Incblog for enterpreneurs

Covering entrepreneurship and business start up questions for non-residents and US citizens.

 

Aug 29 2013

LLCs or corporations: which is better for non-residents?

by John Gordon | 23:08 GMT

For a foreign national looking to set up a business in the US, the choices of business entity to use look very confusing. Most of the free information about US companies is designed for US residents, and does not take into account the needs of non-residents.

In general, however, the choice of entity for a non-resident follows simple, general guidelines:

  • If the company will be doing business in the US, then a corporation is the better choice.
  • If the company will be used strictly outside the US, and there will be no US resident owners, then a limited liability company (LLC) will be much better.

Why do these choices work? First, the easy part: If you use a US company to carry on business outside the US, and have no US-resident owners, then very likely your LLC is not subject to US income tax or reporting. As a single-member LLC, your company is automatically considered to be a “disregarded entity,” meaning that it does not exist for income tax purposes. If the owner is not subject to US tax, and the LLC is not doing anything that would trigger US tax obligations, then it does not have a US tax or reporting obligation. A US corporation, no matter which state it is incorporate in, is taxable on its worldwide income, and must file a corporation tax return each year.

On the other hand, if your company will be doing business in the US, by leasing office space, , hiring employees, or otherwise setting up a “permanent establishment,” then a corporation makes more sense for most people. This is because, while a corporation pays ordinary income rates whether owned by a resident or non-resident, an LLC’s situation is more complicated. The default tax status is flow-through, either as a disregarded entity or a partnership. Flow-through tax is a mixed blessing for a non-resident, since it means that the non-resident must obtain a US tax number and file a non-resident US income tax return. Any money earned from the LLC that is to sent to the owner(s) must first be reduced by 30% – which is sent straight to the IRS as a withholding tax. When the non-resident files his /her/its tax return with the actual tax amount due, the IRS may then issue a refund (by check) to the taxpayer for the excess of the withheld amount over the actual due. If it sounds complicated, well, it is complicated. As part of this process, the LLC must designate a tax withholding agent to calculate the amount due and send it to the IRS before releasing the rest of the money. There are also various information that are prepared and sent to the IRS at the end of the year. A foreign-controlled LLC is also subject to the Branch Profits Tax, an onerous tax and accounting procedure meant to prevent foreign-owned companies from circumventing capital gains taxes. US corporations are not subject to the Branch Profits Tax. The only benefit that an LLC would have is that non-US source income that is not considered earned from the activities of the LLC (a complicated concept in practice) are not taxed. Because of all these complications, using a corporation to transact only US business (and using a different, non-US entity for non-US business) is considered the best practice.

Planning to set up a company in the US? Contact us today for your FREE, NO-OBLIGATION company formation consultation.

 

John Gordon John Gordon

Founder, President & CEO of USA Corporate Services Inc., a New York City-based incorporation and company management firm. He is a graduate of the Global Executive MBA program from Columbia Business School and London Business School.

 

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