2025 Update

If you’re a foreign entrepreneur, you’ve likely seen bold claims online: “Form a U.S. LLC and pay 0% tax!”

It sounds almost too good to be true. And in some cases, it is true — but only if your business is structured and operated the right way. The reality is more nuanced, and misunderstanding the rules can mean unexpected taxes, IRS penalties, and compliance issues.

This article will break down all the major scenarios for foreign-owned U.S. businesses, including:

• When an LLC really pays 0% U.S. federal income tax
• Why Amazon FBA is a tax trap
• What changes when you elect C-Corp taxation
• The compliance forms and penalties you must not ignore

Let’s dive in.

1. The Default U.S. LLC (Disregarded Entity)

By default, a single-member U.S. LLC owned by a foreigner is disregarded for U.S. federal tax purposes. That means the IRS looks through to the owner directly.

Services Performed Abroad → No U.S. Federal Tax

If you are physically performing services (consulting, IT, freelancing, design, etc.) from outside the U.S., the IRS considers your income foreign-sourced.

• Result: You pay 0% U.S. federal income tax.

Services Performed Inside the U.S. → Taxable

If you physically work while in the United States, the income becomes U.S.-sourced. That triggers federal taxation.

Compliance Obligations

Even when no tax is due, the LLC must file:

• Form 5472 (Information Return for Foreign-Owned LLCs)
• Pro forma Form 1120 (a “cover sheet” for Form 5472)

Penalty for missing Form 5472: $25,000 per year.

Key point: 0% tax does not mean 0% filings.

2. E-Commerce LLCs: The Fulfillment Question

If you’re selling online, the treatment depends entirely on where your goods are fulfilled.

Case A: Products Fulfilled from Abroad (e.g., from India)

• Orders are shipped directly from outside the U.S.
• The sale is considered foreign-sourced.
• Result: No U.S. federal tax.

But watch out:

• Sales tax nexus: After the Wayfair Supreme Court ruling, states can require foreign sellers to collect sales tax if they meet economic thresholds (number of sales or revenue in that state).
• Customs duties: U.S. customers may face import duties when goods cross the border.

Case B: Amazon FBA or U.S. Warehousing

This is where many foreign sellers get surprised.

• If your inventory sits in U.S. warehouses (like Amazon FBA), the IRS considers that U.S.-sourced income.
• You are engaged in a U.S. trade or business (USTB).
• You must file Form 1120-F (foreign corporation) or Form 1040-NR (foreign individual).
• You will also need an ITIN (Individual Taxpayer Identification Number).

Bottom line: Fulfillment location determines taxability.

3. Electing C-Corp Taxation

Some foreign entrepreneurs choose to have their LLC taxed as a C-Corporation (via Form 8832).

Key Features:

• Flat 21% corporate tax on net income.
• File Form 1120 (U.S. corporate tax return).
• Dividends paid to foreign shareholders → subject to 30% withholding tax, unless reduced by a treaty.

When does this make sense?

• If you plan to reinvest profits in the U.S. instead of distributing them.
• If you want to attract U.S. investors, who often prefer a corporation over an LLC.

Trade-off:

You lose the ability to run at 0% tax, but gain access to reinvestment and investor credibility.

4. FDAP Income: The Exceptions

Even if your LLC is otherwise “tax-free,” some types of income are always taxable for non-residents.

This is called FDAP income (Fixed, Determinable, Annual, Periodical) and includes:

• Royalties
• Dividends
• Interest
• Rents from U.S. sources

These are typically subject to 30% withholding tax, reduced only by tax treaties.

5. Compliance Matrix

Here’s a quick reference guide that summarizes the main scenarios:

6. Detailed Infographic

A flowchart showing:

• Step 1: Do you provide services or sell products?
• Step 2: Where performed/fulfilled?
• Step 3: Which tax applies?
• Step 4: If C-Corp → 21% corporate tax + dividend withholding.

This visual helps readers quickly understand which “path” they fall into.

7. The Bottom Line

Yes, you can legally run a U.S. LLC with 0% federal tax — but only if:

• You perform services outside the U.S., OR
• You sell products fulfilled from abroad.

But remember:

• Filings (Form 5472) are mandatory even with 0% tax.
• State franchise taxes often apply.
• Sales tax compliance is separate from income tax.
• Your home country will likely tax your worldwide income, so “0% in the U.S.” doesn’t mean “0% everywhere.”

The difference between paying 0% tax and paying full corporate tax often comes down to small but critical decisions about structure and operations.

Next Steps

• If you are planning to form a U.S. company, decide early whether LLC (disregarded) or C-Corp treatment makes sense.
• Review how your services are delivered or how your products are fulfilled.
• Don’t ignore compliance filings — penalties can be severe.

Want to make sure your U.S. business is structured the right way?