Both the Limited Liability Company in the United States and a Limited in the United Kingdom are corporate setups which are populars amongst nomads. In this article, we’ll make the comparison: US LLC vs UK Ltd.
In Short: What is the Difference between US LLC and UK Ltd?
First of all, both companies are obviously set up in a different country: the LLC in the US and the Ltd in the UK. This means that the rules of their respective country apply to them.
Accordingly, the steps to incorporate these companies will differ as they need to follow the local regulation.
Apart from the corporate law and procedures, there is one other big difference. They are each subject to the tax rules of their respective country. And the tax rules in the United States are different than those in the United Kingdom.
We will discuss this more in detail later on but the major difference in this respect is that the UK Ltd is subject to corporate tax while the US LLC isn’t.
Full Comparison between US LLC and UK LTD
In this section, we’ll make a full comparison of US LLC vs UK LTD.
Incorporation Process Comparison
First, we’ll have a look in how the incorporation process looks like.
Formation of US LLC
The formations of a US LLC is done in a few steps:
- Choose a state where you want to incorporate
- Check if the name you want to use for the LLC is still available
- Find a registered agent in your state of choice as they will provide the physical US address for your business
- File the articles of organization and pay the formation fee
- Draft an operating agreement for your US LLC
- Request an Employer Identification Number (EIN)
- File your Beneficial Owner Information (BOI)
- Open a bank account with your EIN
Incorporation of UK LTD
Just as for the US LLC, you’ll need to take a few steps to incorporate a Limited in the UK:
- Decide on a unique company name
- Find a registered address in the UK for your Limited company
- Prepare the Memorandum and Articles of Association
- Decide on who will be appointed as a director
- Submit your formation request with Companies House
- Receive your Certificate of Incorporation
- Open a bank account
- Do the necessary tax registrations with HMRC (e.g. corporate tax & VAT)
Yearly Compliance Overview
After the incorporation, you also need to account for the recurring compliance.
Annual Compliance US LLC
For the US LLC you need to file Form 1120 and Form 5472 each year by mid April for the previous tax year.
In these forms, you need to include some basic numbers regarding the LLC. Furthermore, you’ll have to include details regarding the owner of the LLC (e.g. tax residency). However, you don’t have to file any financial statements.
Yearly Administration UK LTD
Things are a bit different for a UK LTD.
The UK LTD will need to keep proper financial statements and will have to file these with Companies House.
At the same time, you’ll also have to file an Annual Confirmation Statement confirming that the public information about the company is up-to-date and correct.
In addition, you will have to log a corporate tax return with HMRC in order to assess your corporate tax liability.
Taxation: US LLC vs UK LTD
An important part is the taxes that apply to each of those entities. We’ll give a brief outline here and we’ll discuss some specific situations in the FAQ later in the article.
US LLC Taxation
By default, the US sees the US LLC as a passthrough entity. This means that the company is not liable to corporate income tax in the US. Therefore, you need to assess any tax liability on the level of the owner of the LLC.
If you are a non-resident of the US, this basically means that you shouldn’t be liable to taxes in the US. If you want to know the details, I suggest reading my article on US LLC for digital nomads.
Taxation of a UK LTD
The United Kingdom does see a UK LTD as a company for tax purposes. Accordingly, the Limited needs to pay corporate income tax on its global income after expenses. The rates vary from 19% to 25%.
Cost Comparison
How much does it cost to incorporate and run a US LLC vs UK LTD?
US LLC Costs
The cost to set up a US LLC can differ widely depending on the service provider you use to assist you with this. I offer to set up your LLC for a mere EUR 800.
In addition to the setup cost, you need to account for the annual cost which amount to EUR 700-800. These costs include filing the necessary forms, your registered agent and yearly state fees.
Costs involved with UK LTD
The costs to incorporate a UK LTD are slightly higher at around EUR 1.000 while the annual fees normally range from EUR 750-850.
Is it Better to Start a Business in the UK or the US?
Whether it’s better to start a business in the United Kingdom or in the United States depends on your situation. There is no one size fits all.
That’s also why we discuss both of these corporate setups so you can get an idea what would work better for you.
In any case, you would mainly want to pay attention to your country of personal tax residence. The rules of this country will also determine which structure can work best for you as many countries have rules about owning a company in a foreign jurisdiction.
FAQ
Hereafter we’ll discuss some of the frequently asked questions regarding the US LLC and the UK LTD.
How is a US LLC Taxed in the UK
The US LLC will be taxed in the UK according to the UK tax rules.
Therefore, tax treatment will differ from the tax treatment of the US LLC in the United States which we discussed before.
There can be two reasons why a US LLC or it’s owners are liable to taxes in the UK.
The first one is when the US LLC is in practice managed from the United Kingdom or when it has a permanent establishment there.
In this case, the UK has the right to tax (part of) the income of the US LLC. Her Majesty’s Revenue and Customs – the tax authorities in the UK – will subject the US LLC to UK corporate tax at a rate from 19% to 25%.
Another reason why taxes could be due in the UK on the income of the US LLC is when the owner is a tax resident in the UK.
Distributions from the US LLC to its owner will be seen as a dividend. In this case, you’ll have to declare the dividend in your personal tax return and the tax rate will depend on your total income.
What is the UK Equivalent of an LLC?
The UK equivalent of an LLC depends on the angle you focus on.
This might sound confusing but I’ll explain it in more detail.
The reason is that we can make a comparison on both levels: liability and taxation.
From a liability point of view, a US LLC can be compared to a UK LTD or to a UK Limited Liability Partnership. For all those entities, the liability of its owners is normally limited to the assets of the entity.
There is one difference between the US LLC and UK LTD on the one hand and the UK LLP on the other hand though. You can incorporate the first group as a single owner without the need to include another person in the business. This is different for the LLP which is a partnership whereby you need at least two partners.
From a tax point of view the LLC is most comparable to the LLP. The reason for this is that both entities are so-called passthrough entities whereby the underlying owners need to include the income in their tax return according to their respective legislation.
What is the US Equivalent of a UK Limited Company?
The US equivalent of a UK Limited Company would probably be a C Corporation.
Both company forms offer limited liability protection. Any creditors of the business can only come after the assets of the company and not after your personal assets.
You can also compare both from a tax perspective. A UK LTD will pay corporate tax in the UK while a C Corporation will pay corporate tax in the US.
What are the Tax Advantages of an LLC in the UK?
The tax advantages of an LLC in the UK depend on the exact setup we are talking about.
If set up properly, a US LLC itself will not be liable to any taxes in the UK. However, the owner of the LLC might be a tax resident in the UK and this can trigger taxes in the UK.
In that case, the benefit of working with a US LLC can be multifold.
First of all, the UK sees distributions from the US LLC as a dividend. This means that these payments are subject to the tax rates for dividends which are in general lower than the income tax rates for professional income.
Second, you will only need to pay taxes on the distributions when you decide to make an actual distribution. If you leave the money in the LLC, no dividend tax will be due in the UK.
Third, there are some ways to optimize your expenses through the LLC while only paying taxes on the net distribution.
Nevertheless, the aforementioned comes with some attention points and possible risks.
Therefore, you shouldn’t start operating a US LLC as a UK tax resident without getting tailored professional advice.
How is a UK Limited Company Treated for US Tax Purposes?
How a UK Limited company is treated for US tax purposes depends on a few elements and the exact setup we are talking about.
The UK Limited itself will not be subject to taxes in the United States if it doesn’t engage in trade or business there. There is one more situation whereby US taxes could be due. Mainly if the UK LTD receives passive income from a US source (e.g. royalties).
Yet, as a US private individual you could be shareholder of a UK Limited company. In this case, you might have to report your participation in your US tax return. Furthermore, you’ll also have to pay taxes if you receive a dividend from the company.
How is a Foreign Owned LLC Taxed in the US?
A foreign owned LLC can be exempted from taxes in the US.
The reason for this is that a US LLC is by default seen as a passthrough entity. This means that there is no tax due at the level of the LLC itself but only by the owner.
However, this only applies if the US LLC doesn’t do business in the US. This means selling goods or providing services in the US.
Furthermore, you have the option to subject your US LLC to corporate taxes in the US. In this case, it isn’t a passthrough entity anymore and taxes will be due on the company’s profit.
Whether or not the LLC is subject to actual taxes in the US, you still need to meet certain annual filing requirements to make sure your business is compliant.
What is the USA LLC Income Tax Rate?
The US LLC income tax rate is 21%. This is the federal corporate tax rate for LLCs which don’t qualify as a passthrough entity.
Nevertheless, the qualification as a passthrough entity is the default option. If your LLC does qualify as such, normally not taxes will be due in the US.
Can a UK Company Do Business in the US?
A UK Company can do business in the US. However, there might be tax consequences linked to this.
If your UK company starts selling goods or providing services within the US, this will most likely create tax liabilities in the US.
Therefore, one needs to approach this with the necessary caution and should consult with a professional upfront.
Are US LLCs Problematic for UK Tax Purposes?
US LLCs can be problematic for UK tax purposes because they are treated different for tax purposes in both countries.
In the US on the one hand, an LLC will mostly be seen as a passthrough entity. Due to this, there’s only taxes due when you sell goods or provide services in the US or when the LLC receives passive income.
In the UK on the other hand, the US LLC is seen as a company for tax purposes. This means that payments made from a US LLC to its UK shareholder are seen as dividend distributions according to UK tax rules.
This difference in qualifications can sometimes lead to higher taxes. However, in the right setup, you can also use this to your advantage as part of your tax planning.
Can I Run a UK Ltd Company from Abroad?
You can run a UK Ltd company from abroad. Your UK LTD will need an address in the UK though.
Furthermore, there is an attention point from a tax point of view. If you run your Limited from abroad, this could create a permanent establishment in a foreign company.
Consequently, you could also become liable to taxes in another country than the UK.
Work With Me
Reach out if you want to see which structure would suit you best in the debate US LLC vs UK Ltd.
Maybe there are even better options available for you. We can discuss these during a meeting tailored to your specific situation and needs.
I have worked with hundreds of nomads over the years in order to sort out their ideal tax setup and I can do the same for you.
