Formation of Limited
Liability Companies (LLCs)

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More about Limited Liability Companies (LLC):

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At a practical level, an LLC can be a relatively easy business entity to set up, allowing foreigners to commence business operations with a United States presence, and access a business bank account in the United States; allowing them to easily collect payments in the United States from customers. Merely opening an LLC does not provide work authorization in the United States, however, one can work from abroad and collect payments from U.S. customers (and others around the world) via their LLC. An LLC in the United States, can thus sometimes open lucrative commercial doors that are largely unavailable to foreign business operations. From an Immigration Law perspective, opening an LLC in the U.S. to support a new business operation in the United States, is often a vital step towards eventually obtaining an E-2 "Treaty Investor" Visa, an E-1 "Treaty Trader" Visa, an L-1A "New Office" Visa, or an O-1 "Visa of Extraordinary Ability;" as an individual employed by their own U.S. entity.

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How does LLC Taxation Work?

United States LLC's are normally "pass-through" entities for tax purposes. This means that if you have a "single-member" LLC (one owner who owns 100% of the "membership interests"), then that LLC will normally be taxed as a sole proprietor, unless a contrary election is made. If you have a "multi-member LLC" (two or more owners with "membership interests"), then such LLC (unless a contrary tax election is affirmatively made), will normally be treated as a Partnership for tax purposes. This means that members would pay U.S. taxes on their individual tax returns for their share of the U.S.-source (or "Effectively Connected Income") taxes owed, in accordance with classic "Parternship" taxation rules.

 

Although U.S. taxes can be extremely complicated and you should always consult with a Certified Public Accountant (we can happily introduce you to one), foreigners that live abroad and are regarded as "non-resident aliens," are generally only subject to U.S. taxes on U.S.-source income. This would be income from U.S. clients and customers, U.S.-based operations, U.S. real estate income, U.S. trade or business income ("effectively connected income (ECI)"), and services performed from inside the United States. It is often hard to determine whether income into an LLC is "U.S.-source income," however foreign income earned from foreign clients for services performed entirely outside of the United States (in the absence of substantive U.S. business operations), is not generally subject to U.S. income taxation. While foreign members of U.S.-based  LLCs are generally only subject to U.S. taxes on "U.S.-source income," and while LLC taxes generally flow directly to the members and are paid via their individual tax returns, LLCs are still required to file an Informational Return with the Internal Revenue Service. Likewise, many states require annual state filings, and penalities for missing filings can be large (even with $0 tax is due.) Accordingly, it is very important to have a licensed Accountant and/or Certified Public Account advise you on your tax filing obligations. It is a good idea to form your LLC with an experienced attorney who can also handle any necessary annual filings; very often working in close collaboration with your tax professional.

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LLC Limitation of Liability Principles:

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One of the reasons that LLCs are an attractive business entity structure, is because LLC members are generally not personally liable for the company's debts or obligations. That said, this protection is not absolute. Personal liability may arise where a member provides a personal guarantee, personally commits wrongful or negligent acts, or where a court “pierces the corporate veil” due to fraud, commingling of funds, undercapitalization, or failure to observe basic corporate formalities. Members may also be personally liable for certain tax, wage, or statutory obligations imposed by law.

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LLC Formation Basics (General Framework in the United States):

 

An LLC is formed by filing a state-level formation document (often called Articles of Organization or Certificate of Formation) with a Secretary of State or equivalent authority in the chosen state. This filing legally creates the LLC and requires naming the company, designating a registered agent with a physical address in the state, and paying the state’s formation fee. Most states do not require an Operating Agreement to be filed with the state, but drafting one is strongly recommended because it governs member rights, voting, profit allocation, management structure, and internal procedures. After formation, most LLCs will want to apply for a Federal Employer Identification Number (EIN) from the IRS, which they use for tax filings, opening bank accounts, and other formal business activities. Obtaining an FEIN number is also generally a pre-requisite for many U.S. Immigration filings related to the LLC.

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Management and Organization:
LLCs typically choose whether the entity will be member-managed (all members participate in daily decisions), or manager-managed (one or more managers — who may be members or external appointees — run operations). These choices, along with members’ voting rights and profit/loss allocation, are set in the Operating Agreement. Unlike corporations, LLCs have great flexibility in internal governance: no mandatory director/board structure, no requirement for annual meetings in most states, and broad discretion to tailor management in the Operating Agreement.

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State Formation Considerations for Foreign Owners:

Foreign owners (non-U.S. citizens) can generally form an LLC in any U.S. state without U.S. residency or citizenship, so long as a registered agent is designated in the state of formation. However, the state of formation matters because it determines annual filing requirements, privacy protections, costs, and which courts might govern disputes.  

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General Rule on State of Formation and Operations:
As a general matter, a business will typically form its LLC in the U.S. state where it expects to have its primary operations, physical presence, or employees, since that is where the business will be actively conducting its day-to-day activities. Forming in the state of actual operations often simplifies compliance and avoids the need to maintain registrations in multiple states. By contrast, LLCs that do not maintain meaningful U.S. operations or physical presence, often have greater flexibility in choosing a state of formation, with states such as Delaware and Wyoming being common choices for holding companies, online businesses, or more passive structures. Similarly, foreign-owned entities that do not expect to generate U.S.-source income or conduct active business operations within the U.S., often choose states such as Delaware or Wyoming for formation due to their administrative simplicity and business-friendly frameworks.

 

Foreign Qualification / Doing Business Rule.
As a general rule, an LLC is required to register as a “foreign” LLC in any U.S. state where it is considered to be “doing business” or “transacting business” under that state’s laws, even if the LLC was formed in another state. “Doing business” typically involves maintaining a physical presence, employees, or ongoing operational activities within the state, and generally does not include passive ownership or purely interstate commerce. Accordingly, if an LLC actively operates or renders services within a particular state, it is often advisable to form the LLC in that state or timely foreign qualify to remain compliant and avoid penalties.

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Having outlined the general rules, here are some of the individual state-level characteristics for the common states our clients customarily consider.

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Florida:
Florida requires member or manager names and addresses on the Articles of Organization, and LLCs must file an annual report (due by May 1 each year) with a fee (around $138.75). Florida has no personal state income tax, which benefits LLC members, but an LLC that elects C-corporation taxation may face a state corporate tax at 5.5% on net income above a threshold. For many foreign-owned service businesses with a physical presence or active operations in Florida, forming the LLC in Florida aligns the legal domicile with where the business is actually operating — and often avoids foreign qualification registrations in multiple states.

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Wyoming:
Wyoming is popular for foreigners because it has low formation and annual fees (roughly $100 to form, around $60 annual report/license tax), no state income tax, and strong privacy — member identities need not be publicly disclosed on state filings. Wyoming also imposes minimal ongoing compliance requirements (one annual report), making it attractive for online or holding structures without active U.S. operations. 

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Delaware:
Delaware is historically strong in business law and dispute resolution, with a well-developed body of corporate/LLC jurisprudence. Many investors and lawyers prefer Delaware for complex, or investor-driven ventures. Forming an LLC in Delaware usually imposes a flat annual franchise tax (about $300) without an annual report requirement for LLCs, and members/managers generally do not need to be listed in public records. Delaware LLCs also do not pay state income tax on income derived outside Delaware, but they still face federal tax obligations, and just as with an LLC formed in any state, Delaware LLCs must foreign qualify in states where they actually do business.

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Members’ Rights and State Differences:
Differences between states are often in filing fees, privacy rules, and annual requirements rather than fundamental member rights — all states generally allow management flexibility and limited liability protection. As a broad summary, Florida publicly discloses manager/member names, whereas Wyoming offers greater anonymity. Delaware lies between those extremes, and is recognized for strong legal precedent and investor familiarity. Regardless of the state, failure to meet annual filing requirements or pay required fees can lead to loss of good standing or administrative dissolution of the LLC. 

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At Allen Pavlow, we work closely with our clients to carefully evaluate their business goals and other relevant factors before recommending a specific state for LLC formation. Once the appropriate state is selected, our team can handle the LLC formation process from start to finish, and connect you with experienced registered agents and tax professionals to help ensure smooth, ongoing compliance. Feel free to complete the intake questionnaire below to get the conversation started.

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