I am a non-resident alien who is thinking about starting a LLC which will be registered in the US and will have a bank account in the US (Delaware). It will provide services of custom-written essays which will be ordered over the Internet. Orders will come from the US, Canda, Australia, etc. Orders will be written by writers residing outside the US. There will be no physical office in the US. No US residents will be hired.
What are the tax implications of organizing it as a single member LLC or LLC with two or more members? Will the income generated on the orders from non-US clients be subject to the federal income tax?
This is a pretty complicated question (almost like a law school exam!), and is one that depends on a couple of facts that need to be answered. But the answer to your question lies buried deep in the Treasury Regulations, 301.7701-1, -2, and -3 and following (the "Check-the-box" rules).
I would provide the following answer:
1) a) If single member LLC (one person owns the LLC), then the default tax classification of the domestic LLC, i.e., formed in the US, is disregarded. Though it sounds harsh to be disregarded, this does alleviate some administrative work (not filing separate tax return, etc.).
If the LLC makes the election to be taxed otherwise, then it can be taxed as a association, which is treated like a corporation under the US Treasury Regulations. If the LLC qualifies, the LLC can elect to be taxed as an S corporation. If it doesn't qualify, then the LLC is taxed as a C corporation.
1) b) If 2 or more members, then the default tax classification of an LLC is a partnership.
If the LLC makes the election to be taxed otherwise, then it can be taxed as an association, which is treated like a corporation under the Treasury Regulations. If the LLC qualifies, the LLC can elect to be taxed as an S corporation. If it doesn't qualify, then the LLC is taxed as a C corporation.
To answer the second part:
2) a) Short answer: Yes. A business entity organized in the United States and doing business in the United States will be taxed on the income generated even from orders of a non-US client, no US employees, and even if there's no physical office in the U.S. US taxpayers are taxed on the world-wide income.
However, the LLC may be entitled to foreign tax credits and other tax treaty benefits. Tread lightly! I'd run this through some thorough analysis before embarking on such an adventure.
2) b) Long answer: This answer becomes more interesting if the LLC is not organized under US law but simply does business in the United States. This would require a lot more facts to answer.
3) The unasked question: If a non-resident alien is running the show, then I'd be vary careful about the substantial presence test of a non-resident alien and being subject to US taxation on the non-resident alien's worldwide income.
Long story short, international taxation is incredibly sophisticated, but provides for great planning opportunities!!
