We have formed relationships with many business owners who have formed “Amazon-based” businesses. In other words, they create and source physical products, ship those products to an Amazon warehouse, and then list the products for sale on Amazon's website. The majority of this business takes place on Amazon.com, although Amazon also has websites in the UK, Japan, and Canada, among others.
Building a business this way is relatively inexpensive and easy to start-up, especially since Amazon does all the legwork: storing inventory, having a website with potential buyers, handling the sales, handling returns, etc. This has come to be known as “FBA” or “fulfillment by Amazon”.
Many of our contacts that have Amazon-based businesses are located in the United States, giving them several options when it comes time to form a corporate entity.
However, if you are a foreign-based business owner, and you want to sell products on Amazon.com (i.e., in the United States), then you must decide what is the best corporate entity for a foreigner to form in the US?
What is the best corporate entity for a foreigner in the US?
Is an LLC a good choice for a foreign business-owner?
In most situations, I would say no, an LLC is not a good choice. To understand why, here is a quick rundown of the similarities and differences between an LLC and a traditional corporation:
- Both are legal entities, making them separate from their owner in the eyes of the law;
- Both offer “limited liability” to their owners (shareholders for corporations, and members for an LLC);
- Both are formed under the laws of the state in which the business will be operating. So for a foreign business-owner, this can be pretty much any state you decide that you want to incorporate in. There are a number of factors to consider here, which we will address in a separate blog post.
- Both lack any requirement that the owners, managers, directors, shareholders, etc. must be a U.S. Citizen, meaning that a foreign citizen can form a corporation or LLC in the United States even if they don't live here.
- Both can have just one shareholder or owner.
So with all this in mind, why do I typically recommend against forming an LLC if you are a foreign business owner who wants to do business in the U.S.?
The biggest reason is that by electing an LLC, the foreign business owner will be required to file a personal tax return in the United States, and potentially also state and local tax returns depending on where you choose to do business. This could open the door for the U.S. Taxing Authorities to demand information on your foreign income as well, and possibly even audit you personally.
This is because an LLC is a “pass-through” entity, meaning that the LLC itself does not pay tax. Instead, all of the income from the LLC flows through to the individual owner of the LLC.
A corporation, on the other hand, is a separate “tax-paying” entity, meaning that the corporation itself pays all the taxes on its income. So you would only need to obtain one tax ID number (called an EIN), and file one corporate tax return. If you set the corporation up in a state that has no income tax, like Florida, you wouldn't have to file a state income tax return either.
A secondary reason to form a corporation rather than an LLC is the ease of ownership transfer. It is typically easier to transfer shares in a corporation rather than sell a “membership interest” in an LLC if you decide to sell your business. If you own an Amazon-based FBA business, this is a very likely exit scenario for many foreign based owners.
What about the tax benefits of an LLC?
It is true that the owner of an LLC can take the losses in an LLC as a deduction against it's own taxable income, and this is certainly a consideration that you should account for.
Another consideration is that corporate income is taxed twice, first at the corporate level and second at the taxpayer level. However, it is possible that a tax treaty would exist between the shareholder's country and the U.S. that would provide certain tax credits for the corporate income tax paid. This is beyond the scope of this blog post and we would urge the reader to consult with a tax professional in your own company.
Notwithstanding, there are many ways to legally avoid double taxation, such as by paying deductible expenses and salaries that would reduce or even eliminate any tax liability on the part of the corporate entity.
What about an S-Corporation?
We didn't mention an S-Corporation in this article because a foreign based business-owner is not eligible to form an S-Corporation. To do so, you must have a green card or pass the “substantial presence” test.
Because you must be at least a “resident alien” to form an S-Corporation, this is not a viable option if you are based solely overseas and not a U.S. Citizen.
So what's the bottom line?
In most situations, the best corporate entity for a foreigner to form in the US, and the one we most often recommend, is a traditional corporation for the reasons mentioned above.