Startup Myth vs. Reality #1: “Having an LLC means no taxes”

One of the most common misconceptions among founders is the belief that forming a U.S. LLC means you don’t have to pay taxes.

The truth? It’s more nuanced. Let’s break it down.

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The Myth

“If I create an LLC in the U.S., I won’t pay any taxes.”

Many international founders hear this from forums or other entrepreneurs. It sounds appealing—but it’s not always correct.

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The Reality

An LLC is a “pass-through entity.”
That means the company itself doesn’t pay corporate income taxes. Instead, profits (and losses) “pass through” to the members (owners), who must report them on their personal tax returns.

But that doesn’t mean “no taxes.” It simply means taxes are reported differently depending on:

• Whether you are a U.S. resident or a foreign founder.
  
• Where the income is generated (U.S. source vs. foreign source).
  
• Whether the business has a U.S. trade or business (known as “ECI” – Effectively Connected Income).
  
  

For example:

• A foreign-owned LLC providing services from abroad may not owe U.S. income tax directly—but still has reporting obligations (e.g. IRS Form 5472).
  
• A U.S.-based founder running the business inside the U.S. must report LLC income on their personal tax return and pay accordingly.
  
  

The Risk of Believing the Myth

Founders who assume “LLC = no taxes” often:

• Miss IRS reporting deadlines.
  
• Fail to file mandatory forms (like 5472 or 1120).
  
• Lose credibility with investors during due diligence.
  
• Face penalties, even if no tax was due.
  
  

The Lesson for Founders

• LLCs are flexible, but tax obligations depend on your specific situation.
  
• “No corporate tax” ≠ “no taxes at all.”
  
• Always combine incorporation with proper tax guidance.
  
  

Reality check: An LLC can save you money and simplify compliance—but only if it’s set up and maintained correctly.
Turn your idea into a company with Grow—and stay compliant from day one.

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