How to Operate a US Based E-Commerce Business from Outside the USA and Save a Lot of Money!

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven”). My traditional proposal was to set up a US LLC, take the default election of ‘disregarded entity’ (a “disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer universally appropriate. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors such as PayPal, Amazon, Shopify, Stripe, etc. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really knows how to use. The payors face serious penalties if they get it wrong. So most payors have decided to refuse to open accounts for anyone who cannot execute a W-9. Again, only taxable individuals and entities can issue a W-9.

Because of this it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors. That means setting up accounts with PayPal, Stripe, Amazon, Shopify, etc. will be impossible with a US LLC treated as a ‘disregarded entity’.

Our solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. We will establish a US LLC which then elects to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation). This Taxable US LLC will act as a Payment Agent for a non-resident business with a written agency agreement to resell non-resident goods and services in the USA. 90% percent of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes. A second US LLC can be established to act as a ‘disregarded entity’, and the funds can go from the Taxable US LLC to this Non-Taxable US LLC.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. Another alternative is to set up a second US LLC to be the Payment Agent that then transfers the 90% to the original company.

The only downside is that there is now a requirement to file an annual tax return for the Taxable US LLC which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the tax return. There may be little or no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

So although it is not as easy as it used to be, it is still very easy.

For new clients this is the solution:

Company 1 is a US LLC electing to be a ‘taxable association’; a Taxable US LLC.

Company 2 is a US LLC electing to be a ‘disregarded entity’; a Non-Taxable US LLC.

Company 1 accepts payments on behalf of Company 2 for goods or services through Paypal, Amazon, Shopify, Stripe, etc., receives a modest commission which is used to pay transactions costs and company fees, and then pays a modest corporate tax that will probably never go above 15% of the net income.

There are of course other more complicated options that might be useful for some clients, but for most this is all that will ever be needed to setup and operate your e-commerce business in the United States of America.

How a US LLC can Uniquely Benefit a UK Resident

A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

“Disregarded Entity” vs “Taxable Association”: What is the best way to structure your LLC?

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven” for non-residents). My traditional proposal was to simply set up a US LLC, take the default election of ‘disregarded entity’ (“disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer entirely the case. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really understands how to use. And the penalties for getting it wrong are quite serious so payors are paying a lot more attention, or just choosing not to do business with anyone who cannot execute a W-9.

In short, it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors.

My solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. The US LLC will elect to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation), but it will only act as an agent of a non-resident business (with a written agency agreement) to resell non-resident goods and services in the USA. 90% of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. The only downside is that there is now a requirement to file an annual tax return which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the return. There may be no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

If you have any further questions please do not hesitate to contact me.

How the USA can provide you financial privacy

Do you want Financial Privacy?

Many people are surprised to find out that the USA actually provides better financial privacy than most other developed countries, and even better than most “tax havens”.

lockIt is my considered opinion that some of the best banking privacy in the world is now found in the United States of America. As long as you are not “laundering money” (the vague definition does cover a lot of ground) or supporting national security threats, the US provides some of the most strictly ENFORCED privacy rules around. Notice my emphasis on the word ENFORCED.

There are many jurisdictions that have such amazingly draconian bank privacy laws that you wonder why anyone would ever take the risk of becoming a banker in those countries. I am thinking of one small country where even a minor disclosure released through mistake can result in jail time and fines for the banker, at least under the terms of its laws. Wow! That must mean that your money and your information is safe! Well let us look at how often these laws are enforced. After all no one is perfect. In the country I am thinking of there has never been, to my knowledge, a single banker prosecuted under the draconian bank privacy laws. Not even a slap-on-the-wrist or a probated sentence. Either bankers in that country never make mistakes, or the laws are never enforced. What good are bank privacy laws that are not enforced?

In the USA on the other hand bank privacy laws are enforced (to the chagrin of most of my banker friends) by a bevy of alphabet soup Federal, State and Local agencies whose only reason to exist is to enforce various consumer protection laws, banking disclosure rules and credit protection regulations. In addition to all the government agencies looking to enforce these rules (and levy punitive fines that go to fund their activities), the laws themselves almost always give the victim the right to sue the bank in civil court with punitive damages and attorney’s fees awarded. I know a lawyer who specializes in class-action law suits against banks who violate these consumer protection rules.

In addition most states have enacted Deceptive Trade Practices Acts which provide treble damages plus attorney’s fees to the victim of any Deceptive Act, disclosure of prohibited information being among them.

Because of these consumer protection laws combined with vigorous government enforcement along with civil court remedies for victims, US Banking has become some of the most private in the world in spite of the rather sinister reputation of the Patriot Act.

If you would like more information on how best to take advantage of the USA contact me.

What is an LLC? Why should you care?

A limited liability company (LLC) is a hybrid business entity that blends together characteristics of a partnership and a corporate structures. It is incredibly flexible giving limited liability to its Members (the owners) just like a corporation, but offering the ease of management of a partnership.

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It also can offer interesting tax advantages depending upon how you want to use it (but only if properly set-up). It can be set up to be treated as a “disregarded entity” providing “pass through” tax treatment, or it can be set up as a “taxable association” in which case it is taxed like a corporation, but without some of the negative aspects of a corporation. This can often avoid double taxation.

But the most interesting aspect of an LLC is its ability to protect your assets. How can an LLC protect your assets?

The LLC has many special features similar to a partnership that are very beneficial for asset protection:

  • A partial LLC interest, unlike shares in a corporation, cannot be easily seized by creditors. If a Creditor attempts to take your Membership Interest, the creditor will only receive an “assignment” of the interest. The creditor can take away your membership interest, but will not be able to vote in the absence of the unanimous approval of all the other Members.
  • An LLC can require Members to make additional contributions of capital. So if a creditor takes away your Membership Interest, the LLC may require the Creditor to make additional contributions to the LLC. If the Creditor refuses, he may lose his interest in the LLC.
  • If the LLC shows a profit, it is not necessary for the profit to be distributed to the Members but can be retained by the LLC. However, the Members will be taxed on this profit even though they did not receive it. So if a Creditor takes your Membership Interest, the LLC can operate at a profit, and may be able to force the Creditor to pay taxes on profits which the Creditor never received.

A creditor who attempts to take your shares in the LLC will only get an assignment of non-voting shares. The remaining shares will be held by the other members who may be friends, family, or even specially designed trust that will protect your interests. These other Members will be able to vote on who becomes Manager of the LLC, not the creditor that took an assignment of interest.

The other members may choose to appoint you or another friendly person to be the Manager of the LLC. As Manager of the LLC you will be able to decide whether or not you and other employees get a salary, whether or not assets are sold, whether or not profits are distributed, whether or not there is a need for additional contributions from the Members, etc.

In essence, a Creditor who takes your shares in a cleverly designed LLC will not be able to vote or control the company, will not be able to force distribution of assets or profits, may have to pay taxes on income earned by the company even though it never received the profits, and will be vulnerable to demands for additional capital.

As you can see this would be a very unpleasant situation to be in if you were a creditor, but a very good situation to be in if you are trying to protect your assets. Few creditors will want your membership interest in the LLC when they realize what a hornets nest they are getting themselves into.

I have designed a specific system to be able to take advantage of these attributes of an LLC. I call it The Personal Preservation Fortress®. Check it out if you would like to get more information on how to effectively and affordably protect your assets.