The Tax Implications of US Business Structures for Non-Residents

What are the different types of business structures in the US?

1. Sole Proprietorship

A sole proprietorship is a type of business entity in the United States that is owned by one individual. It is the most common form of business structure and is relatively simple to set up. In a sole proprietorship, the owner is both the business and the individual, meaning that all profits belong to the owner. However, this also means that the sole proprietor is responsible for all losses, debts, and liabilities, and creditors or lawsuit claimants can access the business owner’s personal accounts and assets if the business accounts are not able to cover the debt. Examples of sole proprietorships include freelance writers, independent consultants, tutors and caterers. Sole proprietorships are taxed on Form 1040 Schedule C and the income is linked to the owner’s personal income tax return. When deciding to do business in the US, foreign individuals or companies should consider whether to conduct business as a sole-proprietor or form an entity such as an LLC, C Corp, S-Corporation, or Partnership. Each type of entity comes with its own set of legal, financial, and tax implications.

2. Partnership

A partnership is a business structure in which two or more people come together to form and manage a company. In the United States, partnerships can be classified as general partnerships, limited partnerships, or limited liability partnerships. All partners are considered “general partners” in a general partnership, and a limited partnership consists of at least one “general partner” and one “limited partner”. In a limited liability partnership, all partners have limited personal liability, meaning they are not liable for wrongdoings performed by other partners.

In terms of taxation, partnerships in the United States are treated as a “pass-through” entity, meaning that the profits or losses are passed through to the partners and each partner is taxed under the individual income tax. The partnership itself is not a separate tax-paying entity and is not taxed under the law. The partnership must file its own tax return and supply additional forms to the partners for their personal taxes.

It is important to note that while partnerships may offer liability protections, they may not shield all personal liability depending on the specific business structure and operations. Furthermore, it is important to be comfortable with whoever you enter into a business partnership with, as they can both positively and negatively affect the business.

3. Corporation

A corporation is a business structure that is legally separate from its owners, allowing it to act and transact as an entity in its own right. In the United States, corporations come into existence when a state issues a certificate of incorporation. Corporations are the only business tax structure allowing for perpetual existence and are split into two main classifications: the C corporation and the S corporation.

C corporations are considered the default designation for corporations and are not a pass-through entity, meaning that they are taxed twice at both a corporate and personal income level, known as double taxation. On the other hand, S corporations are pass-through entities that avoid double taxation, though the IRS places strict restrictions on them such as only having 100 shareholders who must all be U.S. citizens or residents.

The shareholders of a corporation are generally exempt from liability for the debts of the corporation, known as the “limited liability” protection. The current federal corporate income tax rate for U.S. corporations is 21%, and state corporate income tax rates vary from state to state. After paying the corporate income tax, shareholders can declare dividends, which may or may not be taxable depending on where they live.

Overall, corporations offer extensive legal protection and have detailed ongoing requirements, though they also require more effort and higher fees to establish and maintain.

4. S Corporation

An S Corporation, sometimes referred to as an S Corp, is a type of corporation that is eligible for special tax treatment under Internal Revenue Code Subchapter S. Unlike a C Corporation, an S Corporation is a pass-through entity, meaning that all profits and losses are “passed through” to the owners and are taxed at their individual tax rates. This allows them to avoid double taxation. Additionally, an S Corporation is subject to some restrictions that a C Corporation is not and must meet certain criteria in order to qualify for S Corp status, such as limiting the number of shareholders to 100 and having all shareholders be U.S. citizens or residents. S Corporations also have different filing requirements than C Corporations; they must file their federal tax returns by the fifteenth day of the third month following the end of the tax year, generally March 15. The income is then passed down to its members individual returns. Lastly, S Corporations do not have the same level of longevity as C Corporations, as ownership changes can affect their existence.

5. C Corporation

A C Corporation, or C corp, is a type of corporate entity recognized under United States law. It is a legal entity separate from its owners, and is eligible for many of the same rights as individuals, such as the ability to sue or be sued, enter into contracts, and have free speech. C corps are taxed twice, once at the corporate level and again at the personal level, and they have extensive liability protections for their owners. Unlike S Corporations, which have limited shareholders and must be owned by U.S. citizens or residents, C Corporations can have unlimited shareholders. Furthermore, they have the unique ability to exist perpetually, meaning their existence is not dependent on the coming and going of ownership. In order to establish and maintain a C corporation, higher fees and more work are required, as well as detailed ongoing requirements such as annual meetings, appointing a board of directors, and other state-imposed regulations. The federal corporate income tax rate for a US corporation is 21%, and state corporate income tax rates vary from state to state. This structure is attractive to foreign business owners, as it avoids double taxation.

6. Hybrid LLC

A Hybrid LLC is a business structure that combines the limited liability protections of a corporation with the flexibility and tax efficiency of a partnership. The owners of an LLC are called members, and they can be either individuals or organizations. From a tax perspective, a Hybrid LLC is a pass-through entity, which means that an LLC is not taxed in the US like a corporation, but rather the members of the LLC are taxed individually, like a partnership. Also, it is important to note that a US LLC can be formed and owned by a single member, unlike partnerships, which must be owned by at least two members.

The advantages of a Hybrid LLC include liability protection for one or more owners, the ability to choose between two taxation methods, and the potential for major tax savings. The drawbacks of a Hybrid LLC are costs to establish and maintain, and more complex tax requirements. All states permit the organization under applicable state law of a limited liability company (LLC), and they can be formed quickly, usually within one day.

7. Limited Liability Company

A limited liability company (LLC) is a legal form of business that is similar to a corporation and a partnership. It combines features of partnerships and corporations with the limited liability protections of a corporation, and the flexibility and tax efficiency of a partnership. In the US, LLCs are created under state statutes and offer limited liability protection to their owners, meaning that their personal assets are not at risk if the company fails. LLCs also avoid double taxation, as the earnings distributed to members are not subject to corporate taxation. LLCs can be formed and owned by either a single individual or multiple members, and their tax treatment can vary depending on their characteristics and elections made by the owners.

8. Corporation Equivalent

A corporation is a type of business entity that is separate and distinct from its owners, commonly referred to as a “legal person,” and is eligible for many of the same rights as individuals in the US. In the US, corporations are divided into two classifications: the C Corporation and the S Corporation. A C Corporation is not a pass-through entity and is taxed twice, at the corporate and personal income levels, an example of double taxation. On the other hand, an S Corporation is a pass-through entity and avoids double taxation, but has stricter qualifications for shareholders, such as the requirement of US citizens or residents and a maximum of 100 shareholders.

In general, corporations provide extensive liability protections for shareholders, allows for perpetual existence, and is able to act as a legal person. However, the formation and maintenance of corporations are more costly than other business structuring, and it also requires more detailed ongoing requirements, such as annual meetings and appointing a board of directors. This type of business entity is comparable in title and operation to companies in other countries, such as the Ltd in United Kingdom, SARL in France, and PT in Indonesia.

9. Subsidiary

A subsidiary is a business entity that is owned or controlled by another company, known as the parent company. The parent company can be an individual, a corporation, or another type of business entity. The parent company generally has a controlling interest in the subsidiary, meaning that the parent company is the one that exercises control over the subsidiary’s operations and finances. The relationship between a parent company and its subsidiary is often referred to as a parent-subsidiary relationship.

In the United States, a subsidiary is a separate legal entity from its parent company and is subject to the same laws and regulations as any other corporation. Subsidiaries have the same rights and responsibilities as any other business entity, including the ability to enter into contracts, sue and be sued, open bank accounts, and make other financial decisions. The parent company, however, has the authority to control the subsidiary’s operations and finances.

The parent company of a subsidiary can have total control or partial control of the subsidiary. If the parent company owns 100% of the subsidiary’s capital stock, then the parent company has total control. If the parent company owns less than 100% of the subsidiary’s capital stock, then the parent company has partial control. In either case, the parent company has the authority to exercise control over the subsidiary’s operations and finances.

In the US, subsidiaries provide numerous benefits to the parent company, including the ability to manage risk, pool resources, access new markets, and increase efficiency. They also allow the parent company to separate its assets and liabilities from those of the subsidiary, protecting the parent company from potential losses. In addition, most US states and the federal government offer various incentives and tax benefits to subsidiaries, which can help the parent company save money and increase profits.

What are the tax implications of each type of business structure for non-residents?

1. Partnership

Non-residents of the US may form a partnership to conduct business in the US and the tax implications will depend on the type of partnership chosen. Generally, partnerships are treated as “pass-through” entities for US federal income tax purposes, meaning that the profit or loss is passed through to the partners and each partner is taxed under the individual income tax. As such, foreign partners will be subject to US tax on their share of the partnership income, regardless of the residency of the partner. The required taxes for non-residents may include federal income tax, state income tax, Social Security and Medicare taxes, and any applicable local taxes. Additionally, the partnership itself may be required to pay estimated taxes and other fees and penalties associated with not filing a tax return on time.

2. Corporation

Non-residents owning a corporation in the US may be subject to various tax implications depending on the type of business structure they choose.

For Corporations, the current federal corporate income tax rate is 21%, and state corporate income tax rates vary from state to state. Non-residents may be liable for the corporation’s income tax in the state where it is incorporated. In addition, if profits are distributed as dividends to the shareholders, this may also be taxable depending on where the shareholders reside.

On the other hand, Limited Liability Companies (LLC) may provide a more beneficial tax structure for non-residents. LLCs are pass-through entities, meaning that any profits earned by the LLC are passed through to the owners, and the LLC itself does not pay income taxes. The owners will then be subject to taxation based on the rules in their home country. This may result in lower taxes compared to Corporations, since the profits are only taxed once at the individual level.

However, LLCs have stricter requirements when it comes to ownership. Generally, LLCs can only have up to two non-resident members, while Corporations can have unlimited shareholders. Therefore, if non-residents are looking to own a business with more than two members, a Corporation may be the way to go.

In conclusion, both Corporations and Limited Liability Companies can provide foreign entrepreneurs with different tax implications and business opportunities in the US. It is important to consider the differences between these two types of business structures in order to make an informed decision before starting a business in the US.

3. S Corporation

For non-residents, the tax implications of forming an S Corporation differ from those of forming a C Corporation or an LLC. Unlike an S Corporation, C Corporations and LLCs are pass-through entities that do not face double taxation. Consequently, non-residents are not eligible to register an S Corporation, and should instead consider a C Corporation or an LLC. The tax implications of forming an LLC are similar to those of forming a C Corporation, with the added benefit of pass-through taxation, meaning that the losses and profits of the business go to the owners/shareholders and are reported on their personal tax returns. In contrast, S Corporations are flow-through entities that generally pay no entity-level tax; instead, S-corporation income is taxed at the owner level. Therefore, for non-residents, the tax implications of forming an S Corporation are different from those of forming a C Corporation or an LLC.

4. C Corporation

Forming a C Corporation as a non-resident has a number of tax implications. Firstly, C Corporations are taxed at a corporate and personal income level, resulting in double taxation. Secondly, non-resident shareholders of a C Corporation are exempt from filing U.S. personal income tax returns as the profits and losses of the corporation do not flow through to them. Finally, the federal corporate income tax rate for a US C Corporation is 21%, and state corporate income tax rates vary from state to state.

5. S Corporation Structure

The tax implications of owning an S Corporation for non-residents depend on the country of origin and the type of income. For example, a non-resident business owner may be subject to a host of tax requirements, including filing an informational return, depending on the type of income received. In the United States, S Corporations are pass-through entities and the owners are not taxed twice. Instead, income is passed through to the owners who pay taxes on the income at their individual income tax rate. However, non-residents may need to file an informational return to declare any income received if the country of origin has a taxation treaty with the United States. Additionally, if they are considered to be conducting a trade or business, they may be subject to federal, state, and local taxes on any income. By contrast, C Corporations are taxed twice, at the corporate and personal income levels. This type of structure is subject to corporate tax rates and the owners may be required to pay additional taxes on any income received. Non-residents may also need to file an informational return and may be subject to taxes at the state and local levels, depending on their activities.

6. Limited Liability Company

Forming a limited liability company (LLC) in the US has many tax implications for non-residents. While the LLC offers limited liability protection to its owners, it is a pass-through entity and thus is not taxed like a corporation. Instead, the members of the LLC are taxed individually, like in a partnership. For non-residents, it is important to keep in mind that an LLC formed by a single person is referred to as a Single-Member LLC, and a Foreign Individual forming an LLC must also have an ITIN (U.S. Tax Identification Number).

The biggest difference between an LLC and other business structures is that members of the LLC are not personally liable. This means that if the LLC is sued, the claimants are suing the company, not the members. This protection is not available in other business structures such as partnerships and corporations, where the personal assets of the owners and shareholders may be vulnerable.

The flexibility in regards to federal tax treatment of an LLC is also an important factor for non-residents to consider. A single-member LLC can be taxed as a sole proprietorship or a corporation, allowing the non-resident to choose the tax treatment most beneficial for them.

Overall, there are many advantages and tax implications to consider when forming an LLC as a non-resident. The limited liability protection, pass-through taxation, and flexibility in regards to federal tax treatment are all important factors to consider when deciding which business structure is right for you.

7. Disregarded Entity

For non-residents, the tax implications of having a disregarded entity are numerous. To begin, all non-U.S. citizens must register their entity in Texas under an assumed name (d/b/a) or a special type of assumed name called a fictitious name in order to transact business in the state. If a foreign entity registers to transact business under a fictitious name, they must file an assumed name certificate with the Texas Secretary of State. Furthermore, in order to file taxes as a disregarded entity, the entity’s legal name must meet certain requirements.

Additionally, the foreign entity must determine if their income is subject to U.S. taxes, as non-residents are only taxed in the U.S. if they are “engaged in a trade or business in the United States.” If the entity is found to be engaging in a trade or business, the income earned is considered Effectively Connected Income (ECI) and must be reported to the IRS by filing a U.S. tax return.

Finally, entities should be aware that obtaining a certificate of registration or assuming a name does not necessarily protect their trademark or other intellectual property rights. It is important to check with the appropriate authorities to ensure that the entity’s name is not infringing on any other legal rights.

8. Trade or Business

For non-residents, the tax implications of operating a business through either a US LLC or an independent agent can be significant. While operating as an independent agent will not generally create a US taxable presence, operating as a US LLC can result in the company being considered as Engaged in Trade or Business in the US (ETBUS), which will result in the company’s US source income being subject to US federal taxes.

If a non-resident does not have dependent agents in the US, and is therefore not considered to be ETBUS, then the company is generally not subject to US federal taxes, although they may be responsible for paying taxes in the US on any profits that are earned in the US.

On the other hand, if a non-resident does have dependent agents in the US, then the company is considered to be ETBUS, which would result in the company’s US source income being subject to US federal taxes. Furthermore, the US LLC would be responsible for any taxes due on income generated in the US, even if the non-resident was physically located outside the US.

Overall, the tax implications of operating a business through either a US LLC or an independent agent can vary drastically depending on the structure of the business and the physical location of the non-resident. It is therefore important for non-residents to carefully consider the tax implications of each business structure before deciding which option is best for them.

9. Payments to a Foreign Corporation

The tax implications of making payments to a foreign corporation through a foreign corporation depend on the source of the income and the residence of the payer. Generally, the payer must withhold a certain percentage of the payments to the foreign corporation, which can be up to 35% or 39.6% depending on the source. For example, if the payments are for personal services performed by the foreign corporation, the payer has to withhold 35% from the payments. In addition, the foreign corporation may be subject to the US corporate income tax and branch profits tax if it is deemed to be engaged in a trade or business in the US. In such cases, the foreign corporation must also file a Form 1042-S and Form 1042 to report the dividend payments to non-resident shareholders.

10. Foreign Earned Income

Step 1: Determine whether your foreign earned income is considered Effectively Connected Income (ECI) or Not Effectively Connected Income (NECI). Effectively Connected Income (ECI) is income earned in the U.S. from the operation of a business in the U.S. or from personal services. This income is taxed for a nonresident at the same graduated rates as for a U.S. person.

Step 2: Determine whether your income is earned in a trade or business or is passive income. Passive income is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.

Step 3: Since nonresident aliens are generally subject to U.S. income tax only on their U.S. source income, it is important to understand the Source of Income concept. The Source of Income is the location or country where a specific item of income is deemed to have originated or is deemed to have been generated.

Step 4: Depending on the income source and the tax rate, you may be able to take advantage of the foreign earned income exclusion (FEIE) which allows you to pay zero U.S. income tax on up to about $100k per year of income from working while you live outside the U.S.

Step 5: Lastly, you must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return. You may also be able to use the Foreign Tax Credit to reduce the amount of U.S. tax you owe.

11. Double Taxation Abatement

The Double Taxation Abatement is a provision in the U.S. income tax treaties with foreign countries which allows non-resident businesses to be taxed once in the country where the income was earned and once in the U.S. This type of taxation is usually referred to as dual taxation. The abatement allows certain types of income earned by non-resident businesses to be exempt from U.S. taxation, or taxed at a reduced rate, depending on the specific provisions of the treaty. This can result in a significant tax savings for non-resident businesses, as it reduces their total tax burden by eliminating the double taxation. Furthermore, this provision can also provide an incentive for foreign businesses to invest in the U.S., as it makes it easier for them to conduct business in the country.

12. Worldwide Income

The foreign earned income exclusion (FEIE) allows non-residents to pay zero US income tax on up to about $100k per year of income from working while living outside the US. This can have an effect on the income distribution of US tax filers. Figure 5 displays the participation rates by business income type across the income distribution of US tax filers, showing that participation rates in C-corporation income is over eight times higher at 80.4% among the top 1% than in the bottom half of the income distribution, and that partnership participation is over 51 times higher in the top 1% than in the bottom half of the income distribution. Panel (A) of figure 6 shows that pass-through income is even more concentrated among high-income households than pass-through participation and other forms of business income. Therefore, the tax implications of worldwide income for non-residents are that they can potentially benefit from lower tax rates due to the FEIE, while the income distribution of US tax filers may become more unequal as a result.

13. Treaty Benefits

The tax implications of treaty benefits for non-residents vary depending on the particular treaty. Generally speaking, individuals may be eligible for reduced or eliminated U.S. taxes on various types of income, such as pensions, interest, dividends, royalties, and capital gains. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) does not apply to the United States, however the U.S. does rely on the limitation on benefits provisions in its existing income tax treaties and the provisions of its domestic law to implement the Base Erosion and Profit Shifting standards. Additionally, the foreign earned income exclusion (FEIE) allows non-residents to pay zero US income tax on up to about $100k per year of income from working while they live outside the US. Non-U.S. citizens may also qualify for a tax credit on their U.S. taxes, reducing their overall U.S. tax liability. Furthermore, foreign partners in LLCs may have to file Form 1065 and provide a Schedule K-1, even if there is no profit, in order to report the profits and losses of the business to the IRS.

14. U.S. Source Income

The tax implications of a business structure for non-residents depend on the type of business as well as the source of income. For example, a consulting agency without any offices or employees in the US would not be subject to US taxes on the income generated from services provided, as the work is performed outside the US. On the other hand, a foreign Fulfillment by Amazon (FBA) Seller may be liable for US taxes if the income is deemed effectively connected to a US trade or business. However, if the foreign seller is not engaging in a trade or business in the US, their income from selling products into the US is not taxable.

In addition, nonresident aliens are eligible to receive the Foreign Earned Income Exclusion which allows them to pay zero US income tax on up to about $100k per year of income from working outside the US. Finally, some countries have income tax treaties with the United States which may reduce or eliminate US taxes for non-residents. Ultimately, the tax implications for non-residents depend on their specific business structure and the source of their income.

15. Reporting and Filing Requirements

Non-resident business structures need to comply with the following reporting and filing requirements in order to be compliant with US tax laws:

1. Form 5472, to report transactions with related parties
2. FBAR, to report foreign bank and financial accounts
3. 1040-NR, to file income taxes for non-resident individuals
4. 1120, to file corporate income tax returns
5. Texas Workforce Commission requirements when you have Texas employees
6. Texas Department of Insurance requirements regarding the Texas workers’ compensation system
7. Texas Attorney General Employer Information Center requirements regarding new hire and termination reporting
8. Form 1120, to report items of international tax relevance, including foreign tax credit-related information, the sourcing and bucketing of income and deductions, and interests in foreign entities or distributions from foreign corporations.
9. Form 1065, U.S. Return of Partnership Income, to report the total withholding liability for the partnership’s tax year.

16. State Tax Implications

The state tax implications of each type of business structure for non-residents will depend on the state in which the business is operating. Generally, a non-resident business will not be subject to state sales tax unless it has a physical presence in the state. On the other hand, a non-resident business may be subject to state income taxes if it has an income source in the state, such as employees or business activities that generate income. In addition, non-resident businesses may be subject to local taxes such as income, sales, and property taxes. Finally, businesses may need to file an annual tax return with the IRS, even if the business does not owe any taxes. It is important for businesses to be aware of the state and local taxes that may apply to them and to consult with an accountant or tax expert to ensure that they are in compliance with all applicable laws.

17. Self-Employment Tax

For non-residents, self-employment has various tax implications depending on their engagement in a trade or business in the United States. If a non-resident is engaged in a U.S. trade or business, their income is considered Effectively Connected Income (ECI) and is subject to U.S. taxation. In this case, the non-resident must file taxes as a sole proprietorship if they are a single-member LLC. To do this, they must pay self-employment tax on all earnings and include business earnings on their personal tax return using Schedule C. Furthermore, employers must withhold taxes from the employee’s compensation and pay over to the IRS the employee’s allocable share of premiums under the federal unemployment insurance program. If, however, the non-resident is not engaged in a trade or business in the U.S., their income is not subject to U.S. taxation.

18. Other Considerations

When evaluating the tax implications of different business structures for non-residents, it is important to consider factors beyond simply the taxation rules. For example, differences in individual state tax laws and transportation costs should be taken into account, as well as tariff and trade regulations, the size and scope of the company, any leases or employees, and marketing needs. Additionally, there are additional forms that will need to be filled out regardless of the structure chosen. It is also important to consider how to optimize one’s tax situation, which could be done with expert advice. Ultimately, the choice of business structure should take into account both the current and future needs of the organization in order to ensure success.

19. How to Choose the Best Structure for Your Business

Choosing the best business structure for your company is a critical decision that can have lasting implications for your business. Here is a step-by-step guide to help you choose the best structure for your business:

1. Consider your long-term goals. Think about the type of business you want to create and the ownership structure that best suits your needs.
2. Consider the plans to hire employees. Different business structures have different rules around hiring employees, so you’ll need to consider this before committing to a structure.
3. Evaluate the legal risks. Different business structures may have different legal risks, so be sure you understand these risks before making a decision.
4. Consider the tax implications. Different business structures have different tax implications, so it’s important to research and understand the implications before making a final decision.
5. Consult an expert. It’s worth consulting an attorney or tax expert to ensure you are making the best decision for your business.
6. Make a decision. Once you’ve done your research and consulted with an expert, it’s time to make a decision and register your business with your state.

20. Conclusion

When foreign companies decide to do business in the United States, they must be aware of the tax implications associated with different types of business structures. Non-resident companies should consider a range of factors, including liability protection, tax rates and regulations, when choosing a business structure.

In general, the most commonly used business structures available for non-residents in the US are limited liability companies (LLCs), limited partnerships (LPs) and corporations. Each of these business structures has different tax implications for non-residents.

The LLC structure offers liability protection to non-residents and is the most popular choice of business structure in the US. LLCs are taxed as pass-through entities, meaning that the business’s profits and losses are reported on the owners’ personal tax returns. Non-resident owners of LLCs are subject to the same federal income tax rate as US citizens and may also be subject to state income tax, depending on the state.

Limited partnerships are similar to LLCs in that they offer liability protection to non-residents. However, limited partnerships are more complex than LLCs, as they involve a general partner and several limited partners. These partnerships are taxed as pass-through entities, so profits and losses are reported on the partners’ personal tax returns. Non-resident partners are subject to the same federal and state income tax rates as US citizens.

Finally, corporations offer liability protection to non-residents, but are the most complex of the three business structures. Corporations are separate legal entities from their owners, and are taxed separately from their owners’ personal income. Non-resident owners of corporations are subject to federal income tax and may be subject to state income tax, depending on the state.

In conclusion, non-residents have several business structures from which to choose when doing business in the US. Each of these business structures has unique tax implications, and it is important for business owners to understand the different tax implications for each type of structure before deciding on the best structure for their business.

How to choose the right business structure for your needs?

Step 1: Determine your business needs

Step 1: Decide on the state for your LLC

When forming a business, the first step is to decide what state your business will be registered in. The state you choose will have an impact on taxes and other legal requirements. As a result, it is important to research the different states to assess which one best meets the needs of your business.

Step 2: Choose a name and compare it with your state’s database

Once you have decided the state, the next step is to choose a name for your business and compare it against the state’s database of registered business names to ensure it is available.

Step 3: Use a service provider to open your LLC and serve as your Registered Agent

After you have chosen a name, you will need to use a service provider to open your LLC and serve as your Registered Agent. The role of the Registered Agent is to provide a physical address in the state where the business is registered and accept legal papers on behalf of the business.

Step 4: Apply for an EIN

Once you have opened your LLC, you will need to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The EIN is like a social security number for the business and is necessary to open a bank account, hire employees, and file taxes.

Step 5: Open bank accounts and apply with payment processors

The final step is to open bank accounts and apply with payment processors (such as Stripe and PayPal) to enable the business to accept payments. By opening bank accounts in the name of the business and setting up payment processors, you will be able to start accepting payments for goods and services.

Step 2: Research business structures available

When starting a new business, it is important to select a business structure based on your individual circumstances and long-term goals. The most common types of business structures in the US. include the Corporation and the Limited Liability Company (LLC).

A Corporation is a separate legal entity owned by shareholders. It has limited liability protection and is organized under state laws. It has higher startup and maintenance costs than an LLC, and can have up to 100 shareholders.

An LLC is a flexible business structure that provides the same limited liability protection as a corporation and is organized under state laws. It has lower startup and maintenance costs than a corporation and can have one or more owners.

When researching business structures, a business owner should consider the potential tax implications and legal protection offered by each type of structure, as well as the long-term goals of the business. It is also important to consult with an attorney or tax expert for advice on the best business structure for their particular needs and goals.

Step 3: Calculate your tax liability based on your chosen structure

Step 1: Identify your business structure. Depending on the type of business, you may be a sole proprietor, a partnership, a limited liability company (LLC), a C corporation, or an S corporation.

Step 2: Determine whether you are engaging in “Trade or Business in the US”. If you are, you must pay taxes on the income from US sources that is connected to the “US Trade or Business”.

Step 3: Calculate your taxes owed. For sole proprietorships, calculate tax rates using the SOI’s sample of individual tax returns. For S-corporations, calculate tax rates using OTA tax calculators. For all other business structures, you may need to consult a tax professional to determine the exact tax rate.

Step 4: File your taxes. Once you have determined the amount of taxes owed, you must file an annual tax return with the IRS.

Step 4: Consider the costs and benefits of each structure

When selecting a business structure, costs and benefits must be taken into consideration. For instance, the costs associated with setting up a Corporation or a Limited Liability Company (LLC) are higher than those associated with a Sole Proprietorship, but the benefits offered by both the Corporation and LLC are greater in terms of personal liability protection and potential for future growth. Additionally, the ability to attract investors and manage government paperwork can also be determined by the type of business structure chosen. Business owners should look at their own personal circumstances, long-term business goals, and the associated costs before deciding which legal structure best suits their needs. Ultimately, the right business structure can help maximize business profits by creating an environment that is conducive to success.

Step 5: Consult with an accountant to ensure that your taxes are being handled properly

When it comes to choosing a business structure, consulting with an accountant is essential. By having a knowledgeable professional on hand to assess your particular situation, you can save yourself time and money in the long run. An accountant can help you understand the complexities of U.S. taxation and how it applies to your business. They can also recommend the best structure for your individual needs, as well as advise you on potential income generating opportunities, such as claiming expenses and salaries to non-US citizens or residents. Furthermore, a tax expert can ensure that you are aware of any applicable state or international taxes that you may have to pay. Having this knowledge can help you make informed decisions, maximize profits, and potentially avoid costly mistakes. Ultimately, consulting with an accountant when deciding on a business structure can prove to be invaluable.

FAQs

What are the different business structures in the US?

In the United States, there are four main types of business structures for entrepreneurs to choose from: sole proprietorships, partnerships, corporations, and limited liability companies (LLCs).

Sole proprietorships are the simplest type of business structure, with one owner who is personally liable for all debts and liabilities of the business.

Partnerships are when two or more people own and run a business together. All partners in a partnership are personally liable for all debts and liabilities of the business.

Corporations are a more complex business structure where the business is treated as a separate legal entity, meaning the owners are not personally liable for the debts and liabilities of the business. However, profits of a corporation are taxed twice, as the company pays corporate income tax and the shareholders pay personal income tax on dividends received.

Finally, LLCs offer the limited liability protection of a corporation and the flexibility of a partnership. Unlike a corporation, LLCs don’t pay taxes at the corporate level; instead, profits and losses flow through to the individual members who pay taxes on their portion of the LLC’s income. LLCs also allow for a greater number of investors and do not have restrictions on non-U.S. citizens assuming roles as members (owners).

What are the tax implications of the different US business structures for non-residents?

Tax implications for non-residents in the US depend largely on the type of business structure they choose to form. Generally, the taxes applicable to non-residents are the same as those applicable to U.S. citizens and residents, but depending on the type of company they choose to establish, they may need to fulfill additional requirements.

When it comes to LLCs, owned entirely by non-resident aliens, taxes are typically paid through individual income tax returns. The company itself is not subject to income tax, but the non-resident owners are required to report their income from the LLC to their home countries. Additionally, non-resident owners may be subject to sales tax if their LLC engages in selling goods or services.

When a business is owned by both U.S. and non-resident partners, the tax situation is more complicated as it depends on the type of company they form. If they form a C Corporation, the non-resident partners may be subject to double taxation, as both the corporation and the partners will be taxed separately. However, if they form an LLC, they can opt to have the business taxed as a partnership, meaning that the profits will only be taxed once.

Additionally, foreign businesses may own U.S. companies, although they may need to fulfill additional requirements such as filing Form 5472 with the IRS and filing U.S. income and excise tax returns. In this case, the amount of taxes payable by the foreign entity would depend on the type of income the US company generates.

As mentioned, the tax implications for non-residents in the US vary depending on their chosen business structure and the type of income their company generates. Therefore, it is important for non-residents to thoroughly research their options before making a decision, as well as to consult a tax advisor to ensure that they are in compliance with all applicable laws.

How do US taxes work for non-residents?

Step 1: Determine your alien tax status.

If you are a non-resident, you are taxed in the United States only on U.S. source income. If you are a U.S. resident, you are taxed on your worldwide income. Resident status is not limited to those having a green card. Resident status also applies to those with a physical presence in the United States.

Step 2: Understand your filing requirements.

Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. U.S.-source income that is considered “effectively connected” with a U.S. trade or business, such as salary and other forms of compensation, is taxed at graduated rates. Passive income such as interest, dividends, rents or royalties is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.

Step 3: Consider any tax treaties.

The United States has income tax treaties with several foreign countries. For nonresident aliens, these treaties can often reduce or eliminate U.S. tax on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains.

Step 4: Be aware of withholding taxes.

Payments made by a U.S. person to a non-resident, including non-resident partners and shareholders, in respect of certain types of interest payments, rents, royalties, dividends, management fees, and administration fees may be subject to a 30% withholding tax. However, the rate may be reduced under an applicable income tax treaty. Capital gains realized by a non-resident are generally not subject to U.S. withholding tax.

What is the difference between a C Corporation and an S Corporation?

The difference between a C Corporation and an S Corporation is mainly in how they are taxed. C Corporations are subject to double taxation, meaning the business and shareholders are taxed separately on the corporation’s income at both the corporate and personal income levels. On the other hand, an S Corporation is a pass-through entity, which allows it to avoid double taxation. This means the income is passed down to its members individual returns and taxed only once.

Another difference between the two is in the shareholders. C Corporations can have unlimited shareholders, while S Corporations are limited to 100. Additionally, S Corporations must have U.S. citizens/residents as shareholders, whereas C Corporations don’t have this requirement.

Finally, there is a difference in the way corporations are established and maintained. C Corporations are more costly to set up and maintain than S Corporations and require more detailed ongoing requirements, such as annual meetings and the appointment of a board of directors. On the other hand, LLCs are typically quicker and less expensive to establish, but they are not eligible to be taxed as an S Corporation.

Are there any tax deductions for non-residents doing business in the US?

Yes, there are tax deductions for non-residents doing business in the US. Non-residents may be eligible for a reduced withholding tax rate if there is an applicable income tax treaty in place which applies to the type of income they are receiving. Additionally, capital gains realized by non-residents may be exempt from US withholding tax if they are not effectively connected with a US trade or business, or if the non-resident does not reside within the US for a certain period of time within the taxable year. Furthermore, US LLCs are not subject to corporate income tax and any profits and losses of the LLC are passed through to the members, who will report their share on their personal tax returns.

What is the withholding tax rate for non-residents?

The withholding tax rate for non-residents depends on the type of income they receive. Generally, interest, rents, royalties, dividends, management fees, and administration fees are subject to a 30% withholding tax. However, the rate may be reduced or eliminated under an applicable income tax treaty. For example, the Canada-United States Tax Convention eliminates withholding tax on cross-border interest payments (other than participating interest). The withholding rate on capital gains realized by a non-resident is generally 0%. However, if the gains are effectively connected with a US trade or business, or if the non-resident resides within the US for a certain period of time within such taxable year, then the non-resident may be subject to withholding tax, unless exempted under an applicable income tax treaty.

What is the income tax filing requirement for non-residents?

Non-resident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. To file their taxes, non-resident aliens must use Form 1040NR, U.S. Nonresident Alien Income Tax Return, and submit it along with any necessary instructions to the IRS. They can also apply for an automatic extension of time to file using Form 4868. For more detailed information on determining alien status and tax obligations, refer to IRS Publication 519, U.S. Tax Guide for Aliens.

Are there any special requirements for a limited liability company?

Yes, there are special requirements for a limited liability company. For example, if the LLC is partially or fully owned by a foreign individual, that individual must have an ITIN (U.S. Tax Identification Number). Additionally, the LLC is treated as a “pass-through entity” for tax purposes, meaning that the LLC is not taxed in the US like a corporation, but rather the members of the LLC are taxed individually, like a partnership. Furthermore, LLCs provide limited liability protection to their owners since they are separate entities, meaning that the personal assets of the owners are untouchable by business creditors.

Are there any double taxation avoidance agreements with other countries?

Yes, the United States has double taxation avoidance agreements with other countries, known as Social Security Totalization Agreements. These agreements prevent double taxation of individuals who are subject to both US and foreign social security taxes, and allow employers in the US and abroad to withhold and pay over to the IRS income and related Social Security and Medicare taxes on behalf of their employees.

What is the best way to set up a US business for a non-resident?

Step 1: Consider whether you need a Corporation or an LLC. If you are looking to seek angel or VC investments in the United States, have a US person as one of the members of the LLC, or intend to issue Stock Options to employees, a Corporation might be the better choice. Step 2: If an LLC is the best option, decide on the state you want to register the LLC in. Choose a state with favorable tax laws and regulations, as this will help you to minimize your tax burden. Step 3: Choose a name for your LLC and register it with the chosen state. Make sure you adhere to all the state’s requirements for registering an LLC. Step 4: Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This is required for filing taxes and for opening a bank account for the business. Step 5: Create an Operating Agreement for the LLC. This document outlines the roles and responsibilities of the members of the LLC and sets out the rules for running the business. Step 6: Open a business bank account. This is necessary to start operating your business and to keep track of your income and expenses. Step 7: Obtain any necessary licenses and permits. Depending on the type of business you are running, you may need to obtain certain business licenses. Step 8: File the necessary paperwork to remain compliant with the state. Depending on the state, you may need to file an annual report and business taxes. Step 9: Consider obtaining a business insurance policy. This will help protect your business if something goes wrong.