Why it is attractive to own a company in the U.S., especially when you're not based there
This post gives an overview of the main takeaways when forming and managing your LLC in either Delaware or Wyoming.
Note: This page is purely educational and does not constitute legal or tax advice. Information found here cannot be relied upon or used as a replacement for discussion with a professional. Please use this page as a starting point for your own research pertinent to your individual circumstances.No
Delaware and Wyoming LLCs are extremely popular entities both for American citizens and foreigners alike. The USA is actually the largest offshore jurisdiction in the world due to:
The lack of reciprocity in reporting
The laissez-faire approach of some of the states
The importance of the US Dollar and the American banking system
And while the applications of US LLCs stretch far and wide, the reporting and tax requirements for the people who use them can appear to be equally unending.
In reality, the reporting and tax requirements of an LLC are very simple. It’s all about understanding what type of LLC your entity will be classified as and identifying sources of income.
US LLCs vs C-Corps
It is essential to understand the difference between the two main US company types that are popular international vehicles: LLCs and C-Corporations. These entities are often confused, especially in how they pay taxes and do reporting.
Legally speaking, LLCs are akin to partnerships where the Partners are called Members, whilst C-Corps are corporations and its owners are stockholders or shareholders. They share some common characteristics:
They both offer limited liability protection. Company owners and managers are not personally liable for the company’s obligations.
They both offer protection for intellectual property.
They both can have an unlimited number of owners or as few as one.
There are also significant differences:
An LLC is extremely flexible. The Operating Agreement does not have to follow any established standards, and members are free to agree on any structure they see appropriate.
A C-Corp is much more structured utilizing clear, well-understood concepts like stocks representing ownership, a board of elected directors, company officers, etc. and a significant body of best practices has grown around its setup.
Members of an LLC are not listed in the company records, and they can remain completely anonymous.
Shareholders of a C-Corp can also stay private, but the name of the elected officials and the members of the Board have to be public. Some companies mitigate this issue by employing nominee managers and board members, which is entirely legal.
Most crucially, LLCs and C-Corporations fall under very different taxation rules.
LLCs are considered “pass-through” entities and are taxed at the level of the individual owners. If those owners live in a low tax country, tax on their LLC income will be highly optimized.
A C-Corp, on the other hand, has to pay corporate taxes, and shareholders are personally taxed as well on any income they generate from the company (dividends, capital income, et cetera). Getting taxed twice certainly doesn’t sound as good as pass-through taxation. However, the C-Corp has other benefits for different use cases, mainly when it comes to fundraising.
The rest of this piece will be dedicated to illuminating the ways that an OtoCo on-chain LLC may have to pay taxes and conduct its reporting.
Income Taxes and Reporting
There are three distinct types of LLCs with very different requirements:
Foreign owned LLCs
Multi-member LLCs are typically what a DAO LLC would be considered to be. This includes OtoCo LLCs generated in Gnosis Safe with multiple owners.
Domestically-owned Single-member LLCs
These are U.S. LLCs that are owned by one person who is a resident of the USA.
It is up to the individual member of the LLC to pay taxes personally based on the LLC's profit for that year. In practice, this means including a Schedule C with the 1040 personal income tax form.
The member is required to declare and pay taxes regardless of if the member actually "receives" the profit or it is “kept inside” the business.
Tip: Don’t forget, you will be responsible for paying self-employment taxes!
Foreign-owned Single-member LLCs
For those of you who have no roots in the USA, these are the entities for you: U.S. LLCs that are owned by one member that is not a resident or citizen.
If you have U.S. source income, you will likely be required to file a personal income tax form (1040-NR) and get an ITIN (Individual Taxpayer Identification Number). Some examples of U.S. source income would be services performed in the USA or goods sold in the USA.1
If you do not have any U.S. source income and engage in business purely outside the USA, you will likely not have any U.S. income taxes to file.
Tip: You could be required to file taxes both in the USA (for the U.S. source income) and your own country of residence (for other taxable income).
There are additional reporting requirements if your LLC has “reportable transactions” and they are with a “related party” (including but not limited to: family members or subsidiary companies).
These LLCs are required to file a Form 5472 and Form 1120 every year regardless of whether there is income that must be reported to the Internal Revenue Service (IRS).2 In most cases, a transaction is not a “reportable transaction” if neither party to the transaction is a United States person, which keeps things quite simple for foreign-operated businesses.3 Further reading on this subject can be found at the bottom of this page.
Tip: If you do not engage in “reportable transactions” with “related parties,” and have no U.S. source income, you could have zero reporting obligations to the USA as a foreigner!
These LLCs are taxed much the same way as single-member LLCs but each member is required to pay taxes personally for their share of the LLC's profits.
The tax requirements will be based on each member’s local jurisdiction. In many countries, taxes owed will be based on "allocated profit" not received profit. In this case, the member is required to declare and pay taxes regardless of if the member actually receives income from the LLC. The Operating Agreement of the LLC, or an additional supplementary agreement, should outline the allocation of profit to all its members.
Some members may live in a country like Brazil, which allows the member to delay paying taxes until actually receiving the funds. Some members may live in a country with no foreign income taxes at all!
Each member of an LLC needs to review the guidelines of their local territory. Thankfully, U.S. LLCs are very popular and the tax and reporting requirements are well documented in nearly every country.
Unless a multi-member LLC has no income or expenses/credits to claim, a Form 1065 will need to be filed with the IRS and each member will be required to fill out and attach a Schedule K-1.4 This does not mean you are liable to pay taxes, it is just a reporting requirement.
In some cases, multi-member LLCs may be required to file a Form 8804 and 8805.5 Please be sure to determine if this applies to your circumstance.
Note: non-resident members of the LLC are still supposed to submit a personal 1040-NR for any income sourced from the U.S. and would need an ITIN.
Who Qualifies as a Non-resident Alien?
For foreigners to avoid much of the U.S. tax and reporting requirements previously mentioned, it’s vital that they pass the “non-resident alien” test. Such non-resident alien is someone who is not a citizen or permanent resident (i.e. Greencard holder) of the US, and who does not meet the substantial presence test. In practice, this means you should count the number of days you spend on American soil. In true IRS fashion, the calculation is anything but straightforward.
To meet the substantial presence test, you must be physically present in the United States on at least:
31 days during the current year, and
183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
All the days you were present in the current year, and
1/3 of the days you were present in the first year before the current year, and
1/6 of the days you were present in the second year before the current year.
If you satisfy these conditions, you are a resident alien from a taxation perspective, and you will not be able to enjoy the benefits for true foreigners.
Reporting and tax requirements for a U.S. LLC are well documented and are in many cases quite simple for both foreigners and residents. Make sure to look up your local jurisdiction’s laws with regards to how U.S. LLCs should be handled. Do not hesitate to consult a professional during times of uncertainty as it will almost always be cheaper than consequences and fines imposed by the IRS.
Consult a Professional
If you would like to speak to a professional, please email firstname.lastname@example.org and we will do our best to try and connect you.
2 https://www.loeb.com/en/insights/publications/2021/03/obligations-to-file-form-5472-for-foreign-owned-disregarded-entities#:~:text=If%20you%20are%20a%20foreign,a%20U.S.%20Trade%20or%20Business). & https://www.lexology.com/commentary/private-client-offshore-services/usa/kozusko-harris-duncan/completing-us-tax-forms-form-5472-foreign-owned-disregarded-entities
Foreign-owned single-member LLCs:
General LLC taxation rules: