Hi barumbarum,
It is recommended that an LLC have more than one member because if
not, the IRS will tax it as a Sole Proprietor. With only one owner,
the LLC will not be considered a separate entity from the owner.
If all of your services are performed outside the U.S., as a
nonresident alien, your income would not be subject to U.S. income
tax. But because you've formed an LLC as a Sole Proprietor in the
U.S., your tax-free benefit has been lost. So the attorney was correct
but I don't think he quite nailed the reason why. An accountant might
have been a more appropriate person to consult.
To enjoy the US tax free benefit, it is advised that the LLC have two
or more members.
"Features of a Delaware Limited Liability Company:
* A Delaware LLC may be formed by one or more organizer or member. It
is not recommended that one member only is used. An LLC may be treated
like a Sole Proprietorship by the IRS when owned by one member. If the
member is a non-resident alien, and the LLC derives its income outside
of the US, the tax free benefit will be lost when treated like a Sole
Proprietorship by the Internal Revenue Service (IRS)"
http://www.us-llc-for-non-residents-of-the-usa-incorporate-llc-in-us.offshore-companies.co.uk/delaware/llc_in_delaware/
>>>> About U.S Source Income
"Non US persons are only taxed on US source income or income connected
with the conduct of a US trade or business. If the LLC earns only
income which falls outside this definition and the members of the LLC
are non US persons with no US presence then no tax would be payable
either by the LLC or by its members."
http://www.ujoffshore.com/enghtml/services/incorp_jurisd_delawllc.asp
U.S. or Non-U.S. Source Income:
"Nonresident aliens, for tax purposes, unlike U.S. citizens and
residents, are only subject to tax on income that is considered U.S.
Source Income by the IRS. Foreign Source Income received by
nonresident aliens is not subject to U.S. taxation.
* U.S. Source Income - income is generally considered U.S. Source if
the location of the activity for which the payment is being made is in
the U.S.
* Foreign Source Income - income is generally considered foreign
source if the location of the activity for which the payment is being
made is outside the U.S."
http://vpf-web.harvard.edu/ofs/tax_services/emp_pay_sou.shtml
>>>> About an LLC Sole Proprietor
IRS FAQ:
I recently formed a limited liability company (LLC). The LLC has no
employees. Do I need a separate Federal Tax ID number for the LLC?
"No, you will not need a separate Federal Tax ID number for the LLC if
you are the sole owner of the LLC and the LLC has no, employees. If
you are not the sole owner of the LLC or if the LLC has employees, you
will need a separate Federal Tax ID number for the LLC.
If your business has only one owner, it will automatically be
considered to be a sole proprietorship (referred to as an entity to be
disregarded as separate from its owner) unless an election is made to
be treated as a corporation."
http://www.irs.gov/faqs/faq12-1.html
34. What are the advantages of operating as a Delaware LLC by
nonresident non-U.S. citizens?
34.1 "If properly structured, a Delaware LLC will be treated as a
partnership for Federal income tax purposes. And, you may be able to
legally avoid all U.S. Federal income taxes for non-U.S. business
source income."
http://www.delbusinc.com/faqllcs.htm
"The default tax treatment (by the IRS) of an LLC with only one member
is as a sole proprietorship unless an election is made to treat it as
a corporation The IRS, by default, treats all LLCs with more than one
member as a partnership, unless that LLC makes an election to be
treated as a corporation for tax purposes."
http://www.delawareintercorp.com/forms.htm
I hope I've been able to make that clear. If you have any questions,
please post a clarification request *before* closing/rating my answer
and I'll be happy to reply.
Thank you,
hummer
Search Strategy:
I searched the IRS website and also Google using the terms:
LLC nonresident alien
LLC foreign
LLC offshore
LLC Sole Proprietorship
LLC Delaware |
Request for Answer Clarification by
barumbarum-ga
on
03 Dec 2004 01:50 PST
Hammer,
ok, I understand. Perhaps this wasn't part of original question, but
what is your suggestion for me to do? I don't understand what is the
income in this talk, is it original price of $100 on which I sold
licenses, or is it difference between what I sold ($100) and what I
purchased it ($99)?
I licenses are not mine, and I opened LLC in delaware to resell
software in USA, would I still have to pay taxes to $100? But this
sounds ridicolous to me (pardon my word) since I spent $99 to obtain
that product.
Can you give me exact solution on what I should do? I will be
double-taxed this way, both in USA and domestic country.
|
Clarification of Answer by
hummer-ga
on
03 Dec 2004 04:06 PST
Hi barumbarum,
What country are you in?
What exactly are you doing in regards to your business? Do you ship CDs?
What do you mean by the licenses aren't yours?
hummer
|
Request for Answer Clarification by
barumbarum-ga
on
03 Dec 2004 04:49 PST
I'm in one European country, but do own offshore company too - so any
of those can be seller to delaware company.
Currently I don't ship CDs but I can if it's required to avoid these taxes.
If I change my question from 'sell licenses' to 'sell copies of the
software' this changes this completely, right? Then I am taxed only on
that $1 income, correct?
|
Clarification of Answer by
hummer-ga
on
03 Dec 2004 05:06 PST
Hi again.
I would still like to know what country you are in, where is the
domestic home of your business, where is it registered?
I would still like to have a brief description of your business. What
do you do? Presently people download copies of your software and you
sell the license?
I still don't understand what you meant by "I licenses are not mine".
Thank you, hummer
|
Request for Answer Clarification by
barumbarum-ga
on
03 Dec 2004 05:46 PST
Hummer,
I'm resident of Croatia. I'm looking for a way to avoid USA federal
tax on US income, since i'm going to be taxes in Croatia too. Software
is made in Croatia anyway, just sold to USA through new delaware
company. So, what choices I have?
|
Clarification of Answer by
hummer-ga
on
03 Dec 2004 06:02 PST
Ok, barumbarum, what I was trying to lead up to was to determine if
you'd be better off without the LLC because you don't need an LLC to
do business with the U.S. If you just sell your product from your home
country, the U.S. cannot collect income tax from you even if all of
your customers are in the U.S. What matters is where the work/services
are performed, not where your customers are. In other words, you can
do business with customers in the States all you want to without
paying income tax to the IRS - you did not need to set up an LLC to
accomplish that.
Anyway, here is what you can do to keep your LLC if you really want
to. When you file your U.S. Income Tax, be sure to include Form 8832.
In this way, the IRS will consider your company a "Corporation" rather
than a Sole Proprietor.
1. Single member LLCs.
"Generally, when an, LLC has only one member, the fact that it is an
LLC is ignored or ?disregarded? for the purpose of filing a federal
tax return. Treasury Regulations Section 301.7701-1,-2,-3"
"If you prefer to file as a corporation instead of as a ?disregarded
entity? Form 8832 must be submitted."
http://www.irs.gov/pub/irs-pdf/p3402.pdf
FORM 8832: Entity Classification Election:
"...a business entity with a single member can choose to be classified
as either an association taxable as a corporation or disregarded as an
entity separate from its owner."
Disregarded entity:
"A disregarded entity is an eligible entity that is treated as an
entity that is not separate from its single owner. Its separate
existence will be ignored for Federal tax purposes unless it elects
corporate tax treatment."
http://www.irs.gov/pub/irs-pdf/f8832.pdf
You will find full instructions with Form 8832. Filing as a
Corporation should give you the results that you desire.
Regards,
hummer
|
Request for Answer Clarification by
barumbarum-ga
on
03 Dec 2004 06:47 PST
Yes, I am aware of all above. I had to setup Delaware LLC in order to
get merchant account - otherwise I have to use 3rd party payment
services (non USA entities have hard time getting merchant account, at
least here).
But question still remains - what do I need to do so I'm taxed to only
my USA income ($1) and not to overall sold price ($100)? If I sell
'software copies' instead of 'software licenses' does it change
anything in the way I am taxed? Does it change anything if I ship CDs
or not?
|
Clarification of Answer by
hummer-ga
on
03 Dec 2004 09:21 PST
Ok, barumbarum, I think I finally found a good website for you. Read
the entire section: "Using the US LLC for Offshore Business".
"However, we have found that a more significant benefit arises for
non-resident aliens utilising LLC's. If the LLC is owned entirely by
non- resident aliens, no LLC business is conducted in the US and all
its income is foreign source income, then no tax need be paid to the
IRS. The US, in this case, becomes a tax haven for non-resident
aliens."
If the domestic LLC is owned strictly by non-resident aliens, conducts
no trade or business within the US, generates no US source income,
does the domestic LLC have to file a tax return to the IRS and,
further, is the foreign source income subject to federal tax?
"Although we have determined that the domestic LLC does not have a
federal tax liability on its foreign source income, we must examine
whether the domestic LLC is required to file a tax return with the
IRS."
"If a domestic LLC operates in the United States or has US members, it
is obliged, under the Internal Revenue Code, to file information
returns with the Internal Revenue Service on a regular basis. However,
if the domestic LLC has no US members, no agents, no fixed place of
business and no business in the United States, then it is not required
to file any federal information returns.
Even if ?nominee? members are retained through a management company to
structure the domestic LLC, as long as the nominees are non-residents
the LLC has no reporting requirements."
"If the domestic LLC is structured properly and the organisational
aspects are adhered to properly, and there are no US members and no US
source income or foreign source effectively connected income, then the
domestic LLC can be used to produce foreign source income and not have
a federal tax liability on that foreign source income, nor have tax
reporting requirement to the IRS."
http://www.consumoffshore.com/english/corpusa/llcintro.html#usllc
In other words, since all of your income is derived from a foreign
source (whether CD or license), and since there are no US members, and
IF your management company for the LLC are also nonresidents, then you
don't have to file income tax at all. However, even if you do have to
file income tax, the $100 is foreign source income and is not taxable
by the U.S. The $1 is not "income" but rather an "expense", it is
coming out of the foreign source income to pay for expenses. You need
to discuss this with an accountant who specializes in what you are
doing to make sure you have everything set up properly.
In regards to selling CDs or licenses, it really doesn't matter. The
point is, where are you doing business, where is the service
performed?
I hope that is clearer,
hummer
|
Request for Answer Clarification by
barumbarum-ga
on
03 Dec 2004 09:45 PST
Yes, I think I understand now. Thanks a lot!
|
Clarification of Answer by
hummer-ga
on
03 Dec 2004 09:52 PST
Thank you for your thank you, barumbarum, and for the tip - that is
very nice of you. I hope all goes well with your business! Sincerely,
hummer
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