What should you do if you have some money left in your business bank account and want to invest it? Or if you have funds in your account and want to trade on the stock market.
Opening an LLC for investing or using your current US LLC structure is a great way to move forward.
Basically, if you do it through a Limited Liability Company, you’ll have several advantages, including liability protection and potential tax benefits.
Trading and investing as an individual vs. LLC
Speaking of trading and investing, whether as an individual or through an LLC, there are significant differences. Let’s explore them:
Asset Protection
One of the key benefits of investing through an LLC is asset protection. Okay, but what does that actually mean?
In a worst-case scenario (and most straightforward manner of speaking), if your creditors come after you, your LLC’s funds will remain untouched.
Furthermore, even if your business is targeted, investments held within a separate LLC for investment purposes will remain safeguarded. Literally, this separation brings you peace of mind, ensuring that your hard-earned investments are shielded from potential financial liabilities.
Inheritance
It’s not a pleasant topic to speak about but a very important one.
In the unfortunate event of your passing, how you structure your investments can greatly affect how they’re inherited by your family.
If your investments are held personally, your children may inherit them, but they could be subject to significant fees and legal processes to transfer ownership.
However, if your investments are held within an LLC, your children can inherit the LLC itself, along with all of its assets, without the hassle of managing complex probate procedures and fees.
Tax Benefits
There is a certain advantage when you use an LLC for investment. By structuring your investments within an LLC structure, you may have the opportunity to defer taxation until a later date.
Okay, but what does that mean to you, again?
Well, this means you can invest your funds before they are subject to personal taxation. Also allowing you to potentially compound your returns over time. Using the tax advantages offered by an LLC can help optimize your investment strategy and maximize your overall returns.
If you are interested in finding out more about how to start your remote company remotely, reach out to us and schedule a ‘one-on-one’ consultation.
Taxation of Investments
As a non-US resident, to understand the taxation of investments is to move smoothly to the US market.
Different types of investments by non-US residents are taxed differently in the US. In general, there is a difference between capital gains and the income produced by your assets, such as dividends, rents, etc.
Income from assets
The income produced from the assets is always considered to be effectively connected income with the United States. Therefore, income is subject to US taxes no matter where you reside. This type is called Fixed, Determinable, Annual, or Periodic (FDAP), including rents and dividends. It is typically subject to a default tax rate of 30% unless your home country has a double-taxation treaty with the US that reduces this rate.
Capital gains
When it comes to capital gains, we would say it’s a brighter place to be. They result from selling assets at a higher price than what was initially paid. Also, they are not effectively connected to income in the US and therefore are subject to taxes there. As a result, the effective rate of 0% for non-US residents applies. This means you won’t pay taxes on the appreciation of assets, allowing you to enjoy the profits from your investments without the burden of capital gains taxes.
However, it’s essential to note that taxes are applicable to other forms of investment income, such as dividends, and rents. These types of income are subject to taxation at the prevailing rates, which can impact your overall investment returns.
To understand the varieties of investment taxation can help you make informed decisions when structuring your investment portfolio. You can implement tax-efficient strategies and take advantage of favorable tax treatments. Plus, optimize your investment returns and minimize your tax liabilities.
To cut the noise and be more specific, here are 2 examples to get the picture.
Example 1: Dividends and Capital Gains from Stock Investments
Imagine you buy 10 shares of Apple at $100 per share. Over the year, Apple pays out dividends of $1 per share, totaling $10 in dividends for you. Since dividends are considered FDAP income, you’ll be subject to a 30% tax rate on this income, resulting in $3 in taxes owed.
Now, let’s say you decide to sell your Apple shares when the price has risen to $120 per share, resulting in a total sale proceeds of $1200. Since this $200 profit is considered a capital gain, it is not subject to taxation for non-US residents. This means you get to keep the entirety of your capital gains without having to pay taxes on them.
Example 2: Rental Income
Now, let’s explore rental income from real estate investments. Suppose you purchase a house for $100,000 and decide to rent it out for $1,000 per month. Since rental income falls under FDAP income, it is subject to a 30% tax rate for non-US residents. This means you’ll owe $300 in taxes each month on your rental income.
Long story short – capital gains are generally not taxable. Other forms of income, such as dividends and rental income, may be subject to taxation at the applicable rates.
If you are interested in learning more about US LLC taxation – here is a tax guide.
Conclusion
When it comes to investing, you have the option to use a personal account or an LLC for investing. Of course, depending on what aligns best with your financial goals and circumstances.
Opting for an LLC can offer advantages such as asset protection and potential tax benefits. However, it’s essential to be mindful of certain factors to optimize your investment strategy:
Duration and Presence
If you choose the LLC route, consider your duration of stay in the US and avoid establishing employees or physical premises in the country. By doing so, you can mitigate capital gains tax implications.
Tax Planning
While paying taxes on FDAP income is inevitable, you can strategically plan your investments to minimize tax liabilities. For better navigation through the tax landscape, first, you need to understand the implications of different types of investment income.
If you consider these factors and craft a well-thought-out investment strategy, you can make the most of your investment opportunities while optimizing your tax efficiency.
Before you click and close this article, stay a bit longer and read about our process.
The Neubase Process
As a US foreigner, you can practically start your global business from your home. Stepping on such a journey, pretty much, it can be overwhelming and stressful, especially if you want to minimize the risks.
The Neubase process starts with a simple application and choosing the package that it’s the best option for you.
However, if you have any questions, or doubts about your journey, just reach out to us and set up a free call with Petar.
