How to Structure your Non-US Business or Profession

Are you an expat or digital nomad with your own gig going on? This article describes how to wrap everything in the perfect legal structure for your situation so you pay as little US tax as possible.

Written by Stewart Patton

A few house-keeping matters before we dive in:

Business v. Profession

An important concept for the structures discussed in this article is the difference between a profession and a business.

A professional sells their own services. So, a lawyer, accountant, IT consultant, web designer, copywriter, graphic designer, software developer, and business advisor would all typically be engaged in a profession—they aren’t selling a product or the services of other people, they’re selling their own time and attention. They’re renting their brain to clients.

However, a business has a life of its own outside the personal efforts of the owner. Imagine a hotel—the front desk is checking people in, maids are cleaning rooms, the kitchen is making meals, and the bartender is making drinks, all while the owner is up in her room taking a nap. That’s a business. Now, imagine a solo practitioner lawyer’s office while the lawyer isn’t in it—there’s no business going on.

How to Structure your Business

Hold through a Non-US Corporation

If you own and operate your own business outside the United States, and your business isn’t a profession, it’s generally most advantageous to hold the business through a non-US entity that’s classified as a corporation for US tax purposes.

And, of course, it would be wise to form this corporation in a low- or no-tax jurisdiction. See this article for a discussion of the best jurisdiction for your non-US corporation.

By holding through a non-US corporation, you can

  1. take advantage of the foreign earned income exclusion by paying yourself a salary as an employee of the corporation,
  2. avoid self-employment tax,
  3. avoid the rules that limit the use of the foreign earned income exclusion by a self-employed person (the “30% rule” and “scaleback rule,” discussed further below), and
  4. avoid US tax on your business’s earnings over your salary until your non-US corporation pays that out to you as a dividend.

Here’s the way to pay zero us tax using this structure:

Now, of course, there are some ins and outs here-this is just a broad general outline. For example, the amount of this salary must be an “arms’ length amount” for it to be respected for US tax purposes. For full details on exactly how this structure works (plus a step-by-step guide to actually setting it up), see the Tax-Savvy Expat : Entrepreneur course.

Consequences of Holding Business Directly

What if you were to simply hold your business in your own name (or through a passthrough entity) instead of through a corporation? Several bad results:

Keep Good Records

Holding through a non-US corporation is a fantastic structure, but it does come with complications and considerations. For example, you’ll be required to include IRS Form 5471 with your US tax return to report the activity of your foreign corporation, and you must include a balance sheet and income statement on that form each year. You’ll have other forms to file as well in certain years. So, it’s important that you keep meticulous records of your corporation’s business activity.

How to Structure your Profession

A profession is a very different beast than a business, so of course it must be structured differently.

Bad News First

Unfortunately, operating a profession through a non-US corporation simply doesn’t work for US tax purposes. The reason for this is that a corporation is a separate person. In a profession, the client is paying to hire the professional. So, the professional must pay tax on that income-the professional can’t simply send that income over to a separate person (a non-US corporation). Doing that would violate the “assignment of income doctrine.”

You’ll find people on the internet who say differently than the above. The reason for that is they aren’t US tax attorneys, they just sell non-US corporations. So of course they think everyone in the world (plus their mother, dog, and parakeet) need a non-US corporation (or 2, or 3!).

Do I Even Need a Legal Structure?

If your profession is pretty much a series of jobs, then not having a legal structure is perfectly OK. So, if you simply hire yourself out for discrete projects that you work on one at a time, and you get paid on a pure hourly basis, then having a legal structure honestly won’t help you all that much.

But once your profession grows beyond those early stages, having a legal structure is absolutely mandatory. Here are the benefits of operating through a legal entity:

  1. it provides a more professional appearance to clients, banks, and others;
  2. it protects your personal assets from liabilities generated by your business;
  3. to a more limited degree, it protects your business assets from liabilities generated outside your business;
  4. it provides a centralized place to keep business assets; and
  5. it helps keep business income and expenses separate from personal income and expenses, which can be helpful for tax reporting purposes.

Legal Structure Options for Professionals

First, since you can’t use a non-US corporation, you should simply operate your profession through a limited liability company (an “LLC”) formed under the laws of a US state.

Then, there are two ways for your LLC to be classified for US tax purposes.

Disregarded Entity:

S Corporation:

Now again, there are more details and nuances to consider here-the above is just a general outline. For full details on exactly how each of these structures work, plus a step-by-step guide to setting each of them up, see the Tax-Savvy Expat : Freelancer course.

Any questions?

This stuff is complicated.

This article gave you a good introduction to how everything works. However, once you make the leap from “doing some research” to “I’m really seriously thinking about doing this stuff,” you need expert advice on your particular situation.

Unlike many lawyers, I don’t have a minimum number of hours I need to bill before taking on a new client. If you just want to jump on the phone for a half-hour to make sure you understand how everything applies to you, I’m happy to help.

You can easily schedule a call with my easy online calendar system.

Download this FREE REPORT to discover common (and costly) expat tax myths.


Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.

Stewart Patton

I'm Stewart Patton, US tax attorney and expat entrepreneur based in beautiful Belize. Read more about me here, or email me at [email protected] to discuss how I can help.

U.S. Tax Services, P.O Box 2651 Belize City, Belize • Belize tel: (+501) 629-6007 • U.S. VOIP: (312) 675-8571 • Email: [email protected]