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). Here’s a better article for non-Americans and Americans who live in the US.
Are you still rocking the Naked LLC?
If you’re like many Amazon FBA sellers, you simply formed an LLC when you started your business, and you’ve been doing business through that LLC ever sense.
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
This article discusses
- 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 way to 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, otherwise expand your business, or invest in something else entirely.
So, if you’ll invest 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 from providing personal services 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.
- Also, the FEIE only works for income from providing personal services. For a self-employed person with an Amazon FBA business, the IRS only allows you to treat up to 30% of the income as foreign earned income. You just have to pay US tax on 70% of your income.
- 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 make exactly $100,000 a year of net income, you’ll pay US tax of about $25,000. That’s about $2,000 every single month that you’re sending to the IRS instead of using to expand your business!
If you make $30,000 of net income, you’ll be needlessly sending about $6,000 per year (or $500 a month) to the IRS. That’s like buying a very nice car for the IRS just out of the goodness of your heart!
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 form an LLC in which your non-US corporation is the sole member. This allows you to open a US 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 time or 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.
- You can pull out about $100,000 per year from the company as a salary and pay zero US tax, completely legally.
- Finally, the net income 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?
Yeah, it costs at least $10,000, but it’s totally worth it . . .
Just kidding! 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.
You can handle this!
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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 those who have a profession-people who sell their own time and attention to multiple clients.
- Tax-Savvy Expat : Entrepreneur is for business owners–those who sell something other than their own time and attention.
Selling on Amazon definitely qualifies 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 four 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,
- the actual legal documents you need to properly put your structure together, and
- the legal structure itself–your purchase of Entrepreneur includes the first-year fees for the legal structure you need to get the tax savings discussed above.
Finally, your purchase of Entrepreneur includes a consultation 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.
Tax-Savvy Expat: Entrepreneur has everything you need to get the legal structure described above. In just a couple of days, you could easily and legally reduce your tax bill to zero dollars a year.
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.
Everything you need to get going is included in the Entrepreneur package. So, your non-US corporation structure will pay for itself in the very first year if you make only $1,000 a month of net income from your Amazon FBA business.
Plus, getting this structure in place now gets you properly positioned for the pop. You’ll have everything already set up when you really start selling.
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 can be 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
- Tax-Savvy Expat : Entrepreneur is the most cost-effective way to get the proper legal structure in place for your business.
Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.