The US LLC is a unique business structure which allows a person or persons to operate their business without putting at risk their personal assets through limiting their liability. It provides the owners with a legal protection for their personal assets without the complexity of the commonly used corporation. A corporation is a company limited by shares, while an LLC does not issue shares and its owners are referred to as members.
A US Limited Liability Company is organized under state law and it is registered with the office of secretary of state within the state of Incorporation. In 1988 the LLC became universally accepted and every state within the union now have legislation enabling this form of business organization.
The basic document of filling and registering an LLC is Articles of Organization. The Articles list the name of the LLC, its registered agent and address, members and directors and business activity. Since an LLC does not have shares, the owners are therefore not shareholders but members.
The LLC can be formed with one member. Members are not liable for the debts of the entity.
Non-US-Resident aliens may be members of an LLC which has it referred to as an "offshore LLC". The LLC can have as minimum as one Non-US-Resident Member (owner) with no local member. This type of LLC is referred to as Non-US-Residents owned LLC.
LLC & Taxes
In the US there are two major tax levels:
1. Federal Level (Internal Revenue Service)
2. State Level (State Tax Department)
Every US Entity (Individual or Corporation) is subject to the Federal & State Tax laws.
A major advantage of an LLC is its tax classification as a “pass through entity”, which means that there is no tax liability on the LLC unless the members clearly choose to be taxed like a corporation (company limited by shares). The tax liability goes to the member following the type of ownership.
Single-member LLC (One owner, Sole Member)
By default, a single member LLC is disregarded. It means that the income or deductions of the LLC go on the owner's tax return. For example, if an individual owns an LLC that operates an active trade or business, the LLC's income and deductions will be taxed as individual income tax rate (and not corporate tax rate).
If an individual owns an LLC that holds rental property, the LLC's income and deductions will be treated as individual passive income and not business income.
In other words, the fact that the business or real estate is operated or owned by an LLC is sort of irrelevant for tax accounting. The LLC is, in the language of tax law, disregarded.
The tax accounting works similarly if the owner of the LLC is a corporation or partnership. If the owner is a corporation or partnership, the LLC's income and deductions just get combined with the corporation's or partnership's other income and deductions and appears on the corporation's or partnership's tax return.
Multiple-member LLC (two members and more)
A multiple member llc by default is treated as a partnership. This means that the LLC's income and deductions get reported on a partnership tax return. And then that tax return allocates the income and deductions among the partners, or LLC members.
Each partner, or LLC member, receives a K-1 from the partnership. The K-1 shows that partner's share of the income and deductions flowing out of the partnership
LLC Owned by a Non US Alien
If the LLC is owned entirely by non- resident aliens, no LLC business is conducted in the US and all its income is foreign source income, then no tax need be paid to the IRS. The US, in this case, becomes a tax haven for non-resident aliens.
In other words, the if an LLC is fully owned by non us residents and the LLC’s income is not derived from the United States and it is not effectively connected with trade or business within the United States nor do they employ US residents or rely on a dedicated place of business within the United States, the income is not subject to US tax.
LLC Corporate Documents
The foundation of the LLC is constructed with filling Articles of Formation or Articles of Organization. These also known as Articles of Association or Certificate of Incorporation.
The LLC should have an LLC Operating Agreement to streamline members’ relationships, financial and operational policies.
Each member should receive a member certificate which states the amount or percentages of the LLC’s interest owned.
The LLC should obtain EIN (Tax ID Number) and EIN Confirmation letter.
US LLC as an Offshore Company
US LLC can be used in a similar way to an offshore corporation if owned by a Foreign Member or a Non US Resident Alien. If the Member is not residing in the US and conducts international business not generated in the US and does not have any physical presence in the US, then the LLC has not tax liability in the US.
LLC owned by a non us resident member who doesn’t have any business derived in the US, can be referred as Offshore LLC.
A US LLC can be used in the same way an offshore business company registered in a Tax Haven may be used if you do not plan to trade with the United States.
Many foreign individuals and Non US Residents Aliens organize a US LLC for their International Trade or Business Activity.
E-Commerce, Real Estate Investment, Trade & Wholesale, Professional Consulting are only few examples for common reasons to form a US LLC.
Most popular States to form a US LLC
Delaware has become the most popular offshore location for international entrepreneurs. There are few reasons for the high rank of Delaware:
Some 300,000 companies, including more than half of the Fortune 500®, are incorporated in Delaware.
The State of Delaware is a leading domicile for U.S. and international corporations. More than 850,000 business entities have made Delaware their legal home. More than 50% of all publicly-traded companies in the United States including 63% of the Fortune 500 have chosen Delaware as their legal home.
Businesses choose Delaware not for one single reason, but because we provide a complete package of incorporations services. The Delaware General Corporation Law is the most advanced and flexible business formation statute in the nation. The Delaware Court of Chancery is a unique 215 year old business court that has written most of the modern U.S. corporation case law. Delaware's State Government is business-friendly and accessible. Our Division of Corporations operates with a state-of-the-art efficiency and our staff provides prompt, friendly and professional service to clients, attorneys, registered agents and others. These factors have all contributed to making Delaware a premier legal home to companies around the world.
You Don't Need to be a Resident of Delaware When incorporating a business in Delaware, you don't have to worry about any residency requirement, as it's not required for you to be a Delaware resident. This applies to shareholders, officers, and directors.
Non-Delaware Businesses don't pay Delaware Corporate Taxes If your business doesn't conduct business in Delaware, you're not obligated to pay Delaware corporate taxes. However, it will be required to pay a franchise tax each year.
One Person can Hold all Officer Positions and Serve as Sole Director This is actually a big benefit because many states require that you name separate people as officers and directors. If your business is relatively small and you're the only person who runs it, this is a big advantage.
Separate Court System - Delaware has a separate court system for corporate law that doesn't involve juries. The advantage of this is that companies don't have to worry about juries deciding corporate cases. Instead, a judge who is familiar with corporate law overseas the case.
So with this in mind, you can see why Delaware is such an attractive state to incorporate in. However, there are many things to consider when deciding where to incorporate your business. These include where you're physically located, the costs to do so, and the corporate legal structure that best suits your needs.
Other common states to organize a US LLC for Non US Residents:
Nevada State LLC, Wyoming State LLC, Florida State LLC – All these state has no income tax.
You may consider forming an LLC in other states if you have a need to employ or establish physical presence: New York LLC, California LLC, Texas LLC, and New Jersey LLC.
Other Business Entity Options and US Business Structures
In the United States, there are various forms of business entities. Depending on which form is chosen, your tax and ownership considerations change.
The common forms of business entities are:
>> Sole Proprietor
>> Partnership (General or Limited Partnerships)
>> Corporations ("C" Corporations and "S" Corporations)
>> Limited Liability Company (LLC)
This form of entity is when an Individual operates business activity without incorporating. A sole proprietor is the entity in which a person opens a business alone without incorporation or any agreement with others.
Since there is no incorporation evolved, no forms or filing is required. The Individual is liable for all debt and other liability resulted from the business. The tax liability is the sole responsibility of the owner on an individual basis.
When two or more individuals engage together in a business or trade activity they establish a General partnership. The partners are personally responsible for the debts and other liabilities of the partnership to the extent of their personal assets. There are no filing or registration requirements. Each partner is taxed on his share of the profits as distributed by the partnership and treated as personal income.
A Limited Partnership is a partnership, with at least one general partner and Limited partners. Limited partners are not liable for partnership debt and only their investment is at risk. In the Limited Partnership, there must be a general partner who has total management responsibility.
A limited partnership is required to register with the secretary of state office to list the general and limited partners. If the limited partner gets involved in management, they risk losing their liability protection.
Limited partnership is limited to 35 members (partners). The tax liability flows to the partners on the individual income tax return.
Corporations are business entities that are separate from their owners. Corporations are limited by shares and have shareholders. Corporations are formed by submitting Articles of Incorporation to the state in which the corporation is conducting business or have physical presence. Corporations are taxed separately from their owners at the corporate tax rate.
Because corporations are separate entities, the debts and liabilities of the corporations are also separate from those of the owners. This separation is sometimes called a "corporate shield."
Double taxation - The Corporation is subject to corporate income tax on its profit. The shareholders pay taxes on the distribution of profits, after tax (dividends), which makes it a double taxation entity.
There are two different tax codes for corporations:
C Corporation – The corporation is liable for corporate tax on its profit and the shareholders are liable for dividend tax should the net profit (after taxes) is been distributed to the owners.
S Corporation is a variation of the "C" Corporation and under a different IRS Tax Code. The "S" Corporation is allowed the pass-through taxation treatment similar to that of a partnership and sole proprietorship. Double taxation is avoided by its owners/shareholders.
S. Corporation has some limitation in regards to the shareholders:
1. Ownership is limited to 75 stockholders.
2. Owners cannot be corporations, partnerships, pension plans, charitable organizations, certain trust.
3. Non-US-Resident aliens cannot be shareholders.
LIMITED LIABILITY COMPANY (LLC)
The Limited Liability Company (LLC) is a limited company with a pass-through or disregarded tax liability. It means that the LLC provides the Legal protection to the owners similar to a corporation but avoid the double taxation in paying corporate tax on the profit and then dividend tax on the distribution to the members.
LLC common practice:
It is a separate legal entity similar to a corporation
The owners are not shareholders but members
Members are liable only to the extent of their investment in the LLC
Non US Residents or Non Resident Alien can be a member of the LLC
LLC is a pass through entity. Therefore, The LLC does not pay taxes; its US Resident members are tax liable as personal income similar to a partnership. Non-US-Resident members are liable for taxes on income generated within the US.
There is no limitation on the number of members. It can be formed with any amount of members.
Articles of Organization (know as Articles of Association) is the founding documents required to be filled with the secretary of state to register the LLC.