What Taxes Does an LLC Pay in the United States?

In today’s business world, entrepreneurship means entering a universe full of opportunities and challenges. However, it’s essential to consider the regulations and legal obligations that each country imposes.

If you’re considering establishing an LLC in the United States, you may have heard about the tax advantages associated with this type of entity. However, it’s important to understand that tax obligations can vary depending on different circumstances.

In this article, we explore the topic of taxes for foreign LLCs in the United States, providing you with a detailed guide on what taxes you might have to pay and under what conditions.

We’ll discuss the following aspects:

• When might an LLC be subject to taxes in the United States?
• Applicable taxes for foreign LLCs.
• Steps to follow if your LLC needs to comply with tax obligations.
• Frequently asked questions about taxes for digital services and dropshipping/Amazon FBA LLCs.

The goal of this article is to provide an overview and solid foundation for understanding tax aspects related to foreign LLCs in the United States.

Taxes for an LLC in the United States: An Introduction

LLCs (Limited Liability Companies) are business entities with unique characteristics in terms of taxation in the United States.

• LLC members have limited legal liability, meaning they are not personally responsible for the company’s debts.
• LLCs benefit from a tax regime known as “pass-through taxation,” where taxes are reported on members’ personal tax returns.

However, it’s important to note that foreign LLCs may have different tax treatments. In particular, “foreign-owned” and “pass-through tax entities” are relevant concepts.

It’s essential to understand these differences and how they can affect your foreign LLC’s tax obligations in the United States. We’ll explore applicable taxes and steps to follow to comply with your tax obligations in the country.

There’s a lot of information online about how not to pay taxes in the United States as a non-resident, which is true but there are several conditions that must be met. First, let’s understand some terms:

What does “Foreign Owned” mean?

If no member is a U.S. citizen, the company will become a foreign company. If any of the partners is a U.S. citizen, it cannot be classified as foreign-owned and will be subject to a different tax regime.

What does “Pass Through” mean?

To understand how LLCs are taxed, it’s important to understand that the IRS (the organization responsible for tax collection in the U.S.) considers them “pass-through tax entities.”

This means that the entity that pays taxes - if required to do so - is not the legal company itself, but its owners. Taxes “pass through” the company’s legal entity and are the exclusive responsibility of its owners.

Consequently, the rules to consider when calculating taxes that an LLC must pay are those that apply to individual foreigners, which are very different from those for U.S. citizens.

How can I know if I have to pay taxes?

As a non-resident foreigner, you will only have to pay taxes if your business activity qualifies as ETBUS.

All foreign-owned non-resident LLCs are exempt from paying federal taxes if they don’t engage in ETBUS activity.

What is ETBUS?

ETBUS stands for “engaged in trade or business in the US,” meaning they conduct commercial or business activity in the United States. To be considered ETBUS, your LLC must meet two conditions:

1. The LLC must have at least one dependent agent in the United States (more on this below)
2. The LLC must develop activity “of considerable magnitude, continuous and regular” with entities or people in the United States.

If your company’s activity qualifies as ETBUS, you may be able to benefit from tax rate reductions if the country of which the owner is a citizen has a Tax Treaty with the United States.

What is a dependent agent?

A Dependent Agent is a person or entity, with permanent physical presence in the United States, whose work is essential for your company’s operation.

Before continuing, we’d like to emphasize the importance of permanent physical presence in the United States for Dependent Agents. This can include offices, employees, service providers, regular contractors indistinguishable from an employee, etc.

Basically, if your LLC doesn’t have a Dependent Agent, it won’t conduct any ETBUS business. And if all LLC owners are foreigners, they won’t have to pay taxes as long as these conditions are met.

My company would have to pay taxes. What should I do?

First, if your LLC is going to pay taxes, you’ll need to obtain an ITIN - Individual Taxpayer Identification Number - and prepare a return using form 1040NR.

Ultimately, you’ll only pay taxes on your profits. It’s simple: the difference between your income and expenses. If you plan wisely, the amount to pay can be greatly reduced.

What taxes would I pay in Florida or New Mexico?

Florida:

• State income tax: Does not apply to LLCs in Florida.
• Federal income tax: Must file federal income tax returns using form 1065, the tax scale is from 10% (annual revenue less than $11,000) to 37% (annual revenue greater than $578,000).
• Sales tax: The sales tax rate in Florida is 6%, but additional taxes may apply at the local level.
• Property tax: LLCs in Florida may be subject to property tax on assets they own.

New Mexico:

• State income tax: LLCs in New Mexico are subject to state income tax. The rate varies depending on the LLC’s income level.
• Federal income tax: Must file federal income tax returns using form 1065, the tax scale is from 10% (annual revenue less than $11,000) to 37% (annual revenue greater than $578,000).
• Sales tax: The sales tax rate in New Mexico is 5.125%, but additional rates may apply at the local level.
• Property tax: LLCs in New Mexico may be subject to property tax on real estate assets they own.

Remember that the information provided is general and may be subject to change. I would recommend consulting official tax sources in Florida and New Mexico for updated and accurate information about taxes applicable to your LLC in those states.

Frequently asked questions about taxes for digital services and dropshipping/Amazon FBA LLCs

Taxes for an LLC for digital services:

If you’re a freelancer or if your LLC’s main activity is offering services performed by people outside the United States, you probably won’t have to pay taxes in the U.S. However, it’s important to note that there’s no definitive answer for all cases.

The need to pay taxes can vary according to each particular situation, so seeking tax advice for an accurate answer is recommended.

Taxes for an LLC for dropshipping or Amazon FBA:

In the case of selling physical products using Amazon FBA or dropshipping, the classification of the LLC as ETBUS (Business with effective presence in the United States) is uncertain.

Although there’s no consensus among accounting professionals about the correct interpretation of legislation in this particular case, a future court resolution or clarification by the IRS is expected.

In the case of an Amazon FBA business, goods are likely to be in a warehouse in the United States, which would imply the obligation to pay taxes. On the other hand, in the case of a dropshipping business, the answer may vary.

Conclusion

Take the leap toward new global opportunities. At ExpressFormations, we offer expert advice for forming LLCs in the U.S. Contact us now!, free of charge, and we’ll provide guidance. Start expanding your business beyond borders.

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This article provides general information and does not constitute legal or tax advice. Regulations may change. Consult with qualified professionals for specific guidance about your situation.