Pros and cons of having a US LLC vs. GmbH for tax purposes

38 posts in this topic

I searched for LLC on this forum, and didn't find something fitting my situation, hence my post.

 

I'm an American engineer living in Germany and intend to stay here for several years. I'm going to start a tech consulting business, expecting most, if not all, customers to be in the US. 

I'm aware I could do this work as a Freiberufler, but my customers will only qualify me as a vendor if I'm an LLC or Corporation. I also like the liability protection an LLC/GmbH will

provide. I'm aware I need liability insurance regardless Anyway, I'm trying to figure out the best path for me to move forward, taking everything into account. (I will be the

only owner. I have work permission in Germany. I have gesetztliche Krankenversicherung already.)

 

If I start a GmbH in Germany, my understanding is that it costs several hundred euros, but isn't too difficult, using a service for this purpose. My problem with this option is that I will have to

file taxes as the corporation (separate from my regular income taxes), and keep real accounting records, which sounds like a big pain. I'm aware there is the mini-GmbH (UG) option as

well, but startup capital is not my problem. Not sure how the US would handle the taxes for this situation. I guess they would take whatever income the GmbH pays me as income, just like usual.

 

By contrast, starting an LLC in the US seems much easier. On my US taxes, I can just add a schedule, and declare the income on my personal tax return. Since I live in Germany, I can setup the LLC in the lowest cost US state (probably Wyoming). I've read various conflicting articles online about how Germany will consider this LLC income. I think that because I'm the only owner of the LLC (disregarded entity in the US), it would be considered a partnership in Germany, but I'm not sure. Obviously I need to pay German taxes on the income, but I of course want to be able to use the foreign tax exclusion on my US taxes, so I'm not double taxed. I will pay self employment tax in the US, and not pay Rentenversicherung in Germany (assume I can still elect this option as an engineer?). I would then open a US company bank account for the LLC, making it easy for customers to pay me in dollars via check/transfer.

 

I'm looking for any and all advice on this topic. For example, is there any reason I'm not allowed to setup a US LLC and work exclusively for it, as a resident of Germany? Can anyone reading this reply with advice for and against the LLC vs GmbH? Things I haven't mentioned that would kill one of these options for example...

 

Thank you very much for reading!!

 

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Hi Stephen- I wouldn't rely on free anonymous advice to address all of those issues. Since you're resident here, I'd suggest talking to a German tax accountant who's worked with clients who are liable for US taxes and if you cannot get all of your concerns addressed with that person to find a US CPA to fill in the remaining blanks.

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Thanks. Just trying to educate myself as much as possible. I may very well pay someone once I know as much as I can. Didn't want to pay someone 200E/hour to be able to answer some items and not others, and walk out without a real answer. 

 

Any part of what I posted that you can comment on, even though it's anonymous... thanks.

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That hasn't been my experience with my Steuerberater (I've never been charged for answering questions), and it may not be possible to find someone who is taking new clients, plus is both a German Steuerberater and US CPA, although you'll be able to find someone familiar with the US-Germany double taxation agreement. It's true that the more you know the better, but you need someone who sees the big picture, and it's not a good idea to go cheap on crucial advice like this that could end up saving you time and money in the long run.

 

One other thing- the deadline for filing taxes in Germany when you use a Steuerberater is currently Dec. 31st of the following year, which means they're about to get very busy.

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If you mean the rate, this is the typical rate I've heard from 3 different ones I've contacted who have Germany/US experience.

 

Would still love to hear from anyone who can comment on my situation. Thank you!

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If they have the requisite experience to fully address all of your queries, it's worth it (it's also deductible as a business expense).

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I have no problem paying 200E. I'm however worried this will drag out and cost much more. Anyway, let's see if anyone replies with some info that gets me further down the road to an answer, and then I'll go into the Steuerberater feeling fully informed. Thank you.

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Well, for my personal accounts in Germany, I declare them to the US Treasury via FBAR. If I start an LLC, and have an account in the US, no issue I assume. If I start a GmbH, and have a German bank account, I would need to tell the US about the account via FBAR, like any other account I assume (if total assets are high enough, which they are). If you are referring to something else, please enlighten me... thanks.

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This is the kind of thing I mean by "seeing the big picture". Just Google for the FINCENT (aka FBAR) requirements to see if there is some aspect there for the GmbH v.s. US LLC debate that might affect your decision (I can't tell you off the top of my head if there is).

 

Here's a Disclaimer (which also applies to any and all Posts):

 

Nothing in this or any other post should be construed as legal, financial, tax, or accounting advice. Please consult licensed experts in the appropriate jurisdictions for said advice.

 

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I have googled like crazy for the past several days, just to get to the point I am now. There can't be a FINCEN issue with having a US LLC and a US bank account. And if I have a German business bank account, and have to tell the US about it, that's fine with me, given I will need to report my income to the US from the company anyway. The reality is that I am leaning towards the LLC route, since my customers are there, I'm American, and it seems easier... in that case FINCEN should not matter. Just seeing if anyone on this site has any opinion on why the LLC path is a bad idea for me. Hopefully someone will comment. I understand you think I should go to a tax advisor now, rather than post here, but please let me see if someone will comment. Thank you.

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3 hours ago, StephenGermany said:

I searched for LLC on this forum, and didn't find something fitting my situation, hence my post.

 

I'm an American engineer living in Germany and intend to stay here for several years. I'm going to start a tech consulting business, expecting most, if not all, customers to be in the US. 

I'm aware I could do this work as a Freiberufler, but my customers will only qualify me as a vendor if I'm an LLC or Corporation. I also like the liability protection an LLC/GmbH will

provide. I'm aware I need liability insurance regardless Anyway, I'm trying to figure out the best path for me to move forward, taking everything into account. (I will be the

only owner. I have work permission in Germany. I have gesetztliche Krankenversicherung already.)

 

If I start a GmbH in Germany, my understanding is that it costs several hundred euros, but isn't too difficult, using a service for this purpose. My problem with this option is that I will have to

file taxes as the corporation (separate from my regular income taxes), and keep real accounting records, which sounds like a big pain. I'm aware there is the mini-GmbH (UG) option as

well, but startup capital is not my problem. Not sure how the US would handle the taxes for this situation. I guess they would take whatever income the GmbH pays me as income, just like usual.

 

By contrast, starting an LLC in the US seems much easier. On my US taxes, I can just add a schedule, and declare the income on my personal tax return. Since I live in Germany, I can setup the LLC in the lowest cost US state (probably Wyoming). I've read various conflicting articles online about how Germany will consider this LLC income. I think that because I'm the only owner of the LLC (disregarded entity in the US), it would be considered a partnership in Germany, but I'm not sure. Obviously I need to pay German taxes on the income, but I of course want to be able to use the foreign tax exclusion on my US taxes, so I'm not double taxed. I will pay self employment tax in the US, and not pay Rentenversicherung in Germany (assume I can still elect this option as an engineer?). I would then open a US company bank account for the LLC, making it easy for customers to pay me in dollars via check/transfer.

 

I'm looking for any and all advice on this topic. For example, is there any reason I'm not allowed to setup a US LLC and work exclusively for it, as a resident of Germany? Can anyone reading this reply with advice for and against the LLC vs GmbH? Things I haven't mentioned that would kill one of these options for example...

 

Thank you very much for reading!!

 

 

A GmbH, even the mini-version, would be a separate entity, subject to the German taxation law. Yes, you'll have to do its taxes separately. But: I don't see any reason why it's income would be taxed in the United States. So this arrangement would seem to be obviously preferable to any pass-through to personal income, which is double-taxed.

 

// I am not a lawyer, nor a tax advisor. This is not an advice.

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Also you don't need "real accounting records" for a GmbH until you reach some yearly revenue threshold.

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> For example, is there any reason I'm not allowed to setup a US LLC and work exclusively for it, as a resident of Germany?

I don't think there is one. People from over the world set up LLCs all the time. 

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>  I have work permission in Germany.

What kind of work permission?

> I have gesetztliche Krankenversicherung already.)

You'll have to pay for it in any case, by the way. And I'm not sure that US foreign income taxation credit includes it.

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31 minutes ago, ilyann said:

Also you don't need "real accounting records" for a GmbH until you reach some yearly revenue threshold.

 

Think again.

A GmbH (an UG as well, since that's just a fledgling GmbH that automatically turns into a GmbH as soon as you have forcibly accumulated the 25,000€ capital necessary for the GmbH through your yearly profits) has to do full double-entry bookkeeping (= doppelte Buchführung) and balance sheets (Bilanz = Betriebsvermögensvergleich), whatever its income since it's a Formkaufmann according to §13 Absatz 3 GmbG in combination with §6 Absatz 1 HGB and §238 Abs. 1 HGB (the income limit exception in §241a HGB only applies to single traders, i.e. Einzelkaufleute), see here: http://www.rechnungswesen-info.de/buchfuehrungspflicht.html

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ilyann, thank you for posting. I'm married to a German with German kids... I'm on my first three year Aufenthalts und Arbeitserlaubnis... will be unbefristet in another couple years.

 

PandaMunich, was hoping you would post. =)    Thanks for providing such useful information all over this forum. Would you mind commenting on my overall topic?

See any issues with working as an LLC in the US? All that income would show up on my normal personal income taxes in the US. Hoping that the US LLC will

map to personal income here in Germany.

 

This article seems to say that if my LLC is a disregarded entity (one guy), Germany would consider the LLC income as my income... much like in the US.

 

http://www.lexology.com/library/detail.aspx?g=b23826d7-38fb-4c48-a5ac-37faf055a5d6

 

But like this forum, that's just another thing I read on the Internet. =)

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If I were you, I would seriously reconsider and just become a normal Freiberufler...

 

A LLC is a hybrid between a Personengesellschaft and a Kapitalgesellschaft, and depending on how it's set up, it can be classified as either.

How a LLC is classified tax-wise in Germany depends on certain criteria sent down in a letter by the German Ministry of Finance, BMF v. 19.03.2004 - IV B 4 - S 1301 USA - 22/04BStBl 2004 I 411, which is summed up in this (rather old) article: http://www.meyer-koering.de/de/meldungen/internationales-steuerrecht-steuerliche-behandlung-von-gewinnbezuegen-aus-einer-us-amerikanischen-limited-liability-company-llc-19-11-2008.981/BMF v. 19.03.2004 - IV B 4 - S 1301 USA - 22/04BStBl 2004 I 411BMF v. 19.03.2004 - IV B 4 - S 1301 USA - 22/04BStBl 2004 I 411BMF v. 19.03.2004 - IV B 4

 

Some possible traps: http://www.roedl.de/themen/auslandsbrief/2013-10/usa-llc-limited-liability-company-steuern

and see here: http://blog.handelsblatt.com/steuerboard/2010/08/04/die-ein-personen-llc/

 

Paging @Straightpoop for more in-depth further information.

  

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16 hours ago, PandaMunich said:

 

Think again.

A GmbH (an UG as well, since that's just a fledgling GmbH that automatically turns into a GmbH as soon as you have forcibly accumulated the 25,000€ capital necessary for the GmbH through your yearly profits) has to do full double-entry bookkeeping (= doppelte Buchführung) and balance sheets (Bilanz = Betriebsvermögensvergleich), whatever its income since it's a Formkaufmann according to §13 Absatz 3 GmbG in combination with §6 Absatz 1 HGB and §238 Abs. 1 HGB (the income limit exception in §241a HGB only applies to single traders, i.e. Einzelkaufleute), see here: http://www.rechnungswesen-info.de/buchfuehrungspflicht.html

 

That is a good point, but again, you need to accumulate €100 000 of profits (25% forced saving) for that to kick in :)

 

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My point was that an UG is subject to the same strict rules as a GmbH, since it is in fact a GmbH-in-waiting --> obligatory double-entry accounting and having to do balance sheets, i.e. there is no effort saved if you open an UG instead of a GmbH.

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