Does a US LLC owned by a non-resident alien have to pay US taxes if it operates exclusively online?

Question

I'm a European citizen living in Europe. I intend to register a Limited Liability Company in the US to sell Wordpress themes and do some affiliate marketing. My target will be all English speaking countries. I want to register in the US because most of my clients will be American and they will be more inclined to sign an affiliate marketing contract with a US company than with one located in Europe. Also it is by far easier to register a company in the US than in my country and it seems to be better for taxes too.

The company will only operate online by using websites hosted on a Canadian server (Canadian because of the better price) and I won't have partners, investors, or employees. So, as long as I operate my business entirely from outside the US and I don’t have any office, employees, or equipment in the US, will I still be liable for US taxes?

After a lot of searching, I found that a foreign-owned LLC will be subject to US taxes only if it is “engaged in a trade or business in the US”. And to be engaged in a trade or business it needs to have at least an employee or dependant agent in the US. In fact, a lawyer told me this but I’m not sure that he understood all the details.

So, my purpose is not to avoid taxes, but to minimize them, as I will pay taxes in my own country anyway.

It‘s worth mentioning that a LLC, unless you choose otherwise, is not seen as separate from its members for income tax purposes. It’s a “pass-through” entity, meaning that all the income of the company will pass to its members and they will have to file that income on their personal tax returns. A one-member LLC is treated as a sole proprietorship, for tax purposes.

Answer 1

As you said, in the US LLC is (usually, unless you elect otherwise) not a separate tax entity. As such, the question "Does a US LLC owned by a non-resident alien have to pay US taxes" has no meaning. A US LLC, regardless of who owns it, doesn't pay US income taxes.

States are different. Some States do tax LLCs (for example, California), so if you intend to operate in such a State - you need to verify that the extra tax the LLC would pay on top of your personal tax is worth it for you.

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As I mentioned in the comment, you need to check your decision making very carefully. LLC you create in the US may or may not be recognized as a separate legal/tax entity in your home country. So while you neither gain nor lose anything in the US (since the LLC is transparent tax wise), you may get hit by extra taxes at home if they see the LLC as a non-transparent corporate entity.

Also, keep in mind that the liability protection by the LLC usually doesn't cover your own misdeeds. So if you sell products of your own work, the LLC may end up being completely worthless and will only add complexity to your business.

I suggest you check all these with a reputable attorney. Not one whose business is to set up LLCs, these are going to tell you anything you want to hear as long as you hire them to do their thing. Talk to one who will not benefit from your decision either way and can provide an unbiased advice.

Answer 2

Since as you say, an LLC is a pass-through entity, you will be making income in the U.S. when you sell to U.S. customers. And so you will need to file the appropriate personal tax forms in the US. As well as potentially in one or more States.

The US government does not register LLCs. The various States do. So you'll be dealing with Oregon, Wisconsin, Wyoming, one of those for the LLC registration. You will also need to have a registered agent in the State. That is a big deal since the entire point of forming an LLC is to add a liability shield. You would lose the liability shield by not maintaining the business formalities.

Generally nations aim to tax income made in their nation, and many decline to tax income that you've already paid taxes on in another nation. A key exception: If money is taxed by the U.S. it may also be taxed by one of the States. Two States won't tax the same dollar.

Registering an LLC in one State does not mean you'll pay state taxes there. Generally States tax income made in their State. It's common to have a Wyoming LLC that never pays a penny of tax in Wyoming. Officially, an LLC doing business in a State it did not form in, must register in that State as a "foreign LLC" even though it's still in the USA. The fee is usually the same as for a domestic LLC. "Doing business" means something more than incidental sales, it means having a presence specifically in the State somehow.

It gets complicated quick. If you are thinking of working in someone's app ecosystem like the Apple Store, Google Play, Steam etc. Obviously they want their developers coding, not wrestling with legalities, so some of them make a priority out of clearing and simplifying legal nuisances for you. Find out what they do for you.