In the complicated world of taxes, people who follow flag theory always have to be up to date with the latest developments. Both internal and external politics are constantly changing. Not only do the conditions change for bank accounts, but company structures, such as United States Limited Liability Companies (US LLCs), are always steadily evolving.
This is what has happened with companies in the US. Setting up a company in Delaware or Wyoming is no longer a good idea, at least if you do so for the same motives that made it a good choice before.
American LLCs are a well-respected type of company, and for good reason. In fact, at Tax Free Today we often used to recommend them, especially for people starting out in the business world.
I personally registered my first company in Wyoming. Where else in the world can you establish a tax-free online company in a few minutes, with no accounting, and be recognised practically all over the world?
It was clear that this situation couldn’t last forever in a world where repression is growing stronger by the day. Finally, the IRS, the US tax authority, decided to introduce significant modifications to LLCs managed by foreigners. Shortly beforehand, I dissolved my own American LLC in favour of a new company in Dubai.
Despite these changes to legislation, there are many people who follow the example of people in the past and continue to establish companies in Delaware or Wyoming, having been recommended to do so by advisors or other people with out-of-date information.
Just as, in the past, the fashion at the time led business owners to set up offshore companies in Hong Kong, unaware that it would be impossible to open a business account there (which severely limited their options), establishing a company in Delaware or Wyoming now could be a grave mistake if you don’t listen to personalised advice first (or at least read this article).
Since the start of 2017, LLCs can only remain tax-free with no accounting after the manner of so-called Single Natural Owner Disregarded Entities, i.e., all LLCs that have one natural person as a member.
If two natural persons or a capital company have a share in an American LLC, it will immediately become subject to all taxes.
Of course, without this information, your company could quickly fall under the new category without you even realising. This is why I advise everyone who still has a structure of this kind to dissolve the company as soon as possible (I’ll talk about how to do so below).
Of course, if you’re thinking about setting up a company in Delaware or Wyoming, you should finish reading this article first.
There was already a rule requiring owners of LLCs to declare any combined foreign assets obtained outside the United States (if these were above $10,000 a year) using an FBAR form, which meant providing information on your assets located all over the world.
Although with the latest modifications, Disregarded Entities are still exempt from taxes (as long as they have no income in the US), it’s compulsory for them to request a tax identification number (EIN), keep accounts, and make their economic beneficiaries known.
Unfortunately, it’s extremely difficult to obtain reliable information in the United States, even by talking to the tax office or paying tax advisors. Nobody wants to take a stance; for every modification, they all just refer to an IRS document.
Meanwhile, remember that these modifications affect everyone who still owns an American LLC that is managed abroad.
In any case, even in the past, it was clear that establishing a company in Delaware or Wyoming was nothing more than a provisional solution. The duty to declare accounts, as well as the difficulty of avoiding income in the United States, made it a viable short-term solution, as long as enough private bank accounts were available for company operations and the LLC was only used as a shell company.
Currently, the legal uncertainty of companies in the US has become enormous, which is why I stopped recommending LLCs in November 2016.
Changes to American LLCs (Wyoming, Delaware, etc.)
To be specific, there are three issues that owners of US LLCs need to pay attention to. The modifications came into force on 01/01/2017 for the current tax year, and are summarised here in detail.
- You have to present form 5472 (Information Return of a 25% Foreign-Owned Corporation or a Foreign Corporation), which gives information on transactions with associated parties and is mandatory to declare. You have to make all economic beneficiaries known and declare a place of residence, which could be difficult for those without a fixed domicile.
- You have to keep accounts (although it’s not necessary to show them) that provide reliable information on all company transactions.
- You have to request a compulsory US tax identification number (EIN) to be able to present form 5472. The application should be made with form SS-4.
Failure to present this form can lead to a $10,000 fine.
The background of the modifications
Until recently, all Limited Liability Companies that were managed by a partner who was a natural person and resided outside the United States were automatically classed as Disregarded Entities. In other words, they were fiscally irrelevant as long as they had no income in the US.
They therefore didn’t have to declare their status or share their accounts, which made the United States a very worthwhile jurisdiction, especially for companies in Wyoming and Delaware.
But since then, the US has joined the fight against international money laundering and tax evasion. This means that, from autumn, American business accounts will be affected by the automatic exchange of information under the OECD. In spite of this, it is the modifications to LLC status that will affect foreign entrepreneurs the most.
What’s more, until recently, the IRS had no way of checking if there was US money flowing into an LLC, meaning that it would have to pay tax. With the new regulations, this verification will now be possible, and hefty fines will be enforced when this is breached.
There is still one positive piece of news hiding behind the negative: since LLCs are now less attractive for money laundering schemes and fraud, it’s now easier to obtain company bank accounts outside the US.
Once your company documents are certified before a notary, it’s easy and even advisable to open an affordable and reliable SEPA business account with Paysera Lithuania.
What options do you have as an owner of a United States LLC?
If you own an LLC, it’s likely that you’re wondering what to do now. In theory, you have to decide whether or not you want to keep you company in the United States.
If you choose to keep it, you should quickly take the measures explained below. At Tax Free Today, we CAN’T help you with the complicated US tax system. I also don’t advise you to look for any kind of low-cost solution.
The most appropriate step would be to consult a Certified Public Accountant in the United States. But theoretically, you can also present the required forms yourself.
Another option would be to transfer the residence of the LLC to the Marshall Islands, Belize, or the United Arab Emirates.
If you established your LLC through a low-cost agency for $150, they may not have informed you of the changes. You should liquidate your company as soon as possible to avoid complications, and set up a new company somewhere else. Fortunately, liquidating an LLC is a fairly simple process.
Alternatives for setting up an new company
If you need a new company, you can take a look at the options detailed on our blog. There will be at least a couple articles that you’ll find helpful.
You may also want to download the free e-book “Keys to Choosing Where to Set Up Your Company”.
The best thing to do for anyone who appreciated the simplicity of a US LLC would be to switch to an LP in America’s northern neighbour, Canada, which works exactly the same but has the advantages of a country with a good reputation, and also offers better options for opening bank accounts. Of course, an LP doesn’t limit your responsibility, and requires a $2,000 investment for incorporation.
Another option is to obtain a totally tax-free EU residence in Cyprus.
Tax reform in the United States under Trump
The United States is currently being governed by a president who nobody expected and who is planning a fairly revolutionary tax reform. Taxes are forecasted to go down, but is this generally a good reform for foreign owners of LLCs?
As things stand, there’s at least one person who will benefit from this reform: Trump himself.
The president has a share in 400 LLCs, so he naturally wants to reduce his tax burden, a move that will have dire consequences for Disregarded Entities.
At the moment, LLCs are generally taxed as partnerships with high income tax rates. However, with the planned tax reform, all American LLCs will be subject to a fixed rate of 15% or 20%, with no exceptions.
Some will benefit, while others will lose out. Disregarded Entities, i.e. LLCs with no US income that are managed from abroad, will immediately be subject to this tax.
We can’t rule out the possibility of federal states such as Delaware and Wyoming becoming exceptions to this rule, but this isn’t the case for the moment. In this sense, we can only wait and see.
Nevertheless, for most freelancers and small business owners, the most sensible option in the long term is to avoid establishing a company in the US. Ultimately, there are many safer alternatives that require much less bureaucratic effort than administrating a company there.