1. Introduction
Foreign founders often choose to form a US limited liability company (LLC) because it is simple to set up, widely trusted, and frequently required by platforms such as Stripe, Amazon, payment processors, and US-based clients.
Soon after formation, uncertainty begins to surface:
- "Do I owe US tax?"
- "Is my income considered US-sourced?"
- "Will the IRS tax this income, or only my home country?"
The answers depend on a single foundational concept under US tax law: whether your income is classified as US-sourced or foreign-sourced.
This guide explains that concept clearly and practically, so you can understand:
- When a foreign-owned US LLC is taxable in the United States
- When it is not
- Why many foreign founders legally owe $0 US income tax, while still having US compliance obligations
2. Quick Summary
- If your LLC earns US-sourced income, that income may be taxable by the IRS.
- If your LLC earns only foreign-sourced income, you generally do not owe US income tax. That income is typically taxable only in your home country under local tax laws.
However, no US tax does not mean no US compliance.
Even when all income is foreign-sourced and US income tax owed is $0, a foreign-owned single-member LLC is still required to file:
- Form 5472, and
- Pro-Forma Form 1120
These filings are mandatory regardless of where the income is sourced. For a step-by-step walkthrough of these forms, see our guide to filing Form 5472 and Pro-Forma Form 1120.
3. Who This Guide Applies To
This guide is written specifically for founders who meet all or most of the following conditions:
- You are not a US citizen or green card holder
- You own a single-member US LLC
- The LLC is treated as a disregarded entity for US tax purposes
- You live and work outside the United States
- You earn income through activities such as:
- Software or IT services
- SaaS products
- Consulting or professional services
- Drop-shipping or e-commerce
- Online or digital-first businesses
If this describes your situation, the analysis below directly applies to you.
4. Why "US-Sourced Income" Matters
The IRS does not tax foreign individuals simply because they own a US company.
Instead, US tax liability depends on two independent questions:
- Is the income US-sourced?
- Is the income connected to a US trade or business?
If the answer to both questions is no, then:
- The income is not taxable in the United States
- Certain information filings may still be required
Understanding income sourcing is the first and most important step in this analysis.
5. How the IRS Determines Income Source
The IRS does not focus on:
- Where your LLC is registered
- Where your bank account is located
- Where your customers live
Instead, the IRS focuses on where value is created.
Different types of income are sourced differently:
| Type of Income | IRS Focus |
|---|---|
| Services | Where the work is physically performed |
| Digital services | Where the people performing the work are located |
| Products | Where the product is manufactured |
| Software / SaaS | Where development, management, and operations occur |
For most foreign founders, services and software are the key categories.
6. What Is US-Sourced Income (Generally Taxable)
Income is generally considered US-sourced if one or more of the following conditions apply:
1. Services Performed in the United States
If you or your team physically perform services while located in the US, the income attributable to that work is US-sourced.
Typically taxable in the United States.
2. US-Based Employees or Contractors Creating Core Value
If essential business activities — development, operations, or delivery — are performed by US-based personnel, the resulting income may be treated as US-sourced.
3. US Office or Fixed Place of Business
Maintaining a permanent operational presence in the United States is a strong indicator of US sourcing and US trade or business.
4. Certain Passive US Income
Some passive income is automatically classified as US-sourced, such as:
- US bank interest
- US dividends
- US rental income
Important: Small amounts of incidental US bank interest are common and often do not change the overall tax outcome for operating businesses.
7. What Is Not US-Sourced Income (Usually Not Taxable)
1. Services Performed Entirely Outside the US
- You live outside the United States
- You perform the work outside the United States
- Your team is located outside the United States
The income is generally foreign-sourced, even if:
- Your clients are US-based
- Payments come from US companies
- Revenue flows through a US LLC
2. SaaS or Software Operated from Abroad
- Software development occurs outside the US
- Operations and management occur outside the US
- Servers are outside the US or globally distributed
- There is no US-based team or office
The income is typically foreign-sourced.
3. Online Businesses with No US Operational Presence
Examples include:
- Digital agencies
- Freelancing businesses
- Marketing or consulting services
- E-commerce with foreign fulfillment
These activities are not US-sourced by default.
8. Is the Income Connected to a US Trade or Business?
Income source determines where income is earned. A US trade or business determines whether the IRS has authority to tax it.
These are separate legal tests and must be evaluated independently.
This distinction is where many foreign founders struggle.
Core Principle: Dependence vs. Independence
The IRS evaluates whether US-based activity is effectively your business activity.
- If a US-based agent or business works exclusively or primarily for you, follows your instructions closely, and depends economically on your business, the income may be connected to a US trade or business.
- If the US-based agent or platform operates independently, serves many clients, and provides standardized services, it generally does not create a US trade or business for you.
Independent Agents (Usually Not a US Trade or Business)
An independent agent:
- Serves multiple unrelated clients
- Operates under its own processes
- Is not economically dependent on your LLC
- Continues to exist regardless of your business
Using Amazon FBA to store, ship, and handle returns for your products. Amazon is an independent business serving millions of sellers.
This alone does not connect your income to a US trade or business.
Dependent Agents (May Create a US Trade or Business)
A dependent agent:
- Works only or primarily for you
- Performs core operational functions
- Acts under your direct control
- Would not operate independently
Hiring a US-based individual or company that works exclusively for your LLC and manages inventory, fulfillment, or operations under your direction.
Income may be effectively connected to a US trade or business.
Practical Rule of Thumb
Ask the following:
- Would this US-based person or business exist without me?
- Do they serve many clients, or only me?
- Do they set their own processes, or follow mine step-by-step?
If they are independent → usually no US trade or business.
If they are dependent → US trade or business risk exists.
Why This Matters
Foreign founders often owe $0 US income tax not because they avoid the US, but because their activities do not rise to the level of a US trade or business under IRS standards.
Understanding this distinction allows you to structure operations correctly, remain compliant, and avoid unnecessary tax exposure or fear.
Disclaimer
This article is provided for informational and educational purposes only and should not be considered tax, legal, or professional advice. Every taxpayer's situation is different. You should consult a qualified tax professional or advisor to obtain advice specific to your circumstances before making any tax or filing decisions.