Monday, February 24, 2014

How do I setup a new business in the most tax efficient way when moving from the UK to the US?

Over at Quora we came across the following discussion:  Hi there; I have recently moved form the UK to the US. In the UK, I ran a successful business, setup as a limited company that generated a reasonable income for myself and my wife. Because of the way the business was setup, we paid corporation tax on profits and then took out dividends on those profits, minimizing our personal tax and national insurance/social security liability.

What I need to know, is what is the best solution to do this in the US? I believe that I have a few options, but please so correct me if I am wrong:

1. Setup a new LLC or C Corp business - I Believe though that since LLC income just flows through to my personal tax return that we don't take out dividends and will have full exposure to social security and tax? 

2. Can I keep my UK business and continue to work for that business in the US? If I do that, what are the implications on the earnings that I make here in terms of reporting them etc?

Essentially, I want to work and earn money in the US whilst reducing my tax and social security liability as much as possible.

Any advice very gratefully received!

Wray RivesCPA CGMA  responds

Your situation is somewhat complicated and you really need to speak with a tax professional about the specifics of your taxes, but I can give you some general considerations for minimizing your US taxation.

Assuming you qualify as a resident alien (either by having a green card or by passing the substantial presence test) or are obtaining your US citizenship, you might want to consider setting up an LLC and electing to have that LLC taxed as an S Corporation.  Under US tax laws dividends paid from a C Corporation are effectively double taxed, because the C Corp pays corporate taxes on the earnings that fund the dividends and then you the individual pay tax on the dividend income.

An S corp would allow you to only pay employment taxes on the wages you are paid from the S Corp and any other distributions would still be subject to income tax, but would not be subject to employment taxes. Those earnings would also only be subject to one level of taxation as all profits of an S Corp pass through to the individual shareholders for tax purposes. NOTE that there could be state level taxes to be considered with an S Corp.

As I said before, though, I highly recommend you have a discussion with a US tax professional to be sure an S corp works for your unique situation.

You can keep your UK registered business, but depending on how the business is established, your UK business would likely be categorized as a C Corp and thus you would have to deal with the double taxation of dividends issue.  Just because the business is registered in the UK, if you are actually operating it from the US, then you will still be subject to US tax on the profits.