliant with state and federal regulations.