Caveat: This article is only for Americans who live outside the US (i.e., expats and digital nomads who qualify for the foreign earned income exclusion).
Are you still rocking the Naked LLC?
Let me guess: At some point when you were starting your Amazon FBA business, you figured out how to form an LLC, and you’ve been doing business through that LLC ever sense. Is that right?
Wait—don’t tell me it gets worse. I really hope you haven’t been doing business simply in your own name with no legal structure at all . . .
Either way, you’re paying more US tax than you need to. Or you have other problems, such as that you’re not filing a US tax return at all or your US tax return isn’t being prepared correctly. (And, unfortunately, I’ve seen many expat tax returns that haven’t been done correctly, even from the big expat tax prep companies.)
How to do it right
In this article, we’ll talk about
- why just using a naked LLC (or nothing at all) is not the best legal structure for your situation,
- the legal structure you should be using, and
- the easiest get that legal structure all set up.
And why would you want to read a boring article about setting up a legal structure? Because paying less tax in a perfectly legal way puts more money in your pocket. That’s money you can use to buy more inventory and otherwise expand your business.
So, if you’ll spend just two minutes reading this article, you’ll learn exactly what you need to do to put more money in your pocket, year after year, with no additional work on your part.
Two Alternative futures
Let’s look at two alternative futures for your Amazon FBA business: (i) operating exactly as you are now and (ii) operating through the proper legal structure.
Potential Future #1: Operating as a Sole Proprietor
“Sole proprietor” just means a human running a business in their own name or through a single-member LLC.
Now, the good news is, as an expat or digital nomad, you can take advantage of the foreign earned income exclusion (the “FEIE”). The FEIE allows you to make about $100,000 per year without paying any US income tax.
However, here’s the bad news:
- As a sole proprietor, you’re considered to be “self-employed” for US tax purposes.
- The FEIE works only for income tax purposes-it doesn’t help at all with the “self-employment tax,” which is about 15% up to $118,000 and about 3% over that amount.
- Then, in years when you make more than the FEIE cap of about $100,000, you’ll just have to pay full US income tax and self-employment tax on the amount over the FEIE cap.
The bottom line is that a sole proprietor pays US tax. If you keep operating as a sole proprietor, you’ll pay
- US self-employment tax on all your income and
- US income tax on the amount above about $100,000.
Potential Future #2: Operating through a Non-US Corporation
Instead of being a sole proprietor, the better way to do it is to operate your amazon FBA business through a non-US corporation.
Here’s how this structure works:
- You form a non-US corporation. You can be the sole shareholder and sole director, so you own 100% of it and control everything.
- You then cause your Amazon FBA business to be operated through your non-US corporation (instead of by you personally or by an LLC in which you’re the sole member).
- Finally, you open a bank account under your non-US corporation. This way, all of the assets of your company stay in the company, and there’s a clear line between business assets and personal assets.
This might sound really confusing at this point. But here in a bit, I’ll show you exactly how you can set up this structure yourself without spending a ton of money.
Here’s how this structure is treated for US tax purposes:
- Under this structure, you have two roles for US tax purposes-you’re the sole shareholder of the corporation, and then you’re also an employee of the corporation.
- Since you’re an employee, you’re not self-employed for US tax purposes (like a sole proprietor is). So, this structure legally gets rid of the self-employment tax. That’s an easy 15% savings, right from the get-go.
- Finally, the amount your Amazon FBA business makes above your salary isn’t currently subject to US tax as long as it stays in the company (instead of being paid to you). You’ll only pay US tax on that amount way down the line when you cause your company to pay a dividend to you.
Let’s look at the real-world savings
Here are some examples to show the actual benefits of using the non-US corporation structure for your Amazon FBA business.
We’ll assume you qualify for the foreign earned income exclusion for the whole year (so you don’t pay any US income tax on amounts under about $100,000):
- Let’s say you have a year where your Amazon FBA business makes $10,000 of net income. You’d have to pay about $1,500 in self-employment tax if you keep operating as a sole proprietor.
- With net income of $50,000, the amount you pay as a sole proprietor goes up to about $7,500.
- Then, in a year when you have net income of $150,000, your US tax bill as a sole proprietor would be about $30,000!
What could you do with $30,000? Operating as a sole proprietor, you’d simply have to hand all that money over to the US government.
Now, here’s the kicker: Under each of the scenarios above, with a non-US corporation structure in place, your US tax bill would be exactly $0.00, all perfectly legally and above-board.
By the way, when I say this is absolutely legal, that actually means something because I’m a US tax attorney. I’m not just some “offshore guru” selling hype without the actual credentials to back it up.
But isn’t it really expensive to form a non-US corporation?
Not anymore. That’s how things used to be (and still are if you talk to an “offshore guru”).
You can actually do it yourself without spending very much at all. I’ll show you exactly how to do it.
If you can sign up for a PayPal account, you can form a non-US corporation structure. That’s really all it takes-you just have to click around a bit, type information into boxes, and send emails.
so How do I form a non-US corporation structure?
Well, it takes a little explaining to show you exactly how to set up the proper legal structure for your Amazon FBA business. And the structure itself is just a little bit more involved than simply a non-US corporation.
Been waiting for the sales pitch? Here it comes:
That’s why I created the Tax-Savvy Expat courses:
- Tax-Savvy Expat : Essentials discusses the basics of US tax for expats and digital nomads. It covers the foreign earned income exclusion, foreign housing deduction/exclusion, and the foreign tax credit.
- Tax-Savvy Expat : Freelancer is for folks who have a profession-people who sell their own time and attention to multiple clients.
- Tax-Savvy Expat : Entrepreneur is for business owners-folks who sell something other than their own time and attention.
Selling inventory on Amazon definitely qualify as a business, so you’re in Entrepreneur territory.
Essentials makes sure you fully understand how the basic tax rules work. Then, Entrepreneur dives into the details of how tax works under the non-US corporation structure.
Here’s the best part: Entrepreneur includes three other ingredients to get you all set up for success:
- a step-by-step guide to actually forming your own non-US corporation structure, with clear easy-to-follow instructions,
- links to the actual resources you need to get your own non-US corporation structure up and running, and
- the actual legal documents you need to properly put your structure together.
Finally, here are two more things you get for free with Entrepreneur. These really make taking Entrepreneur an absolute no-brainer:
- Your purchase of Entrepreneur includes a one-hour phone call. So, after you take the course, we’ll get on the phone to make sure you understand exactly what you need to do and how the tax rules apply to your specific situation.
- To make it even easier, Entrepreneur comes with a 30-day no-questions-asked money-back guarantee. If you don’t like Entrepreneur for any reason, then you get an easy no-drama automatic refund.
I’ll wait until I’m making $x a month to set this up
It doesn’t cost nearly as much as you think to set this up, so there’s no need to wait until you hit some arbitrary revenue goal.
Tax-Savvy Expat : Entrepreneur is only $800. Then, it should take only another $900 or so to get your non-US corporation structure up and running. After that, annual fees should be around $700 per year.
So, your non-US corporation structure will pay for itself in the very first year if you make $1,000 a month from your Amazon FBA business.
Plus, getting this structure in place now gets you properly positioned for the future. It would be terrible to have a really good month and have to send a bunch of money to the IRS just because you didn’t take a little time to get your legal structure together.
Finally, there’s also a tax reason to set things up sooner rather than later. Contributing an on-going business to a non-US corporation is generally a taxable event. So, it’s better to do that while things are slow and the business isn’t worth much.
Thanks for taking the time to read this article. I hope you now realize how
- a non-US corporation can save you a ton of money over the years and
- Tax-Savvy Expat : Entrepreneur is the most cost-effective way to get the proper legal structure in place for your business.
CLICK HERE to read more about Tax-Savvy Expat : Entrepreneur.
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