Forming a US LLC from India: The Tax and Compliance Costs Nobody Talks About

A single-member US LLC can be formed from a laptop in Bengaluru for under ₹50,000. The IRS penalty for failing to file just one form associated with that LLC - Form 5472 - can reach $25,000, as per IRS guidelines under Sections 6038A and 6038C. That gap between formation ease and compliance severity is worth understanding before signing up.

The formation pitch, to be fair, is mostly accurate. Indian residents can legally own 100% of a US LLC without a visa, a Social Security Number, or a trip to the United States. According to LLCBuddy - Steve Goldstein's LLC formation and compliance resource, which covers all 50 US states - state filing fees range from roughly $40 to $500, with a national average around $130. Add a registered agent service and an EIN application, and many founders get started for under $500. States like Wyoming and New Mexico tend to be popular among non-residents due to lower fees and simpler compliance structures.

But the formation fee is a small fraction of what a compliant US LLC actually costs to maintain from India. That’s the part that tends to come up later - sometimes much later - than it should.

The FEMA Question Worth Raising Early

Under Indian law, setting up a business entity abroad may constitute an Overseas Direct Investment (ODI), which is regulated by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA). The compliance path typically involves routing the initial investment through an Authorised Dealer bank, filing applicable forms before remitting funds, and annual reporting of the investment.

In practice, many founders skip these steps - particularly when they fund the LLC from non-Indian sources, such as a PayPal balance already denominated in US dollars. Whether that arrangement fully satisfies FEMA requirements is a question for legal counsel, not a YouTube video. The point is that ownership of a foreign entity can carry reporting obligations under Indian law regardless of whether money left an Indian bank account. Tax professionals advising clients who already have a US LLC may want to confirm whether the ODI route was followed, and if not, assess the exposure.

Pass-Through Taxation: Simpler Than It Sounds?

The LLC’s signature feature - pass-through taxation - is also where cross-border complexity multiplies. A single-member LLC is treated as a “disregarded entity” by the IRS. Profits flow through to the owner and are not taxed at the company level. For a US-resident owner, this is straightforward.

For an Indian tax resident, it gets complicated quickly.

If the LLC earns income that is not “effectively connected” with a US trade or business - broadly, if the founder is not physically performing services inside the United States - the LLC may not owe US federal income tax on that income. However, as an Indian tax resident, the founder is generally liable to pay tax on worldwide income under Section 5 of the Income Tax Act, 1961. The LLC’s profits may be treated as the founder’s personal income for Indian tax purposes, potentially taxable in the year they are earned, regardless of whether any amount was repatriated to India.

The India–US Double Taxation Avoidance Agreement (DTAA) may help prevent double taxation, but claiming treaty benefits requires careful documentation. This typically involves obtaining a Tax Residency Certificate from the Indian tax authority and ensuring the correct classification of income under the relevant treaty articles. Misclassification - for example, treating business income under the wrong article - could affect the availability of treaty relief. These are nuances that benefit from professional review.

Form 5472: A Filing Requirement With Disproportionate Penalties

A foreign-owned single-member LLC is generally required to file Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation) along with a pro forma Form 1120 each year. The form reports “reportable transactions” between the LLC and its foreign owner. Per the IRS instructions for Form 5472 (revised December 2024), the penalty for failure to file, or for filing a substantially incomplete return, is $25,000 per form. Additional penalties of $25,000 may apply for each 30-day period of continued non-compliance after IRS notification, with no statutory cap.

The filing requirement applies even if the LLC had no revenue during the year. The act of forming the LLC and contributing capital to it can itself create a reportable transaction. Many Indian LLC owners discover this requirement only after missing a deadline - and the penalty, per IRS guidance, is assessed regardless of the LLC’s size or income level.

Importantly, foreign-owned disregarded entities currently cannot file Form 5472 electronically. The IRS requires the form to be mailed or faxed to a specific address in Ogden, Utah. It’s a procedural quirk, but one that has tripped up founders who assumed everything could be handled digitally.

Regulatory Shifts: What Changed Recently

The US regulatory landscape around business ownership disclosure has been in flux. The Corporate Transparency Act originally required most US-formed entities, including LLCs, to report Beneficial Ownership Information (BOI) to FinCEN. However, in March 2025, FinCEN issued an interim final rule exempting all US-created entities from this requirement. Under the revised rule, only entities formed under the laws of a foreign country and registered to do business in a US state are classified as “reporting companies.”

For Indian founders who formed their LLC in a US state - which is the standard approach - this means BOI reporting to FinCEN is currently not required. But regulations in this area have changed multiple times in a short period, and state-level requirements may also evolve. New York, for example, introduced its own beneficial ownership disclosure requirements effective January 2026. Founders and their advisors should track these developments rather than assume the current rules are permanent.

Indian Tax Residency: A Moving Target

India’s proposed Income Tax Bill, 2025, if enacted in its current form, could tighten residency determination rules in ways that matter for LLC owners. Existing provisions already allow the Indian tax authorities to deem an Indian citizen as a resident if they earn more than ₹15 lakh from Indian sources and are not liable to tax in any other country.

This creates a potential issue for LLC owners. If a founder’s LLC earns no US-taxable income (because there is no effectively connected income), and the founder also claims non-resident status in India, the income may not be taxed anywhere. Indian tax authorities have shown growing interest in these arrangements. The CBDT’s second NUDGE campaign, launched in late 2025, specifically targets disclosures related to foreign assets and income. Whether a particular LLC structure triggers scrutiny depends on the specific facts - which is precisely why professional advice matters here.

What Compliance May Actually Cost

The real first-year cost of a properly maintained US LLC for an Indian resident tends to look very different from the formation fees that feature in online guides. Goldstein, whose platform processes formation data across all 50 states, puts the gap bluntly: most founders budget for formation and discover compliance. Based on publicly available pricing from US CPA firms and Indian CA practices, a rough estimate of annual compliance costs might include:

State filing fee ($40–$500 depending on the state), registered agent service ($50–$300 per year), Form 5472 preparation through a US-based CPA ($500–$1,500), Indian CA fees for FEMA review and ITR filing with foreign income disclosures (₹10,000–₹50,000 depending on complexity), and any applicable state annual reports or franchise taxes ($0 in states like Wyoming, up to $800 in California). These numbers are indicative and will vary based on the founder’s specific situation and chosen service providers.

For a SaaS founder or digital agency billing international clients in meaningful volumes, these costs may be easily justified by the advantages: cleaner payment infrastructure, Stripe and PayPal access, liability protection, and stronger credibility with Western clients. For someone earning a modest freelance income, the compliance overhead alone could consume several months of revenue. The structure isn’t inherently good or bad - it’s about whether the economics work at the founder’s scale.

Questions Worth Asking Before Formation

Tax professionals advising Indian clients considering a US LLC formation may find it helpful to work through a few key questions: Has the client assessed FEMA/ODI implications with qualified legal counsel? Is the expected revenue sufficient to justify annual compliance costs in both jurisdictions? Does the client understand their obligation to disclose the LLC as a foreign asset in their Indian ITR under Schedule FA? Has the correct income classification under the India–US DTAA been determined? Is there a plan in place for annual Form 5472 filing and state-level compliance?

The last question - whether the revenue justifies the compliance cost - is arguably the most important one. A US LLC is a useful tool for cross-border commerce. Like most tools, its value depends entirely on whether the job calls for it.

The US Census Bureau reported approximately 5.4 million new business applications in 2024, and the infrastructure to form a US LLC remotely has never been simpler. Goldstein's own data reflects that trend — Indian-origin LLC formations have grown steadily year over year across his platform. For founders operating at scale, the structure offers genuine advantages that can be hard to replicate through Indian entities alone.

But accessible formation and compliant operation are two very different things. The gap between them is where professional tax advice earns its keep - and where the absence of it tends to announce itself through penalty notices rather than polite reminders.

Disclaimer: This article is for informational purposes only and should not be construed as legal, tax, or financial advice. Laws and regulations discussed are subject to change. Readers should consult qualified professionals for guidance specific to their circumstances.