Tax Implications for Starting a US Business as a Non-Resident
Many non-US citizens and residents establish US based entities in Wyoming, Delaware, or New Mexico, due to ease of business set up. Further, by setting up an entity, many international business people gain access to better banking and easier business registration on e-commerce platforms, such as Shopify, Amazon and others. The US is also known for its transparent rules and laws around business establishment and commercial matters. However, depending on the nature of business, foreign residents may have exposure to tax liabilities if they setup their business incorrectly, and therefore some thought is required before selecting the right entity to create in the US. In this article we discuss various structures that can be used to start a US business.
Taxation of C-Corps:
The Internal Revenue Service (“IRS”) treats C-corps as separate taxpaying entities. They engage in business, earn revenues, realize profits and losses, and distribute profits or dividends to corporate shareholders.
C-corps are not taxed as individuals; they are legally separate from their owners and operators.
C-corps pay several types of taxes, including:
Federal Corporate Tax: C-corps are subject to a flat federal corporate tax rate of 21% on their profits1.
State Corporate Tax: State tax rates vary based on the state where the company is incorporated. For example, in California, the state corporate income tax rate is 8.84%.
C-corps face a unique challenge known as they are taxed on both the income of the corporation and on remittances made to shareholders as dividends.
First, the corporation itself pays tax on its income at the federal corporate rate.
Second, when earnings and dividends are distributed to shareholders, those profits are taxed on the shareholders’ personal tax returns at individual rates (ranging from 5% to 30% for foreign residents, depending on whether there is a tax treaty in effect between the country of residence of the shareholder and the United States).
To mitigate taxation, C-corp owners may choose to withhold dividends, avoiding additional taxation on the shareholder level.
Limited Liability Companies (“LLCs”)
LLCs do not pay taxes directly on their profits. Instead, their profits and losses “pass through” to the individual members.
Each member reports their share of the LLC’s profits or losses on their personal tax returns.
This pass-through structure allows members to be taxed at their individual tax rates, avoiding double taxation (unlike C-corporations).
Therefore, most non-residents without any physical presence or operations in the US may not have any tax liabilities when setting up an LLC. However, if the business maintains business operations, such as a physical office, sales team or distribution center in the US, then the LLC member will be taxed on their income from the US, at the rate of taxation applied to individuals (if the owners are individuals) or legal entities (if the owner is an entity) as applicable. In such cases, the C-Corp offers a higher degree of predictability with respect to taxation, as the corporate tax rate is fixed at 21%, and the dividend tax rate can be established by reviewing the applicable tax treaty.
Limited Liability Protection:
One of the key benefits of forming an LLC/C-Corp is limited liability protection.
As an LLC member/C-Corp Shareholder, you are not personally responsible or liable for court judgments or unpaid debts of the business. Therefore, these business structures also provide some degree of safety to investors who seek to do business as an LLC or C-Corp.
For more detailed guidance on how to set up your US business, get in touch with us today at info@borderlesscounsel.com.
Please note, the above article is provided for informational purposes alone, and is not to be construed as legal advice. You may rely on the above at your own discretion.