Paying 0% tax on company registered as an LLC

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Paying 0% tax on company registered as an LLC

Paying 0% tax on company registered as an LLC

For those seeking to pay 0% tax on company registered as an LLC and to optimise international business operations and minimise tax liability, it is essential to understand international taxation.

One of the ways to optimise tax strategy is to establish a Limited Liability Company (LLC) in the United States.

For non-US citizens, establishing an LLC in the US opens doors to significant tax benefits. The benefit lies in the ability to operate a business in the US without paying taxes, provided certain conditions are met.

There are four main categories of persons who can register a company in the US that pays 0% tax:

  • Non-US citizens.
  • Non-U.S. residents.
  • Non-green card holders.
  • Those who do not have a dependent agent in the United States.

In practical terms

LLCs are recognised as pass-through vehicles or fiscally transparent entities. What does this mean in practical terms? For tax purposes within the US, these entities are virtually non-existent.

There is a lot of misleading information circulating, suggesting that a company registered in the US does not pay tax, implying that it is exempt from taxation worldwide. However, this perspective is only rooted in the US context. The reality is that your tax obligations may extend to the country of your residence. This is not always the case; it depends on whether your country employs a residence-based or territory-based tax system. If your country follows a territorial system, it is likely that you will still reach a 0% tax result in the end. However, each country treats LLCs differently and professionals should be consulted.

So how does it work that LLCs in the US do not pay tax?

The United States of America operates under a federal system, which results in the presence of two distinct levels of taxation:

  • The federal level
  • The state level

All businesses are subject to taxation at both levels. However, when it comes to a foreign-owned LLC, a significant distinction arises at the federal level.

In essence, a foreign-owned LLC is not subject to federal taxation. This implies that the Internal Revenue Service (IRS), the US federal tax authority, will not tax a foreign-owned LLC, regardless of the state in which it is registered.

Whether the LLC is established in Columbia, Delaware, California or another state, the IRS applies uniform taxation rules in all states.

However, there is an important consideration to keep in mind when choosing the state of registration. While at the federal level all LLCs are exempt from taxation in the absence of a physical presence in the US, at the state level variability is introduced.

Each state independently determines its taxation policies, resulting in divergent tax structures. Consequently, opting for a state such as California or New York could lead to exposure to certain state taxes that do not exist in other states.

The most popular states for registering foreign-owned LLCs are:

  • Delaware
  • Wyoming
  • New Mexico

However, it is impossible to determine a definitive “best” choice among these three.

The optimal choice depends entirely on the unique specificities of your business, your scale, the countries you interact with and your origins. Each scenario requires a careful assessment of your distinct priorities.

Delawere, the highest costs

Delaware has the highest costs among the three. Not only is it more expensive to set up, but it is also more expensive to maintain. The franchise tax alone requires a payment of USD 300, plus filing fees, which are not incurred in Wyoming and New Mexico.

Delaware, however, has stronger legislative safeguards and an enriched legal environment. Owner privacy receives superior protection in Delaware, exceeding the standards set by other states. If your company has substantial scale and revenue, you may be willing to assume higher costs to secure enhanced protection.

It is important to note that certain countries, such as Brazil and Ecuador, have designated Delaware as a tax haven. If your affiliations are with those countries, it may be wiser to choose another state to register your LLC.

Wyoming and New Mexico

When comparing Wyoming and New Mexico, the latter offers the advantage of being exempt from annual reporting fees, fees to which a company registered in Wyoming would be subject. While set-up costs are almost identical, ongoing expenses are cheaper in New Mexico, which could be considered the more cost-effective option.

However, if you have a firm belief in the efficiency of your structure, Wyoming may still be the preferred route. Wyoming has a superior legal basis for trusts, making it an attractive prospect for those who prioritise trust arrangements.

In addition, if concerns about potential lawsuits surround your considerations, Wyoming’s strong liability protection sets it apart. This means that if you, as an individual, are faced with legal action, attempts to seize assets owned by the LLC would encounter formidable obstacles.

Establishing an LLC in the US can be a transformative step in reducing tax burdens and optimising global business operations. By understanding the nuances of the tax systems, taking advantage of liability protection and accessing a sound banking system, you can lay the foundation for financial success.

At Letslaw by RSM we can provide you with our experience in the digital law field and in the trademark registration one. So do not hesitate and contact us for any doubt that you might have about digital advertising and its legal questions.

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