If you’re an American living abroad and working for yourself, picking the right business structure can make a big difference. It can save you on taxes, and also affects your banking, compliance, legal liability, and how easily you can get paid. Digital nomads often assume that a US LLC is the best structure because it’s familiar, however things are different when you’re living overseas.

Your business structure needs to be a good fit for your lifestyle, your income level, and your long-term plans. The wrong structure can mean higher taxes, banking headaches, or compliance issues with the IRS or with foreign governments, while the right one can save you thousands and make your life a whole lot easier.

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Here’s an overview of some of the most common options along with their pros and cons.

Single-Member US LLC

This is a popular setup for solo freelancers and one-person business digital entrepreneurs in the USA. You can form an LLC in a low-tax state like Wyoming. You’re the only owner. The IRS ignores the entity for tax purposes and taxes everything as if you earned it personally, on schedule C.

The biggest benefit is simplicity. You get legal liability protection, easy online formation, and almost no maintenance. You can open a US business bank account, use Stripe or PayPal to collect payments, and keep your business finances separate from your personal ones.

But if you live outside the US, things get more complicated depending on how the country you are living with sees the LLC. While living abroad as an American, you would qualify for the foreign earned income exclusion, however under this LLC structure you would still owe self employment taxes of 15.3%. You may also have complex local filing or tax obligations where you live, even if your LLC doesn’t operate there.

Multi-Member US LLC (Partnership)

If you’re teaming up with a partner, a multi-member US LLC offers flexibility and liability protection. The IRS treats it as a partnership by default. That means it files an information return, and each member reports their share of the income on their personal return.

This can be a good option if all partners are US citizens. You get a pass-through structure without corporation taxes, and you can split profits in almost any way you want. You also keep the LLC’s clean, familiar image for US banking and billing clients.

The downsides? More complexity. The partnership has to file a full tax return (Form 1065), and each partner gets a Schedule K-1. If your partner lives in the US and you don’t, you may have conflicting tax obligations (such as being responsible for CA state tax if you have a partner living in California). Also, you’re still stuck with US self-employment tax at over 15% on net income.

S-Corp via LLC Electing S-Corp Status

This option is popular among US-based freelancers with higher income who want to lower their self-employment tax. You form an LLC and elect S-Corp tax status with the IRS. You then pay yourself a reasonable salary and take the rest as distributions, saving you the 15.3% self-employment tax on the distributions.

It’s a great setup and starts to save you money if you make over $50,000 a year in net income (depending on the salary you justify). While it saves a lot of money to justify the additional costs, S-Corps do require a separate tax return (1120S) and there is strict payroll compliance, so you need to run a US payroll (we set up and recommend Gusto), withhold Social Security and Medicare, and issue W-2s, even if you live abroad. For expats, it’s trickier depending on how laws classify S Corps and the local taxation of payroll. Some foreign tax authorities don’t recognize S-Corps as separate from their owners, which can mitigate the benefits or trigger double tax. You also can’t have non-resident aliens (so non-US taxpayers who live abroad) as shareholders in an S-Corp, which rules it out for international partnerships.

Foreign Corporation

Setting up a foreign company can be smart for US expats who live permanently overseas and qualify for the Foreign Earned Income Exclusion expat tax break. You form a foreign company in a no tax or low tax jurisdiction and pay yourself a salary. If you do it right, your salary can be excluded from US tax under the FEIE, up to $126,500 (for 2024, $130,000 for 2025) per year. The key question is which jurisdiction to form the company in. The answer is that it depends on where you are living and doing business. The possibilities are many and it really does depend on each individual situation but here are few jurisdictions we generally work with are British Virgin Islands (overall great and cost effective no tax jurisdiction), Cayman (great if seeking outside investment particularly institution investment), Hong Kong (great if doing business with China like buying goods for e-commerce), Estonia/Malta/Cyprus (great for Europeans and those living in Europe), Dubai (great if you want to be a tax resident in Dubai as well).

This structure also avoids US self-employment tax as salary from a foreign company is not taxable for social security. The corporate tax can be as low as 10.5% if the company has majority US ownership (known as CFC or Controlled Foreign Corporation) or potentially 0% if not a CFC. However, on the US side, owning a foreign corporation triggers Form 5471 reporting, which is one of the most complex IRS forms. You may also face GILTI tax (yes, that’s a real acronym!) on the net profit.

Foreign Company Owned by a US C-Corp

This hybrid approach can help reduce overall taxes, depending on your income levels and business type. You create a foreign company in a variety of jurisdictions (as described above) and that company does the work and receives the revenue. But instead of owning it personally, you form a US C-Corp to own 100% of the shares.

You, as the expat, become an employee of the foreign entity and draw a salary which is subject to the FEIE and no social security taxes. The income from the foreign entity can be sent up to the US C Corp with no tax implications, which may make it easier to invest in US real estate and other investments vs. a foreign corporation. Furthermore, if the shareholder wanted to take more money from the structure (above the $130k annual salary subject to FEIE) then can take it in the form of a qualified dividend, which is a much lower tax rate than if the dividend was taken directly from the foreign company.

It’s a more complex and expensive setup, and has ongoing compliance costs, but for higher earning expats and digital nomads, the benefits can outweigh the downsides. You’ll need a US expat tax specialist to help you set up and with compliance, but if you’re scaling up and looking for tax efficiency across borders, this structure is worthwhile.

Factors to Consider

The right structure depends on several factors that differ depending on each person’s circumstances. These include where you live and whether you plan to stay long term, as different countries have different rules relating to taxing local companies or foreign-earned income. Others may have tax treaties that work in your favor.

Another factor is your income level. For digital nomads making under around $130,000, the FEIE through a foreign company can provide huge benefits thanks to saving on US social security taxes, though you may still be liable to foreign taxes at rates that vary depending on the country where you live. For those earning above that threshold, layering a US company or using a hybrid model can make more sense.

If you’re working solo, keep things simple. A single-member LLC may be fine to start, but look into a foreign entity if you settle abroad. If you’re building a team, taking investment, or working with non-US partners, seek advice.

Don’t forget that the IRS has global reach and If you live overseas, you’ll need to deal with US personal reporting as well as FBAR, FATCA, and potentially Forms 5471 or 8865. Most CPAs don’t specialize in expat taxes, and even fewer know the ins and outs of digital nomad businesses, so choose a firm that specializes in these areas.

Lastly, consider how you want to get paid. US LLCs make it easy to use US payment providers and banks. Foreign companies can create headaches with US payment processors, but they may save you five figures in tax. There’s no one-size-fits-all answer.

Building a business as an expat or nomad gives you freedom, but choosing the right structure can make or break your lifestyle and enhance your business and your future.

At Online Taxman, we have 15 years experience helping Americans living and working abroad get their taxes compliant and optimized. Get in touch via this form to get 10% off our services.

Cover image credit: NASA / Unsplash