Which is the best U.S. state for non-resident business owners?
Corporate State Taxes for Non-Resident Business Owners - Non-US residents can form companies in the U.S and in terms of state tax obligations and which state is the best for your business, it really comes down to how the business is run. In this article we will attempt to explain why.
Do you plan to have a physical presence?
If you’re going to have an office, employees, or physical presence in the USA, then you should form your entity in that state. This is the state where the entity will be transacting business. If your business will have no physical presence in the USA, then typically, you can choose any state.
The type of U.S. federal corporate taxes and state taxes you pay will depend on how your business makes money. There isn’t a simple answer for what the “best state” is for the lowest taxes for non-us residents / citizens. It all comes down to the type of business you have. And this isn’t something we can answer for you. You’ll need to speak with an accountant familiar with non-resident alien taxation and the 60+ US tax treaties.
Having said that, while you can pick any state to form your U.S. entity in (if there is no physical presence), how you obtain and EIN and open a bank account are different. And foreign-owned Single-Member LLCs have an additionally filing requirement with the IRS (which we cover here).
Which state to form your entity in?
When you're running your own business, tax obligations are often on your mind. If you are not yet a business owner, but are considering starting your own company, taxes should be a factor you evaluate. Whether you take care of your own tax matters or have a tax professional handle them, you and your business are the ones on the hook. While federal obligations may seem daunting enough, don't forget about your state tax obligations. Many requirements are imposed at a state level, and complying with them is crucial.
Just like people, corporations have to pay taxes. For any incorporated business, the IRS sets rules for deductible expenses, exempt income and tax credits, and levies a progressive tax rate that varies depending on the corporation's net taxable income. The structure of a business makes a large difference in how that business is taxed. In addition to Federal Corporate Taxes, in the United States, each state has its own tax rates and rules.
If you are a non-resident alien, certain states are better for forming an LLC than others
By definition, non-resident aliens do not reside in any US state or territory. Non-resident aliens also have the right to set up LLCs in any of the states of the United States, plus the District of Columbia and US territories. Non-resident aliens may want to set up LLCs in the United States to create an entity for banking and to distinguish their business assets from any personal assets they hold in the United States.
For example, if you have both an online business that generates income in the United States and a condo you use when you visit the United States, you may want to make sure that your condo is protected as your non-business property.
The US can be one of the world’s best tax havens for non-resident business owners. No federal or state taxes are charged against profits earned without a “dependent agent” in the United States. A dependent agent is a person you employ substantially full-time to increase your income, as contrasted to doing something purely administrative, like making sure payments are deposited into your bank account.
Two examples of profitable businesses that earn income in the US that are exempt from all U.S. taxation:
1. You run a “fulfilled by Amazon business.” Maybe you wrote the definitive book on SEO, and you earn tens of thousands of dollars per month from your Amazon Kindle royalties (as one resident of the UK does). Or maybe you stock specialty goods in Amazon warehouses that are “fulfilled by Amazon” without any additional effort by you. An LLC gives you protection against legal claims on your US assets, which might be the royalties or profits on sales that are in transit from Amazon to your bank account. Since you are not operating a business in the US, you only have to file an information tax return with the IRS. You are not subject to tax or withholding.
2. You provide services over the Internet. Let’s suppose you are a programmer in Belarus. You write software for US companies and get payments through Stripe, PayPal, and bank transfers. All your sales are made by phone or online and you don’t have a dedicated sales agent in the US. You maintain an LLC for collecting payments and making sure the IRS and your clients know that you are not subject to 30 percent withholding imposed on non-resident aliens who run brick-and-mortar businesses in the United States.
In these situations, some states are better for forming your entity than others. First, you do not want any confusion about owing state income taxes. Even if you don’t owe them, you do not want to have to prove that you do not. You should form your entity in a state that does not have a state income tax.
So, which is the best state for forming a business entity in if you are a non-resident alien?
There is no definitive answer to this question, as it depends entirely on your business model as to whether your business is operating in tangible goods within a jurisdiction or in-tangible products and services that are not effectively connected with a state.
Non-resident aliens want to avoid any appearance of a “nexus” of their personal activities and their business activities in any state. But usually, the best state for forming an entity, if you are a non-resident alien, is the state with the lowest renewal and compliance fees.
*Disclaimer*: Yondaa, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Yondaa, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Yondaa, Inc.