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Why every international business needs a tax free LLC + bank account
Why a U.S. company?
The global marketplace is constantly changing, and those who want to succeed in today´s new world order need to be able to adapt fast. In this article, we present the US LLC structure which offers unique advantages, especially for second and third world countries. With a US LLC, you can invoice clients from almost any part of the world and not owe taxes in the US if the business meets specific requirements. Moreover, LLCs are low-cost structures very easy to establish and manage and have minimum reporting requirements. Let us analyze why these structures are such advantageous and why you should establish one.
Why establish a US LLC
- If the US LLC does not have an office or employees in the US, and if it does not conduct business in this country, it will be exempt from income tax and all US taxes.
- There are no withholding taxes. If the owner takes a distribution or if the company pays providers located abroad, then there is no reporting or withholding tax in the US.
- With an LLC there is a good possibility to open a bank account in the US, which brings many benefits. With an account in the US, international transactions are usually very quick and less expensive as you don´t have to pay exchange fees. Some banks in the US offer accounts with no fees if you keep your balance over 5,000 USD. Please keep in mind that US banks are reluctant to work with financial or crypto-related businesses, but they will offer services on a case-by-case basis.
- Many payment processors only work with US bank accounts. Stripe and Square are perfectly good examples. A reliable and popular payment processor is important for any online business.
- Thanks to the LLC structure, the owners (members) of the company are protected from the LLC´s liabilities. If an LLC should be liable for any fines or claims, these are satisfied with the LLC´s assets, not the members´ personal assets. Thus, the ownership of the LLC is separated from the member´s assets. Members will only be liable for the money they invest in the LLC.
- Operating an LLC is quite easy because it has few requirements. The LLC won´t pay income nor withhold tax (under the conditions mentioned above). However, even if it does not pay taxes, the LLC will have to file an annual report with the state and a form 5472. It is also quite simple to transfer ownership to another person.
- Thanks to its simple requirements, the structure has very low maintenance costs.
- The US is not part of the CRS, which means banks don´t automatically exchange information with other countries´ authorities. At the same time, you will be benefiting from the solid privacy and secrecy laws of the United States. If all this is combined with a Nevis trust, we get a rock-solid asset protection structure.
What is an LLC?
LLC stands for “limited liability company”. It was first established in Wyoming in 1977 and was popularized during the 90s. The structure is called “limited liability” because the owners are only liable for the money that they invest in the company, and their personal assets are completely separated from the structure. Thus, a member should not be liable for the LLC´s responsibilities with his personal assets.
Let us explain with an example.
Imagine that we have a friend whose name is Juan. He is a Colombian citizen who runs a technology business in his country. He also owns a US LLC. All the businesses that he conducts in Colombia are passed through his Colombian company, however, all his clients located abroad, e.g., in Peru, Argentina, Panama, etc. will pay him through his US LLC with wire transfer or credit card. When Juan needs to pay his employees or providers in Colombia or any other country, he can easily do so with a transfer from his LLC. Thanks to this approach, Juan can expand his business across the continent, easily receive and make payments, and reduce his tax burden.
Most common uses for an LLC
- Tax-free subsidiary: This only works for non-US-residents, non-US-citizens who can operate through an LLC exempt from income and withholding tax (only if services and products are not provided within the US).
- Holding Company: An LLC can be used to own real estate or other assets. This brings a higher level of protection and confidentiality.
How to make sure your LLC does not pay US taxes
The LLCs are a good option for businesses that don´t have a presence in the US and that are owned by non-US residents, non-US citizens. A foreign-owned LLC is only taxed in the US if it engages in businesses in this country. Engaging in business in the US may include:
- The LLC has an office with at least one employee.
- Representatives, owners, or employees enter the US to deliver services here.
- The LLC has at least one dependent agent in the US, which means employees or companies working for you almost exclusively. This agent has a key role in the development of your business.
To sum up, if you don´t have office or employees and don´t provide services/products/assets in the country, your LLC may not be taxed in the US as you may not have effectively connected income (ECI).
Example 1: Mexican software company without US office or representative
A software company from Mexico provides security services to US clients via online or phone sales. The business is based in Mexico and has no office nor salespeople in the US. This company can open a US LLC with a bank account to receive payments in USD. However, since the employees are in Mexico and the owners are not US residents or citizens, the LLC income is not taxed in the US.
Example 2: Foreign "Fulfillment by Amazon" service provider
An entrepreneur from Colombia sells products in the US using the “Fulfillment by Amazon” service. The marketing and operations of the business are managed from Colombia by the owner. Once the sales are closed, the products are sent to the US, packaged, and shipped by the Amazon employees.
If the LLC resells products in the USA via Amazon, it may have ECI and then have to pay income tax on any profit. If the LLC sells products in the USA delivered from a foreign factory (not a reseller of products), then the LLC wouldn't owe taxes in the USA.
FAQ on US LLCs
In this section, we answer some of the most frequently asked questions about this interesting structure.
What if you eventually want to have offices and employees in the US?
If you ever do want to expand and operate in the US, then we recommend a C-corporation. This entity is taxed separately at a flat 21%. All distributions made by such a corporation are subject to double taxation and withholding taxes when paid to non-residents. The standard withholding tax rate is 30% but this can be reduced if there is a double taxation agreement between the nonresident owner´s country and the US.
Therefore, it is very common to see an LLC addition to a corporation. Thus, the LLC handles foreign billings while the corporation manages the sales and production teams. This combination of structures can also be highly beneficial if managed properly.
Can I work in the US if I own a corporation or an LLC?
As a foreign citizen, you can be a corporate officer and own an LLC. However, you won´t be able to work in the country or to receive compensation or salary unless you have a work permit in the US. You can still work from your home country or country of residence without any issue.
What documents are needed to open an LLC and US bank account?
There are no required documents to open an LLC. However, to open a bank account you will be required to submit at least your passport, proof of residency, and a second ID. Our expert opens bank accounts for company owners who qualify. US banks would rather not deal with perpetual travelers or crypto-related and financial businesses.
Am I required to keep accounting records?
Yes, an LLC is required to keep books and financial records.
Do I have to travel to the US to open the company´s bank account?
In general, yes. Usually, our partner opens bank accounts for qualified business owners.
How long does it take to open an LLC?
The time frame to open an LLC in the US varies depending on the state. Please contact us to ask our partner about this.
What are the annual costs for keeping the LLC open?
The LLC must file an annual report and submit form 5472. It also has to pay the registered agent for the address in the US. The total cost should not be higher than 2000USD.
What is the cost to establish an LLC in the US?
To find out the exact costs, please contact our partner through any of the Mundo channels.
How can I further protect my business from liability and lower my global tax expense?
What many people don´t know is that any asset held in the US (including a company or LLC) is subject to inheritance tax. This means that, if the head of a family should own a business in the US, upon his death, the transfer of the assets to the heirs is taxed at almost 40%. This is very easy to avoid in a completely legal way by creating a Nevis trust that will be the owner of the LLC. The Nevis trust´s settlor will be a member of the LLC and the trust will be responsible for paying the income tax. However, the trust tax rate in Nevis is 0%. Thanks to this combination, the business won´t be taxed upon inheritance either, because it won´t be directly owned by the head of the family.
Tax-free LLC application process
Step 1 - Fill the corresponding form and our partner will register the LLC. Then, we acquire the company tax ID.
Time frame: 1-2 weeks.
Step 2- If you can qualify for a bank account, you will be required to send the documents in order to open the account. Minimum deposits and rates depend on the bank and will be discussed during a consultation.
Time frame: 1-4 days
Step 3 – Request the Individual Tax ID number. This is required to open a Stripe or PayPal account.
Time frame: 3-5 weeks.
Step 4- After submitting the necessary information, the trust can be registered.
Time frame: 1-2 weeks.
Step 5 - File the annual report. This must be done before March 1st each year.
Time frame: once a year
Step 6 – File form 5472 with the IRS. This form will report all transactions between the LLC and the related parties. There is no tax due in this form, but it is a report for the US to comply with international transparency standards. There is a 25,000USD penalty for not filing form 5472.
Time frame: Once a year.
Mundo and its US team provide comprehensive tax planning and corporate services to international businesses and investors so that they can protect their assets through US structures. We dearly protect the privacy of our clients.
While helping many businesses establish their LLCs in the US, we have developed our own process, allowing us to establish entities fast and easily.
We have organized our services into three convenient packages that adapt very well to any business person or investor. If you want to know our packages, click here.
Our expert in Miami is a chartered accountant and runs the Mundo Miami office. He has been specializing in opening US bank accounts and structures for foreigners for many years. He provides advice on highly complex international tax structuring involving pre-migration trusts and transfer of assets into the US as well as advice on obligations and structures for US citizens living abroad.
For more information, costs, and a specific list of requirements, please contact us and get in touch with our expert.
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