taxes, business-structure, tax-structureThis is a question for my partner, who is a US citizen, has a Delaware LLC, and does consulting services. She works/lives in different countries for her day job as a researcher. For the next three months, she will live in the UK, after then potentially 6 months in Singapore, etc.
She wants to pay corporate taxes as required by law, but we are confused as to where to report the taxes. What I found on corp.delaware.gov is that:
Limited Liability Companies and General Partnerships formed in the State of Delaware do not file an Annual Report, they are required to pay an annual tax of $250.00 ($300.00 to be made effective July 1, 2014, beginning tax year 2014).
Furthermore, I think there is also a tax on the LLC’s profit (on top of this 300?), because here, I read:
As a non-US resident, your Delaware LLC will only be taxed in the US on income from US sources, meaning that income from other countries will not be taxed by the US. If you choose to form an LLC, any profits US-sourced income will be taxed by 30%. This 30% goes to the IRS. At the end of the year, you will file your US taxes on Form 1040-NR with the actual amount due. If the amount due is less than the 30% initially taxed, the IRS will issue a refund in the amount overpaid. To make sure the LLC is sending the proper amount to the IRS, the LLC must designate a tax withholding agent to calculate the proper amount that must be sent to the IRS before any of the money is released.
So if she lives outside of the US and I let her clients pay her US LLC account. Does this count as “income from other countries”? And where is this income taxed? Obviously she pays personal income tax wherever she currently lives (UK etc), but corporate profit seems to be something else. I know that if she lives in anther state in the US she needs to register the business there, but I am unsure what to do when living abroad: does she need to register the LLC in the UK?
Thanks for any insight.
This is a fairly complex tax scenario and I would highly recommend you consult with a qualified tax advisor about the specifics of this situation.
The incomes of Americans are taxed by the federal government, most state governments, and in extremely rare cases by municipal governments. Each of these taxing authorities determine which income will be taxed and under what circumstances. By far the highest income taxes are levied by the federal government, so let’s start with that.
Federal Taxation of Individuals
American citizens (and permanent residents) are subject to federal income tax on worldwide income. That means an American must pay income tax on income generated in the United States and on income generated outside the United States. Americans must pay income tax whether or not they live in the United States. Americans must even pay federal income tax if their income was generated outside the United States from non-American sources while living outside the United States.
I’ll continue on individual taxation below, but first let’s cover the basics of federal business entity taxation.
Federal Taxation of Business Entities
American businesses (this includes Delaware LLCs) are subject to federal taxation. Some businesses are taxed directly while others elect pass-through taxation. If a business is taxed directly, it will pay taxes on its income independent of its owners. If a business elects pass-through taxation, it will only file an informational return with the IRS and its owners will pay taxes on all business income with their individual income taxes filings.
LLCs generally elect pass-through taxation to avoid double-taxation. However, LLCs may elect to be taxed directly as traditional corporations in rare circumstances. This may be one of those circumstances and your professional tax advisor will help you make the correct determination.
State Taxation of Individuals and Business Entities
Americans may have to pay taxes to the state in which they are domiciled (this is generally the state in which an American has his or her driver’s license – the de facto American ID card). Some states that have no state income tax. Some states have no corporate income tax. The exact rules vary from state to state. It might be smart to re-domicile in a state that has no state income tax if you plan to leave the United States for an extended period to avoid state income tax. Each state makes its own rules on what is and isn’t taxed, including whether or not foreign income is taxed.
If this is the same person you discussed in your previous question https://startups.stackexchange.com/questions/9762/ltd-company-in-us-while-temporarily-living-abroad then you probably don’t have to worry about state taxation because the State of Washington has no individual income tax and it’s very unlikely they would (or could) tax UK income.
Delaware
Most individual owners of Delaware corporations or LLCs are not domiciled in Delaware. In the United States, business entities are formed at the state level. An individual does not have to be a resident of a state (or even an American) to form a business entity in that state. States like Delaware have more favorable laws to many other states which attracts non-residents to form entities in Delaware even if they have no other connection to Delaware.
Delaware does not tax income of non-domiciled individuals. Delaware also does not tax the income of business entities generated outside of Delware. However, Delaware does have fees (this is the annual tax you mentioned) that is required to maintain a business entity. Delaware’s annual business entity taxes are not based on income.
This is Hard
Taxation in the United States is extremely complex. Graduate degrees in federal taxation are the norm for American tax advisors. Your partner will likely have to pay fees to Delaware for maintaining the LLC. In addition, your partner will absolutely have to file an LLC federal tax return (probably an informational one), an individual tax return (probably including the income of the LLC), and possibly a state tax return in the state of domicile (where he or she has a driver’s license). However, you need the help of a tax advisor to understand the exact requirements.
How to Avoid US Taxation
The only legal way for an American to avoid being subject to US taxation is Renunciation of citizenship. Once the United States government accepts the renunciation (which takes years), a then-former American will no longer be subject to American taxation and the rules you read on the incorporation service website will apply.
American tax law also allows Americans living abroad to avoid some or all taxation since they are paying taxes to the country in which they are living. This still requires filing an informational return and may not cover all income.
Registering the LLC in the UK
I can’t help you with this part because I’m not familiar with UK law. However, I will say that you might want to re-consider the need for a Delaware entity if you are required to register the entity in the UK. You might be better off with a native UK entity alone, without the American connection. I would guess that would simplify the tax situation considerably.
That does not mean you need to rush and shut down the Delaware LLC. You might just be better off operating as a UK entity while in the UK.
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