I am a citizen and resident of Russia, and I want to open a Single Member LLC treated as a disregarded entity in the U.S., to provide custom software development services. I am trying to figure out how to do everything legally, what declarations I have to file at the federal level, and how to pay taxes.
I assume this scenario:
Register an LLC in the state of Wyoming. Principal place of business be outside the U.S. (In Russia).
The LLC acts as an independent contractor for clients from the U.S. and other countries. The sole owner of this LLC is a citizen and resident of Russia. All workers of this LLC are independent contractors from other countries (including the LLC owner) and their residents (Russia, Belarus, Ukraine, Georgia). All workers (independent contractors) filled out Form W-8BEN and filed it with the LLC.
As I understand it:
1. This LLC must file federal income tax returns:
Questions:
1. Is this LLC organization scenario acceptable or not? If there are problems, what are they and how can they be done better?
2. Did I understand correctly that the Form 1120 with the attached Form 5472 is filed with the IRS, only for reporting purposes and no payments are made on them?
3. Would this LLC be "engaged in a U.S. trade or business" and all income received from U.S. customers be treated by the IRS as Effectively Connected Income (ECI), subject to U.S. tax rates applicable to U.S. citizens and foreign residents? In this case, should the payments be made by the owner of the LLC when filing the Form 1040-NR? Can I use the double taxation treaty between the U.S. and Russia to reduce the tax rate for the LLC? If the customer is not from the U.S., then this income is not taxable in the U.S.? Where can I find out more about this and more specifically?
4.All independent contractors working for this LLC (including the owner) do their contract work in their countries of residence, outside the U.S. Does this mean that they all have to pay their own remuneration tax to their country of residence only, and pay nothing to the U.S. because this Non-U.S. source Income?
5. Does the franchise tax, which is present in some states, have to be included in the price of the product/service? If the customer is a U.S. resident and located in California, then the LLC is treated as "doing business" in California and must pay California franchise tax? What is the correct way to determine that this LLC will have to pay franchise tax to some state, for a deal with a customer?
6. This LLC does not have a physical presence in the state of Wyoming, so it does not have to pay Sales (goods and services) Tax to the state of Wyoming for transactions with customers, is that correct? However, the LLC will have to pay this tax in the following cases?
7. If this LLC performs an order for a non-U.S. person or entity located outside the country, then the income from that order will not be taxed in the U.S., is this correct?
8. This LLC must file forms: 1120, 5472 annually in all cases, is this correct? Form 1040-NR only has to be filed if there was income from U.S. customers in the fiscal year? Does it have to file any other federal tax forms?
9. Does the owner of this LLC need to get an ITIN? Will ITIN be needed only for filing Form 1040-NR?
10. Is there anything I am missing? What else do I need to know?
Thank you for your help!
Mikhail
I assume this scenario:
Register an LLC in the state of Wyoming. Principal place of business be outside the U.S. (In Russia).
The LLC acts as an independent contractor for clients from the U.S. and other countries. The sole owner of this LLC is a citizen and resident of Russia. All workers of this LLC are independent contractors from other countries (including the LLC owner) and their residents (Russia, Belarus, Ukraine, Georgia). All workers (independent contractors) filled out Form W-8BEN and filed it with the LLC.
As I understand it:
1. This LLC must file federal income tax returns:
- Form 1120, U.S. Corporation Income Tax Return. (Fill only the name and address of the foreign-owned domestic DE and items B and E on the first part.)
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
- Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
- Annual Report fee: $60
- State Income Tax: not exist
- Capital Gains or Interest: not exist
- Income Earned from Another State: not exist
- Retirement Income: not exist
- Sales (goods and services) Tax: does not pay because this LLC has no physical presence in Wyoming.
Questions:
1. Is this LLC organization scenario acceptable or not? If there are problems, what are they and how can they be done better?
2. Did I understand correctly that the Form 1120 with the attached Form 5472 is filed with the IRS, only for reporting purposes and no payments are made on them?
3. Would this LLC be "engaged in a U.S. trade or business" and all income received from U.S. customers be treated by the IRS as Effectively Connected Income (ECI), subject to U.S. tax rates applicable to U.S. citizens and foreign residents? In this case, should the payments be made by the owner of the LLC when filing the Form 1040-NR? Can I use the double taxation treaty between the U.S. and Russia to reduce the tax rate for the LLC? If the customer is not from the U.S., then this income is not taxable in the U.S.? Where can I find out more about this and more specifically?
4.All independent contractors working for this LLC (including the owner) do their contract work in their countries of residence, outside the U.S. Does this mean that they all have to pay their own remuneration tax to their country of residence only, and pay nothing to the U.S. because this Non-U.S. source Income?
5. Does the franchise tax, which is present in some states, have to be included in the price of the product/service? If the customer is a U.S. resident and located in California, then the LLC is treated as "doing business" in California and must pay California franchise tax? What is the correct way to determine that this LLC will have to pay franchise tax to some state, for a deal with a customer?
6. This LLC does not have a physical presence in the state of Wyoming, so it does not have to pay Sales (goods and services) Tax to the state of Wyoming for transactions with customers, is that correct? However, the LLC will have to pay this tax in the following cases?
- More than $100,000 in gross sales during the current or previous calendar year in Wyoming; or
- At least 200 transactions of taxable and exempt property and services in Wyoming
7. If this LLC performs an order for a non-U.S. person or entity located outside the country, then the income from that order will not be taxed in the U.S., is this correct?
8. This LLC must file forms: 1120, 5472 annually in all cases, is this correct? Form 1040-NR only has to be filed if there was income from U.S. customers in the fiscal year? Does it have to file any other federal tax forms?
9. Does the owner of this LLC need to get an ITIN? Will ITIN be needed only for filing Form 1040-NR?
10. Is there anything I am missing? What else do I need to know?
Thank you for your help!
Mikhail
