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The United States is not usually marketed as an offshore jurisdiction, but it is one of the most-used vehicles for non-resident founders and investors. A correctly structured US LLC owned by a non-resident with no US trade or business and no US-source income produces a 0% US federal income tax outcome with onshore banking, payment processor access, and US legal infrastructure. The structure works, but only inside specific rules. This article walks through the entity choices, the federal taxation framework for non-residents, the state choice question, and the compliance obligations.
The US as an option for non-residents
US entity formation is administered at the state level, not federally. There is no single register a US company process; the founder picks a state and incorporates or registers an LLC under that state's law. The federal level then sits on top: the Internal Revenue Service classifies the entity for federal income tax purposes, the entity gets a federal Employer Identification Number, and the entity files federal returns where required.
The combination has two consequences. First, state choice matters: state filing fees, annual franchise taxes, and entity-level filings differ materially between Delaware, Wyoming, Nevada, and New Mexico. Second, federal tax treatment depends heavily on classification (LLC versus corporation, single-member versus multi-member) and on what the entity actually does (whether it has a US trade or business and whether it has US-source income).
The LLC as the default vehicle
The limited liability company is the default vehicle for non-resident founders. An LLC is a state-law entity that combines limited liability with flexible governance. For US federal income tax purposes, an LLC is classified under the check-the-box rules in Treasury Regulations section 301.7701-3: by default, a single-member LLC is disregarded as separate from its owner, and a multi-member LLC is classified as a partnership. Either type can elect to be taxed as a corporation by filing Form 8832.
A single-member LLC owned by a non-resident is the typical setup for a solo international founder. Because the LLC is disregarded, the federal tax position is the position of the foreign owner. If the foreign owner has no US trade or business and no US-source income, the foreign owner has no US federal income tax liability, and so neither does the LLC. The LLC is a tax-transparent wrapper around the owner's worldwide activities.
A multi-member LLC owned by two or more non-residents is treated as a partnership by default and files Form 1065 annually, with each partner receiving Schedule K-1 showing their share of income, deductions and credits. Where the partnership has US-source income or US trade or business income, the partnership has withholding obligations on the foreign partners under IRC section 1446.
The C-corporation alternative
A US C-corporation is a separate taxpayer. It pays federal corporate income tax (currently 21% under IRC section 11) on its worldwide income, files Form 1120, and pays state corporate taxes where applicable. Dividends to non-resident shareholders are subject to 30% FDAP withholding under IRC section 871 or section 881, reducible by treaty.
The C-corp is favoured over the LLC when the structure needs to be a separate taxable entity for treaty access (an LLC's transparency can break treaty benefits in some jurisdictions), when US-source FDAP income would otherwise create messy withholding outcomes, or when US institutional investors or acquirers require a corporate target.
Effectively Connected Income and FDAP
The two basic categories of US-source income for a non-resident are Effectively Connected Income and Fixed, Determinable, Annual, or Periodical income. The distinction drives the tax outcome.
Effectively Connected Income is income arising from a US trade or business. It is taxed at the regular graduated rates that apply to US persons (after deductions), and it is reported on Form 1040-NR for individuals or Form 1120-F for foreign corporations. ECI is the outcome when a non-resident actually does business in the US.
FDAP income is US-source passive income: interest, dividends, royalties, rents, and similar. FDAP is taxed at a flat 30% on the gross amount under IRC sections 871 and 881, with no deductions allowed against it. Withholding under IRC sections 1441 and 1442 is at the same 30% rate, reducible by an applicable treaty. The mechanics are set out in IRS Publication 515, the authoritative guide for US withholding agents.
For the LLC structure to deliver a 0% US tax outcome, both categories have to be empty: no US trade or business (so no ECI), and no US-source income that is FDAP. The first condition turns on what the LLC actually does. The second condition turns on the source rules for each type of income.
What creates a US trade or business
There is no statutory definition of US trade or business in the Internal Revenue Code. The standard comes from case law and is generally taken to mean considerable, continuous and regular activity in the United States. Common fact patterns that create a US trade or business include a US office, US employees performing the core business, a dependent agent in the US with authority to conclude contracts, regular travel to the US to meet clients and sign contracts, and inventory held in the US for sale.
Common fact patterns that typically do not create a US trade or business include selling software-as-a-service from outside the US to US customers through a self-serve website, performing consulting or freelance services for US clients from outside the US, or selling digital products to US customers through global platforms without inventory or US personnel.
The US source rules for personal services are straightforward: income from services is sourced where the services are performed. A non-resident performing services entirely outside the US for a US payor has non-US-source income, regardless of where the payor sits. The US-payor rule that triggers withholding is a payee-status rule, not a source rule. The LLC files a Form W-8BEN (for an individual owner) or W-8BEN-E (for an entity owner) to certify foreign status, and the payor does not withhold on non-US-source service income.
Form 5472 and the foreign-owned disregarded entity rules
A foreign-owned US disregarded entity, which includes any single-member LLC owned by a non-resident, has annual reporting obligations under IRC section 6038A and the Treasury regulations. The LLC must file Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) with a pro-forma Form 1120 as a cover page. The pro-forma 1120 is essentially a header sheet; only Form 5472 contains the substantive disclosures.
Form 5472 reports reportable transactions between the LLC and its foreign owner and other related parties: capital contributions, distributions, loans, and any other money or property moving between the LLC and the foreign owner. The filing is annual, due with the LLC's tax return (15 April for calendar-year filers, with an extension to 15 October available).
The penalty for failure to file Form 5472, or for filing a substantially incomplete return, is USD 25,000 per failure. Unlike many tax penalties, the Form 5472 penalty has no automatic reasonable cause exception for late filing, so deadlines are not negotiable.
State choice
Wyoming, Delaware, Nevada, and New Mexico are the most common state choices for non-resident-owned LLCs. The choice affects state filing fees, annual maintenance costs, anonymity of ownership records, and franchise tax exposure.
Wyoming is the most cost-efficient. Annual report fees are around USD 60, there is no state income tax, no franchise tax on LLCs, and beneficial ownership is not publicly disclosed. Wyoming has become the default for cost-sensitive non-resident structures.
Delaware is the most established, with the largest body of corporate case law and the dedicated Court of Chancery. Annual LLC franchise tax is USD 300, due by 1 June. Delaware is preferred where the LLC will eventually take outside investment, be acquired, or need a court system with developed corporate jurisprudence.
Nevada and New Mexico are alternatives. New Mexico has no annual report requirement, which keeps the maintenance cost minimal but offers less institutional credibility than Delaware or Wyoming. Nevada has a higher cost structure than Wyoming but is sometimes preferred for asset protection features.
If the LLC's activities give it nexus in another state (employees, inventory, an office), that state may also impose franchise tax, sales tax, or income tax obligations. The home-state choice does not insulate the LLC from foreign-state nexus.
Treaty access and fiscal transparency
A US LLC that is disregarded or treated as a partnership for US federal tax purposes is fiscally transparent. Whether the LLC can access US tax treaty benefits depends on how the treaty country (where the foreign owner is resident) classifies the LLC and whether the relevant treaty article handles fiscally transparent entities.
IRS Publication 515 sets out the treaty-claim rules. Where the LLC is fiscally transparent for US tax purposes and the entity is, or is treated as, a resident of a treaty country, the entity may derive the income and may be eligible for treaty benefits, provided the income is accounted for as the entity's income under the law of the treaty country. The entity must also satisfy any limitation-on-benefits article. The mechanics matter, because some treaty countries treat a US LLC as opaque and others treat it as transparent, and the answer determines whether dividend or royalty withholding can be reduced under the treaty.
For non-residents from countries where the LLC is treated as opaque, a US C-corporation will often deliver a cleaner treaty outcome despite the higher US tax cost, because the C-corp's corporate status is recognised on both sides.
What US structures are used for
The most common applications are solo international founders running SaaS or services businesses worldwide through a single-member Wyoming or Delaware LLC, e-commerce businesses that need US banking and Stripe access but operate outside the US, joint ventures between non-US founders that need a neutral common-law entity, investment vehicles holding non-US assets that need US banking, and pre-IPO structures preparing for US investor onboarding.
The structure works because of US banking access (Mercury, Brex, Wise, Relay, and traditional banks for the bigger names), the dominance of US payment processors (Stripe and PayPal in particular), and the predictability of the US legal system for contract enforcement. The LLC delivers limited liability and access to that infrastructure with, for a properly structured foreign-only operation, zero US federal income tax.
When a US structure is the right tool
A US LLC is the right tool when the foreign owner needs US banking and payment access for a global operating business, when the activity can be cleanly performed outside the US without a US trade or business, when US contract law is the desired governing law for client agreements, or when the structure is preparing for US investor onboarding. A US C-corp is the right tool when the structure needs treaty-recognised corporate status, when there is significant US-source FDAP income, or when the eventual acquirer is a US person.
The structure is not the right tool when the activity inevitably creates a US trade or business (US-based inventory, US employees, an on-the-ground US presence). In those cases the LLC produces ECI and graduated US tax exposure, and the structure should be planned differently.
If you are weighing a US LLC or C-corporation for an international structure, the right next step is a structuring conversation that maps the activity against the US trade or business and US-source income rules before incorporation. The compliance obligations (Form 5472 in particular) are not optional, and the state choice has cost and legal-infrastructure consequences that are easier to get right at the start than to fix later.
This material is produced by Cadena International. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such.
