What is a US LLC? A brief explanation.
There is no reason to be afraid of opening an LLC in the USA - as long as you understand what you can do with it, what your obligations are and how you should pay taxes.
Limitations - what it is
- A LLC is *not* considered a company in most cases (despite the C in LLC). Typically, a company is an independent legal entity with one or more directors / shareholders and has shares. LLCs in their simplest forms have profit payouts, not dividends.
- A LLC is owned by 1 or more persons and / or companies. Any mix of (foreign) persons and companies is possible.
- A LLC can relatively easily add persons or companies as members. The question however is if it is wise to do so (ask first, instead of regret later).
- You do not have to be a U.S. citizen or resident alien in the USA in order to have a US LCC.
- With a LLC you can have customers abroad, use foreign currencies and even foreign bank accounts
- A LLC is very good for digital nomads / remote workers in case they move around a lot. The idea is that the LLC (to the customers) is the stable base, and then depending in which country you are, you deal with the taxation in that particular country.
LLC Tax Obligations
- A LLC comes in 4 flavours: either sole proprietorship, a partnership, a C-corp or an S-corp. The first 2 forms are most common, and arguably, sole proprietorship is the simplest to deal with from tax perspective, especially if you are not liable for US taxes.
- A LLC with one member, a sole proprietor, is to the IRS a disregarded entity. The sole proprietor, as a private person is liable for taxes himself, as if that LLC entity does not exist.
- If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income, but you can apply a foreign-earned income exclusion: $112,000 for 2022, and $120,000 for 2023. Make sure that you can prove it was foreign-earned income.
- If you have no tax obligation as a person in the US, the liability for Income Tax is in the country where you *are* tax resident. In such a case, the IRS will see the LLC as a pass-though entity.
- A LLC is very good for digital nomads / remote workers in case they move around a lot. The idea is that the LLC (to the customers) is the stable base, and then depending in which country you are, you deal with the taxation that particular country. In Czech Republic, it is best as self-employed person.
Comparison between a US LLC and a Czech Trade License / SRO
- In case the LLC is sole-proprietorship, it is very comparabe to a Czech Trade License and is much easier, cheaper and faster to set up than an SRO
- You don't take out salary from an LLC. You are taxed on the business profits (not dividends!) - in CZ as self-employed person.
- More than 95% of our clients really do not need an SRO for the type of business they do. If for some reason a Trade License is not a good choice, a LLC might be
- It is possible to have a Trade License and simultaneously be employee, have an LLC or a business abroad.
- In most cases, an LLC requires simple single-entry accouting.
- You'll have to comply to FBAR regulations in case you are US citizen, greencard holder, resident alien or dual citizen (that *can* be a bit tricky).
- With an LLC you can use a business name other than your name - of course it can't conflict with an existing business
- Getting rid of an LLC is a lot less complicated / expensive than getting rid of an SRO.
- With an LLC you can pay other (foreign) freelancers / self-employed persons / companies. Their invoices are seen as expenses.
- You can't get a Czech Business Visa based on an US LLC, but you *can* based on a Trade License.
- Czech Tax Offices do not really know what an LLC is - and actually, it probably is good idea to have both a Czech Trade License and a US LLC.
Trade License, LLC, SRO or another Business Type - What to Choose
If you are new to Czech Republic and / or entrepreneurship - don't complicate your life with an SRO or some other legal entity abroad before you really know what you're doing!
In case you have your finger on the order button already, don't click yet. Let us first explain why you probably don't need one.
Keep it simple. When you really will be making millions (hopefully in near future), we can always look for ways to optimize - but start as self-employed person with a Živnostenský List ('Živno' for short) or LLC or both. You will not regret it.
There are plenty of expat consultants / lawyers that advise you to open a company (Czech SRO, Estonian Company, GmbH) because 'it is better', usually without specifying why. Also some LLC Registrars charge insane amounts of money for just (only) registering an LLC. Monetary gain of the seller is a common motivation, and usually they won't help you with your accounting / taxes / questions.