The LLC, short for Limited Liability Company, is the most popular corporate structure in the United States. It has the legal characteristics of a corporation in terms of corporate and liability rules, but is treated like a partnership for tax purposes. This roughly corresponds to the taxation of a civil law partnership (GbR) or a limited partnership (KG). According to the tax regulations, profits are not taxed at the corporate level, but the individual members of the LLC declare their share of the profits on their personal income tax return and tax them accordingly.

The LLC is established in all 50 states of the USA as well as in Puerto Rico. Legal frameworks vary slightly from state to state, meaning that forming an LLC may be more advisable in some states than others. In terms of taxes, however, there are no differences.

What is a Disregarded Entity LLC?

The origins of the LLC date back to the 1970s. With the introduction of this new type of company, the US tax authority IRS was faced with a challenge: How should a partnership be treated that consists of only one shareholder? This is not normally a common situation. The question therefore arose as to what the tax treatment of such a one-man LLC should be and how the mandatory partnership tax return for such a company could be filed.

The solution that was then developed by the IRS was of groundbreaking importance: A one-man LLC is not regarded as an independent entity for tax purposes, but is virtually ignored. A separate tax return is not required. The tax treatment of this one-man LLC (also known as a one-person LLC or a single member LLC) is equivalent to that of the sole shareholder.

The shareholder must declare the LLC’s income as separate income on its personal US income tax return and pay appropriate income tax thereon.

Therefore, a one-man LLC is given the term “Disregarded Entity” (literally translated: “ignored entity”).

What is an Exempt LLC?

What if a non-US citizen who does not reside in the United States or have any other tax liability there forms a one-man LLC?

Again, the LLC is not considered a separate entity for tax purposes. The income of the LLC is treated as income from a commercial enterprise of the partner. However, since the shareholder is neither resident in the USA nor is he considered a trader there, he is not subject to any tax liability in the USA. Thus, the income of the LLC is also not subject to taxation in the USA, since the shareholder has no tax obligations there.

In this context, one speaks of a “Foreign Owned Disregarded Entity LLC” or “Exempt LLC” for short, i.e. an LLC that is exempt from US taxes.

What about LLC income in the US?

A foreign resident entrepreneur operating a sole proprietorship is not subject to US tax liability even if he has US customers. As long as there is no business presence (permanent establishment) in the USA, there is no tax liability in the USA, even if profits are made from transactions with US customers.

The same principle applies analogously to Exempt LLC: As long as there is no permanent establishment in the USA, it is not subject to any taxation in the USA.

However, it is important to note when exactly a US permanent establishment is considered to exist. This can already be the case if the LLC employs freelancers in the USA, for example, or even runs a warehouse there. However, the use of external service providers, including Amazon FBA, does not trigger a permanent establishment.

Since the question of permanent establishment depends on both the provisions of double tax treaties and the specific contractual relationships of the LLC, we strongly recommend that professional advice is always sought when planning a business presence in the USA.

What about taxes in your home country?

Even if the Exempt LLC is exempt from taxation in the USA, this does not necessarily mean that there are no taxes in the shareholder’s home country. This affects the taxes at the place of residence and work of the sole shareholder.

Based on the logic of Exempt LLC, the company’s profits would have to be taxed as business income in the shareholder’s home country.

This underscores one of the reasons why forming an Exempt LLC is only appropriate for individuals residing in a tax-friendly country that, for example, treats income from abroad as tax-privileged.

   The requirements for an Exempt LLC in relation to the US tax authorities:

Historically, Exempt LLCs have not been required to file returns with the United States Internal Revenue Service (IRS).

However, this situation met with displeasure at the IRS: The suspicion was that many foreign LLC entrepreneurs do business in the USA but do not pay any taxes.

Therefore, the US legislator decided a few years ago to tighten the regulations for exempt LLCs. Since then, LLCs have had to file a compact tax return annually and report to the IRS who the LLC’s beneficial owner is and what income it generated. Additionally, an FBAR is required for each foreign account held by the LLC.

It is important to understand that this does not create any US tax liability. However, the additional requirements mean additional work and late fees can be significant at $10,000 – $25,000 per form.

Important considerations when designing an Exempt LLC:

Given the aforementioned actions by the IRS, coupled with the agency’s threat to extend audits to more Exempt LLCs, it is important to carefully consider these aspects when designing and incorporating an LLC.

Non-US LLC tax situation:

The classification of LLCs under US tax law should be clear by now. But what about the tax treatment of the LLC outside the USA?

Well the reality is that most foreign tax authorities have difficulties with the LLC.

There are rarely comparable legal forms abroad and the hybrid nature of the LLC (combination of corporation and partnership) often leads to confusion.

This is especially true for the Single Member LLC:

At best, the LLC is considered to be tax transparent. This means that LLC income is subject to income tax in the owner’s state of residence.

However, there are many countries, such as the United Kingdom and Germany, that classify the LLC as opaque depending on the individual situation. As a result, it can be treated as both a corporation and a partnership.

Tax-optimized use of the LLC is only possible in countries that have tax advantages for foreign income.

We therefore recommend that all clients who live in typical high-tax countries such as Germany or Austria refrain from founding an LLC. The zero tax LLC described is suitable for tax-mobile individuals and those who live in tax-privileged countries.

Important note:
The described possibility of founding a US zero tax LLC is only suitable for founders who are taxable in a tax-efficient country of residence or live as digital nomads / perpetual travelers. A legal and tax-optimized use of the US zero tax LLC is not possible if you are fully taxable in countries like Germany or Austria. Even if you are based in a low-tax country, you should consult your tax advisor to clarify whether the use of the LLC can be implemented in a tax-optimized manner and how, for example, the potential triggering of a local permanent establishment can be avoided. We can also advise you on questions of fundamental importance.

Where there is no lawsuit, there is no judgement
We relate this consideration in particular to the use of Nullsteuer LLC if, for example, you are resident in Germany (which we strongly advise against).

It would be a fatal error to assume that since the US is far away and does not participate in the automatic exchange of information under the OECD CRS, you “won’t get caught anyway”.

It should be emphasized that the tax authorities could find out about your LLC sooner than you think. An account with Wise, Stripe, PayPal or a comparable provider with an EU presence is sufficient. After all, all financial service providers have you resident as a beneficiary of your LLC.

Benefits Your Zero Tax LLC
A US LLC as a legal form has many advantages. But what are the key advantages of zero tax LLC for international entrepreneurs who choose this legal form?

Tax free in the US
Assuming you meet necessary conditions, no US taxes are due on the LLC’s profits.

A US LLC is tax-exempt in the United States if
the LLC has only one shareholder and
this partner is a natural person and
such member is not a US citizen, US resident or other US taxpayer, and
the LLC does not have a permanent establishment in the United States.
In this case one speaks of a “Foreign Owned Disregarded Entity LLC” or “Exempt LLC” for short.

anonymity
If you incorporate an LLC in Delaware or Wyoming, your name will never appear publicly. They do not appear in any public registers (e.g. commercial register),

No or little obligation to publish
No balance sheet, annual report or other financial information about the company is published in the commercial register in the USA.

Recognized worldwide
The LLC is recognized worldwide and enjoys a good reputation with your contractual partners.

Large selection of banks & payment providers
Many local and international banks and fintech banks, as well as all major payment providers worldwide (Paypal, Stripe etc) will easily open accounts for your Zero Tax LLC.

Simple foundation
The LLC is easy and quick to set up. No notary appointment, no arrival. Everything goes online.

Easy administration
The administration of the LLC is easy. A mini tax return must be filed with the IRS and an annual report must be submitted to the Commercial Register. That’s it. Of course, we take on these tasks for you as part of our service package for looking after your LLC.

Simple closure
If you no longer need the LLC, it can be deleted in no time. No blocking year, no complex liquidation procedure.

Liability Protection
With the LLC you enjoy the liability protection of a limited liability company. As a shareholder, you are only liable with your contribution, which can amount to $1.

asset protection
The LLC allows you to protect assets and protect them from third-party access. Even if you later run into financial difficulties, the assets in the LLC remain protected from crackdown.

Protection from the Great Reset
We don’t know what the future will bring, but some developments are worrying. Now is the time for conscious citizens to take action to protect themselves and their assets. An anonymous US LLC that holds parts of your assets is a good start and a first concrete step in the right direction.

 

Banking & Payments for your US LLC
A major advantage of the LLC is that you have many banking and payment provider options. Above all, the neobanks should be mentioned here.

Neobanks are growing in popularity in both Europe and the US. We also recommend this option to our clients by default.

Our service package includes opening your account with a startup bank. In the USA, Mercury is one of the options here.

The main advantage of this variant is that the account can run directly on you as the owner. While traditional banks require a US resident, here you can easily act yourself. This saves time and costs.

Neobanks only differ from traditional banks in that they do not have physical branches. Otherwise, accounts at Mercury, for example, are equivalent to conventional accounts. You also get a Visa or Mastercard and do your business conveniently online.

Other neobanks that accept LLCs are Wise and Payoneer – this can be useful if you need a euro account. Because the US banks only provide US dollar accounts.

If you want to accept payments by credit card, we recommend Stripe. Here you can also easily set up an account for your US LLC.

LLC Account Opening – How to Access Your US Bank Account
In connection with the zero tax LLC, the question arises again and again as to whether and how one can open an account for the Limited Liability Company in the USA without being a resident there and, if possible, without having to first enter the country.

Open a business account in the USA as a German or foreigner

If you do not live in the USA, you can of course still open a business account for your zero tax LLC here. However, with traditional banks this has become increasingly difficult over time and your application to open an account may well be simply rejected. It is therefore worthwhile to think about an alternative in relation to the bank account in good time.

Do I need a US account for the Limited Liability Company?
One of the conditions of the Zero Tax LLC is that there is no permanent establishment in the US. However, a company account is necessary and it is quite practical if this is with a US bank. For example, when it comes to payment transactions with service providers. Fortunately, as an alternative to traditional US banks like Bank of America, there are ways to open an account without having a place of business and residence in the US.

US bank account options
Modern neobanks make opening a business account not only possible, but also particularly easy.

                                                    What are neobanks?

Neobanks are simply banks that function exclusively online. This not only reduces the administrative effort, but also the costs. After all, branches in a wide variety of locations are no longer available. The leaner bureaucracy is felt as a benefit in terms of bank account fees.

If you have a US bank account with one of the neobanks, you will receive a credit card or Mastercard and can conveniently make payments online.

Requirements and costs of opening an account
With a neobank like Mercury, Wise or Payoneer, you own the account yourself. A US resident is therefore not required to open an account. However, you must meet a few basic requirements.

Website – essential for external appearance and account opening
One of the requirements is that your company has a website that represents the company in a meaningful way.

It should contain the e-mail address and company data that show that the company has a solid basis. The same goes for a LinkedIn profile, which not only makes you and your company credible to customers, but also to the bank.

No travel required for account opening
Of course, as an entrepreneur, you must be able to demonstrate a certain presence for opening an account with a neobank. However, it is not necessary to travel to the country separately. You don’t have to be a US resident to have your LLC’s bank account with a neobank, and you can still get your business account.

Find an alternative to the multi-currency account
If you open an account with a neobank in the US, the payments will be made in US dollars.

However, if you also need an account for payments with the euro, providers such as Wise are a good choice. It is also possible to set up a multi-currency account.

Of course, you will also receive expert advice from us on all other Zero Tax LLC matters far beyond the bank details.

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TCME – Group worldwide is a leading professional international foreign trade relations investment and consulting firm, with 17 different departments spread in different countries around the world, with its head office in Malaysia.

We’ve helped thousands of people take their businesses abroad, legally reduce their taxes, and become dual citizens. We focus on high-net-worth individuals and their families as well as businesses, where we design and implement bespoke, holistic strategies for successful investors and entrepreneurs to legally reduce their tax burden, diversify and protect their wealth, invest abroad, a second citizenship and to live a freer life worldwide.

Another special area of our full-service consulting is the investment opportunity and solution in Europe, especially in the Balkans, Africa, Asia, the United Arab Emirates, the Caribbean and the Pacific.

Our legal team and our 200+ multi-disciplinary team have more than 25 years of global experience in the different Consulting Areas. Governments as well as the super-rich trust in our expertise in consulting. If you are looking for it, please feel free to contact us. We create a holistic plan that serves your purpose.

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