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.

Important Updates to the Privacy Passport®

Nothing ever stays the same, but sometimes things get better. This is the case for the Privacy Passport®. For more information see:

http://www.alexander-hay.com/offshore-financial-planning/the-privacy-passport/