The rapid advancements in technology have created a new breed of digital nomad entrepreneurs who can run successful businesses from any corner of the globe.
Armed with just a laptop and wifi connection, you can organize a new enterprise remotely. Lately more people than ever decided to move abroad and the United Kingdom is one of the more popular choices as it is an English speaking country and offers plenty of lifestyle choices from international hubs like London to remote villages such as Llanrwst in Wales.
But, before you get started, conduct the necessary research into the laws applicable to US expats running a company from an offshore location like the United Kingdom, particularly taxation regulations. Non-compliance can incur hefty fines levied by the US and UK administrations.
1. Your Business Will be Taxed as a Controlled Foreign Corporation (CFC)
US expats owning a company can expect that the IRS will tax their business as a Controlled Foreign Corporation. You’ll complete and submit the U.S. Tax Form 5471 and declare all income earned. It is critical to note that you’ll file returns even if your income is below the taxable bracket. Entrepreneurs who have started a business in partnership with any entities subject to US taxation laws must also prepare financial statements per IRS regulations. These statements will form the basis for determining the taxes you’re obligated to pay. It is advised to consult an expat tax CPA that focuses on U.S. expatriates.
2. Work Out the Initial Steps for Incorporation
At the time of incorporating the company, you’ll work out several details, such as the type of company you’re setting up. For example, you may wish to establish a sole proprietorship, partnership, LLC, or C-Corporation. Next, you’ll determine the state where the business will be registered and where it will conduct operations. These decisions will ultimately influence the mandatory licenses and permits you’ll need to start the company. Finally, you must organize a workshop or manufacturing facilities and the staff members to run the day-to-day operations. The decisions you make at this stage will determine the income and expenses that you’ll declare in the tax return each year.
3. You’ll Maintain a UK Bank Account.
One of the essentials of running a business out of the UK is to have a company bank account. Your accountant will likely advise you to open an account with a US bank having branches in the UK. As a result, you can seamlessly transfer funds between locations without the risk of incurring excessive fees. However, the IRS requires you to declare all the assets you own in offshore accounts per the Foreign Bank Account Report (FBAR) that you’ll submit by completing the FinCen-116. You’ll include information about any additional income you earned, such as dividends, capital gains, and profits from selling real estate.
4. Maintaining a Physical Address for Your Business in the US
Many startup owners register their company in the US before moving abroad. Depending on your state’s laws, you might have to maintain a legitimate physical presence of the company. If you don’t have a valid address, you can assign a registered agent to accept and manage any legal documents for your company. For that to happen, you must officially designate the person as your agent with a remote online notary. You also have the option to draw up a power of attorney that specifies the functions your agent can perform for you.
5. Taking Advantage of Exclusions
The IRS has instituted several exclusions or tax breaks for US expats so they can lower some of their tax burdens. Some great examples include the Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Tax Credit. However, these rules can be far more complicated for a US expat running a sole proprietorship out of the US while living in the UK. It is advisable to contact an expert tax consultant for information about the exclusions you can use.
Taxation laws for US expats running a company back home from an offshore location can be complex and hard to understand. It is advisable to hire a professional consultant who can guide you in the right direction.
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