How to Have a Tax-Free LLC in the United States?

Did you know you can easily open an LLC in the US as a nonresident? Did you also know that, under certain conditions, it can be completely tax-free? Each year, tens of thousands of international entrepreneurs use a legal loophole to open tax-free LLCs in the US, allowing them to keep more of their profits. 

In today’s article, we will discuss why foreign entrepreneurs can pay 0% taxes in the US. We’ll go through specific US regulations and explain briefly how they work. We’ll cover the main requirements you must fulfill to be eligible for a tax-free LLC in the States. After that, we’ll review the best US states to open an LLC as a foreigner, and we’ll give you some examples of how the taxation of nonresidents works. 

Let’s start.

Why Is It Possible to Open a Tax-Free LLC in the US?

So, you want to open a tax-free business in the US, but you’re unsure if you’re eligible or what the requirements are. Don’t worry, we’re gonna talk about that right now. First things first, we have to mention some IRS regulations to explain why it’s possible to open a tax-free US LLC as a foreigner. 

Legal Definition of Nonresidents 

We’ll start with code section 865, which defines a US resident as a US citizen, a resident alien, or a corporation. If none of the three apply to you, you’re automatically viewed as a nonresident, as defined in subsection G. This legal distinction between residents and nonresidents is what paves the way for tax-free businesses to exist in the States. 

LLC Taxation 

The second important thing to keep in mind is that LLCs are, in general, disregarded entities. All the income and potential tax obligations from it pass through to the owner. The LLC itself doesn’t pay taxes; instead, the owner does. For foreign-owned US LLCs with tax obligations, an owner will have to file Form 1040NR. And in the case when there’s no tax obligation, the owner will still have to file Form 5472 (i.e., an informational tax return). 

The subject of taxation can get quite complicated, and it would take a long time to explain it all. However, if you’re interested in learning more, we have a great article on how foreign-owned US LLCs are taxed. It’s an excellent resource for anyone looking to gain knowledge about this topic. So, be sure to check it out!

Effectively Connected Income 

The question here is, on what are nonresidents actually taxed? To explain that, we’ll have to examine the Code Section 864 C. This part of the IRS regulations defines effectively connected income as income derived from US sources. The main thing you should take from this is that the income from US sources is always taxable. This means that if you earn US-source income, you won’t be able to have a tax-free LLC in the US. However, if the opposite is true and you don’t earn income from US sources, then you can legally pay 0% in taxes. Right?

The Internal Revenue Code Section 862(a)(3) states that income from performing services outside the borders of the United States is not considered US-sourced; rather, it’s foreign-sourced income. And what’s so special about that? Well, if you own a US LLC as a foreigner and the only income you generate is foreign-sourced, you are legally in a position to have a tax-free business in America.

Let’s take a look at some common types of income so you can better understand the difference between US and foreign-source income.

Now, try to keep all the information we’ve shared so far as we move on to explaining the main requirements for opening a tax-free business in the US.

Need help opening a tax-free business in the US? Book a free consultation to get started.

Requirements to Open a Tax-Free US LLC

Here are the main requirements you need to fulfill to be eligible to open a US LLC and pay 0% in taxes:

1. You’re a Nonresident 

The first and main thing that makes you eligible to open a tax-free US business is that you can’t be a US citizen or a Green Card holder. You have to legally be a nonresident, as defined in the code section 865 mentioned above. If you’re not, you’ll have to pay US taxes no matter where you are in the world. This is because US residents, citizens, and Green Card holders are taxed on their global income. The exception to this rule could be future holders of the Gold Visa, but at the time of writing this article (April 2025), it’s still unclear. 

2. Your Business Doesn’t Operate in the US

The second requirement to have a tax-free LLC is that you can’t have your business operating in the US. For example, if you’re providing any service, you can’t be physically present in the US while performing those services. As long as that’s the case, you won’t be generating US-sourced income and will be able to open a tax-free LLC in the States. 

3. You Don’t Have US-Based Employees

And lastly, to ensure you’re eligible to have a tax-exempt business in the US, you can’t have any US-based employees, offices, or dependents. You can technically circumvent this by hiring US employees as independent contractors, but it can get messy pretty fast if you don’t know what you’re doing. Our advice is that if you’re unsure about anything, it’s best to contact professionals.

Requirements Checklist for Tax-Free LLC in the States

✅ You are a nonresident. 

✅ Your business operations are outside of the US.

✅ You don’t have US-based employees, offices, or dependents. 

Best US States to Open a Tax-Free Business as a Foreigner

We’ve discussed why nonresidents can open a tax-free US LLC. We’ve covered different laws and regulations that make that possible, and we talked about the main requirements to get it done. Now, we’re gonna move on and talk a bit about which state is the best for opening a foreign-owned LLC. 

As you know, the US has 50 states, and even though you can technically open a tax-free business as a foreigner in a lot of them, not every state is equal in terms of benefits it offers to international entrepreneurs. So, which states are the best?

For our intentional clients that want to open US LLCs and pay 0% taxes, we recommend two states — Wyoming and Delaware. 

Open Tax-Free US LLC in Wyoming

Opening an LLC in Wyoming as a foreigner allows you to avoid paying taxes under certain conditions; it also comes with a lot of other benefits, like:

• No state income tax — you can pay 0% taxes on LLC’s income
• Low filing fees — the cost of forming an LLC in Wyoming is between $100 and $150
• Low annual fees — the cost of maintaining an LLC with less than $250,000  worth of assets is only $60
• Online formation process — the entire company formation process can be done online, no matter where in the world you are
• Quick processing — forming a company in Wyoming usually lasts between 1 to 3 days
• Privacy protection — the names of LLC owners or members are not publicly listed
• Business-friendly laws — Wyoming is known for having  laws favouring company owners

Open Tax-Free US LLC in Delaware

As a nonresident looking to have a tax-free business, opening an LLC in Delaware is another great option. The state is known for its business-friendly laws, which is why a lot of US corporations are registered there. The only downside is that the state was blacklisted by some countries. For example, Brazil treats Delaware as a tax haven, making it a bit more challenging to do business. However, if you can get around that small hicc-up, this state offers a lot of benefits to international entrepreneurs, including:

• No state income and sales tax — you can pay 0% taxes on income or sales
• Low filing fees — the cost of forming an LLC in Delaware is around $110
• Reasonable yearly fees — the annual cost of maintaining an LLC is $300 
• Online formation process — forming an LLC can be done online
• High privacy levels — the names of LLC owners or members are not publicly available
• Fast processing times — setting up an LLC can be done in one business day

LLC Taxation for Non-US Residents: Examples

We know that getting into this subject is complicated. But we also know that there’s a big light at the end of the tunnel in the form of having a tax-free LLC. To make sure you fully understand the requirements for opening a tax-free business in the States and to ensure your business is actually eligible to pay 0% taxes, we’re gonna share a couple of real-life examples with you. 

LLC Taxation for Non-US Residents With US-Source Income

Here are some examples of how nonresident taxation works in the case that their US LLC generates US-source income. 

Example 1 

Liam and Mark are Canadian real estate investors who purchased a property in Florida and turned it into a rental. They opened a multi-member US LLC and used it to buy said property. Because the property is physically in the US, all the income it generates will be considered effectively connected and will be subject to US taxes. In this case, Liam and Mark are obligated by law to pay US taxes, but only on their US-source income. Any income they make outside the US, like wages or salaries they earn in Canada, is not taxable in the States. This is because Liam and Mark are both legally considered nonresidents. 

To comply with US laws, they need to pay taxes, file Form 1065 for partnerships, and file individual tax returns for nonresidents, Form 1040NR. 

Example 2 

Miriam is a restauranteur from Australia. She moved to the US after she won the Green Card lottery to open a restaurant. Because here business is physically in the US and all of her employees are US citizens, the income Miriam’s restaurant generates is effectively connected and taxable. This means that she must pay US tax and file appropriate tax returns. And, because she’s a Green Card holder, Miriam must pay taxes on her worldwide income. Luckily, Miriam was aware of this beforehand. To avoid getting double-taxed, she sold all her Australian business holdings before moving. 

0% Taxes US LLC for Nonresidents Without US-Source Income 

Here are some examples of how nonresident taxation works in the case that their US LLC doesn’t generate US-source income. 

Example 1  

Narayan is an Indian IT specialist who lives and works in his home country. He opened a foreign-owned single-member LLC in the US to help him lower his tax obligation. The nature of his work allows him to service international clients while operating directly from India. Because he has a US LLC, his reputation has drastically increased. And because he has a US bank account, he was able to streamline payment processing, which made it easier for his clients to pay him. In addition to all of that, because he is legally a nonresident and doesn’t generate any US-source income, he is able to have a completely tax-free business in the States. To comply with US regulations, he needs to file Form 5472 each year. 

Example 2 

Alessia is an Italian businesswoman who runs a digital business selling online courses to clients around the world. She decided to open a US company to lower her tax rate from 24% to 0%. And she was successful in doing that. 

Because she is a nonresident and her business doesn’t operate in the US, all the income her company generates is considered foreign-sourced and is not taxable under US laws. Also, having a US business account helped her streamline payment processing. To comply with US laws and ensure her tax-free US LLC stays in operation, she only needs to file the informational 5472 form.