Opening an LLC in the US: What you need to know about the equivalent of an LLC in America?
Publication date/update: 06.05.2024
Registering any enterprise abroad is one way to scale your business when you need to find or enter new markets for your products. One such country is the USA – a highly popular and prestigious jurisdiction that offers many opportunities for startups and aspiring entrepreneurs. If you have decided to enter the US market, you may wonder: what type of company should I open? We recommend an LLC. We'll explain why in this article.
What are the "pros" of working in the USA?
Why do a significant number of entrepreneurs aim to scale their businesses in this foreign country? This is due to the advantages that the USA can provide when registering a business:
- Scaling. Reliable logistics and connections with other governments provide the opportunity to enter not only the American but also the global market.
- Excellent reputation. Being associated with America allows for a higher level of trust in the legal entity from both customers and partners.
- Working with international platforms and services. This includes major marketplaces, payment systems, and banks.
- Access to innovations and skilled professionals. Innovative technologies offer the opportunity to develop business processes, while well-educated employees can help increase income.
- Tax optimization. Overall, the USA has a high tax burden. However, the final figures depend on the state. It's important to choose a location with the lowest tax rates or tax incentives.
- Availability of support programs for startups or novice businessmen.
Legal guarantees of doing business in the USA
- Asset protection. When opening a business in the USA, your assets will be separated from the company's assets. This prevents the seizure of personal property to cover debts during difficult times.
- Pass-through taxation. The company's profits and losses pass to the owners and are reflected in tax returns, similar to if they owned a partnership or sole proprietorship. This avoids the "double taxation" of property owners, which is usually associated with paying taxes by both the business and the individual.
- Employer Identification Number (EIN) allows for the calculation of all types of taxes and the organization of employee hiring. Getting an EIN is simple and can be done from any other country.
- The ability to earn income regardless of status. If a person does not have a business visa or a green card, they can still become a director or corporate owner.
- Access to small business development loans. States may provide low-interest loans with flexible terms to small businesses to both US citizens and non-residents.
Company Formation: Choosing the Business Structure
Typically, businessmen choose one of two business forms in the United States:
- LLC (Limited Liability Company) is analogous to the Russian Limited Liability Company (ООО). One notable feature is the option to operate under pass-through taxation, which is advantageous. In this scenario, instead of paying corporate taxes, the company pays income taxes similar to those of an individual. This significantly reduces the tax burden.
- C-Corp (C-Corporation) is a company with characteristics of a traditional corporation, which pays taxes as a separate legal entity. Consequently, the overall tax burden is significantly higher.
Undoubtedly, these two forms of business in America have their merits. For example, C-Corp has a simpler management structure. However, many choose to open an LLC precisely because of the lower tax burden. It is also important to know that a non-resident opening an LLC must file three types of reports: corporate and two sets of personal reports (for American regulatory authorities and for the tax service of their own country). However, these inconveniences are covered by savings on taxes and fees. If it is convenient or permissible for you to pay a large tax, then you can choose C-Corp. However, we recommend choosing a form of business with a more optimized tax system due to reduced risks of encountering problems.
LLC Registration: Company Features
LLC can be established by one or several founders. It is important to note that all US states allow the registration of LLC by one person, allowing the company to operate almost like a sole proprietorship. If there are multiple founders in the company, then we can talk about a partnership. This applies to both operating rules and taxation.
A single founder declares all the income of the company in their tax return. In companies with multiple founders, the burden is shared among them according to the income received. All norms for profit distribution are specified in the operating agreement at the stage of company formation. This also applies to the sale of shares or the admission of new participants. If necessary, an LLC can operate not as a partnership, but as a corporation. In this case, taxation will be similar to C-Corp, and profits will be subject to corporate tax at the rate of each state. Company owners may choose this option to access business deductions or simplify reporting.
An LLC can be established by individuals or legal entities, including non-residents and foreign companies. The number of participants who can be part of an LLC can be any, although not all states recognize a company with only two members.
It is also important to consider that an LLC may not operate in all industries. Opening a bank or insurance company is prohibited. Each state separately regulates the remaining spheres.
A single founder declares all the income of the company in their tax return. In companies with multiple founders, the burden is shared among them according to the income received. All norms for profit distribution are specified in the operating agreement at the stage of company formation. This also applies to the sale of shares or the admission of new participants. If necessary, an LLC can operate not as a partnership, but as a corporation. In this case, taxation will be similar to C-Corp, and profits will be subject to corporate tax at the rate of each state. Company owners may choose this option to access business deductions or simplify reporting.
An LLC can be established by individuals or legal entities, including non-residents and foreign companies. The number of participants who can be part of an LLC can be any, although not all states recognize a company with only two members.
It is also important to consider that an LLC may not operate in all industries. Opening a bank or insurance company is prohibited. Each state separately regulates the remaining spheres.
How to Pay Taxes for an LLC in the USA
The American taxation system can be described as dual-tiered. This means that part of the taxes must be paid to the federal government, while the other part goes to the state where the company is registered. Companies pay a federal corporate income tax, akin to personal income tax (equivalent to individual income tax), as well as excise taxes, capital gains tax, and property tax. Companies with employees also pay social and medical contributions. The federal corporate tax rate is uniform at 21%. With pass-through taxation, the personal income tax can vary from 10% to 37%.
At the state level, an additional corporate and personal income tax rate is applied. Additionally, companies pay sales tax at both the state and local levels. There are states where corporate and/or sales tax is not levied at all, which helps reduce the tax burden on enterprises.
It is important to note that taxes are incurred only if the company has profits at the end of the year.
At the state level, an additional corporate and personal income tax rate is applied. Additionally, companies pay sales tax at both the state and local levels. There are states where corporate and/or sales tax is not levied at all, which helps reduce the tax burden on enterprises.
It is important to note that taxes are incurred only if the company has profits at the end of the year.
Filing Financial Reports for an LLC
In the USA, every company is required to submit electronic financial reports annually. These reports are sent to the Internal Revenue Service (IRS) and the state government. If an LLC operates as a pass-through entity, the company files Form 1065 with profit distribution data, while members file personal tax returns. Non-residents must file them using Form 1040NR.
If an LLC holds securities, additional reporting to the Securities and Exchange Commission (SEC) is required, filled out according to specific standards. Such reports must be submitted quarterly and annually but in different forms.
If an LLC holds securities, additional reporting to the Securities and Exchange Commission (SEC) is required, filled out according to specific standards. Such reports must be submitted quarterly and annually but in different forms.
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How to Open an LLC in the USA for a Non-Resident
To register a company, several steps must be taken:
- Choose the state of operation. Responsible consideration of the location choice is important, as it affects taxation, other fees, potential profit, and other factors. Additionally, different states offer various entrepreneur support programs with different tax rates. Traditionally, New York, Florida, Alaska, Texas, and Delaware are considered some of the best states for doing business.
- choose a unique name. In the USA, company names must not be repeated. It is also not allowed to take a name that is too similar to an existing one. Moreover, each state selects a list of words that cannot be included in a company name or that require approval from regulatory authorities. The company's form must be indicated in the name.
- Submit the documents. The final list depends on the specific state. However, a mandatory document for opening a company is the articles of organization, which outline the rules for managing the company, including its sale to third parties and closure.
- Obtain an EIN – equivalent to the TIN. EIN is an identification number that must be obtained by every company. It is registered with the tax authority of each state.
- If necessary, obtain licenses. Many business sectors require licenses. They can be obtained from the IRS. A license is required for certain activities, including transportation and logistics companies. The rules for obtaining it are determined by the state.
- Open a bank account at any financial institution. Typically, this requires an EIN, a business registration certificate, a license, and proof of a legal address. It is important to note that almost all banks open a checking account only in person. However, there is an option to use online services (e.g., Payoneer) for registration. This possibility must be clarified separately with each bank.
Many Russian entrepreneurs are interested in the possibility of cooperation when opening a business in the USA. In general, such a development scenario is possible. A group of people can jointly open an LLC to work directly with clients or other companies. This is especially relevant for a group of self-employed individuals who want to legally combine profits and pay taxes. This applies to situations where each entrepreneur has a small profit from their project. In this case, all expenses will be shared among several people.
A Few Words about Bonuses and Sanctions
In the USA, entrepreneurs, especially those belonging to certain groups, can receive significant discounts or use a range of services for free. For example, Digital Ocean (cloud service), Slack (business communication platform), Deel (payroll calculation program), Webflow (website builder), Airtable (cloud for working with databases), and many others. All of them allow for solving specific production tasks quickly, conveniently, and effectively. Additionally, working in the USA allows for issuing physical and virtual Mastercard/Visa cards without restrictions for transactions within the country and abroad.
Regarding sanctions, it's difficult to predict the imposition of restrictions. Currently, non-residents from Russia can conduct business in the USA calmly and legally without limitations at the visa or other levels. Russian nationals can easily own an LLC with just a business visa in their passport. Moreover, unlike European countries, the USA does not close Russians' accounts in local banks – this is a significant advantage of working in the USA.
Difficulties may arise from the Russian side. Periodically, the Central Bank issues recommendations and government decrees regarding currency and tax regulations. Therefore, to fully reduce risks, obtaining a passport from a second country may be necessary.
Regarding sanctions, it's difficult to predict the imposition of restrictions. Currently, non-residents from Russia can conduct business in the USA calmly and legally without limitations at the visa or other levels. Russian nationals can easily own an LLC with just a business visa in their passport. Moreover, unlike European countries, the USA does not close Russians' accounts in local banks – this is a significant advantage of working in the USA.
Difficulties may arise from the Russian side. Periodically, the Central Bank issues recommendations and government decrees regarding currency and tax regulations. Therefore, to fully reduce risks, obtaining a passport from a second country may be necessary.
Answers to Frequently Asked Questions
It is important to understand that the market in the USA has a large capacity. Many companies can find their niche, but difficulties may arise when entering each of them. Conducting research is an expensive undertaking, but it is often necessary for effective work. It is essential to start with an analysis of the competitive environment and research the target audience to understand what to offer. It is important to analyze the market conditions overall, the position of competitors, and potential customers. It is also important to develop your website. Americans often search for suppliers or sellers online, so the website should be clear, vivid, and attention-grabbing. Often, it is necessary to find a specialist to do the work qualitatively. The same applies to advertising. It is advisable to develop videos and banners with the participation of a professional agency that knows the specifics of the market.
Non-residents from Russia may be refused based on an order from the Office of Foreign Assets Control (OFAC) – a division of the US Department of the Treasury that controls sanctions. The document instructs US citizens and companies to refuse to provide accounting services, services for opening trusts and companies, as well as management consulting to those in the Russian Federation. How do inspectors understand where a person is located? This applies to entrepreneurs who provide Russian addresses when registering. The fact that many of them do not actually reside in Russia is not taken into account. When registering, it is important to provide a US residential address.
Certainly, when opening a business in America, the founder will encounter certain expenses. This concerns costs associated with the type of business. For example, opening a food delivery business will be more expensive than opening a boutique. This is because the former option involves obtaining a license, insurance, vehicle maintenance, website updates, monthly marketing expenses. Expenses depend on the location of the business and the company's structure. Thus, an LLC is a more budget-friendly option than a C-Corp.
You will also need to pay for registration and verification in payment systems and marketplaces if you need them.
You will also need to pay for registration and verification in payment systems and marketplaces if you need them.
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ООО „Dr. Voigt & Partner"
107031, Moscow, Petrovka Street, 27 , Room 1/5
info@partnery-audit.com
+7 495 690 92 62
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DVP Audit GmbH Wirtschaftsprüfungsgesellschaft
Erik-Blumenfeld-Platz 27 b, 22587 Hamburg, Germany
info@partnery-audit.com
Tel. +49 40 866 6740 Fax +49 40 866 67444
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