Before creating a company in the United States, you will have to make some decisions to help define the future of your business. One of these decisions is to choose your company’s corporate structure, a C Corp vs. LLC. These are the two most common business types in the US and both of them can offer you varying benefits. Let’s see the LLC vs. Corporation pros and cons.
The goal of both entities is to separate the physical person from the legal person to protect individuals from personal liability. Each entity has different forms of management and tax compliance. Before deciding which is the best category for you to create a company in the United States as a foreign entrepreneur, you need to know the characteristics of a Corporation vs. LLC.
What is an LLC?
LLC stands for Limited Liability Company. This business model combines some advantages of corporate structure with elements of tax partnership. By creating an LLC in the United States, you can partially protect your natural person from potential financial issues or lawsuits against your legal entity.
What are the advantages of opening an LLC?
Flexibility in management
When comparing LLC vs. Corporation pros and cons, the first gives you flexibility in its management. In C Corporations, for example, there is a structure of directors who make most of the important decisions, while the rest of the employees are responsible for the day-to-day work. An LLC is more versatile in this aspect.
Avoid double taxation
One of the key factors when comparing a C Corp vs. LLC is IRS and taxes. With an LLC, you don’t have to worry about double taxation. The company will not collect income tax and must distribute 100% of the profits to the members, who, in turn, will pay their own individual income taxes.
In some US states where the individual does not pay state income tax (such as Florida), the value collected on the profits (shared at the end of the year) is lower. This makes LLCs even more appealing to domestic and foreign entrepreneurs.
Partial separation of liability
In some US states (such as Florida), you can create an LLC with only one natural individual, separating the liability of the company from this one member (owner). Also as in the case of C Corps, LLCs have no ownership restrictions. This is one key aspect when comparing LLC vs. Corporation pros and cons.
Can you create an LLC from abroad?
As in the case of a C Corporation, it is possible to open an LLC even if you are not a resident of the United States. For this, you only need a business address (it can be a virtual office or your accountant’s address).
Non-US residents have the opportunity to open up their American LLCs without the need for an American visa, social security number, or ITIN. You don’t even need to come to the United States to register your LLC, you can do it all from your home country, 100% online.
What are the disadvantages of an LLC?
Even though when comparing C Corp vs. LLC, the latter might be the most popular option, it still has some disadvantages to it.
LLCs are not ideal to receive investments
If your goal is to create an American company and receive investments, an LLC is not your best choice. In general, investors prefer the traditional C Corp structure because it’s the only one capable of issuing common and preferred stock. Thus, for LLCs, the only way to get external capital is by offering equity or debt.
Mandatory profit distribution
At the end of a fiscal year, you will need to mandatorily distribute the company’s profits among the members according to each member’s share. This is not the case for C Corporations. This aspect is one of the most sought after by founders when comparing LLC vs. Corporation pros and cons.
Who should consider opening an LLC?
The LLC is a good alternative for non-resident business owners who like flexible management since C Corporations have a more traditional structure in which the directors are the only decision-makers. Comparing a Corporation vs. LLC, their structure is so rigid that it requires annual and documented meetings of directors and shareholders. LLCs are much more elastic in this sense.
An LLC is also a good option for those who wish to receive earnings every fiscal year. Alternatively, in the case of a company with partners, they will have to share this value according to each partner’s participation in the business.
What is a C Corp?
Before explaining what a C Corp is, it is good to remember that there is already a specific type of company called S Corp. The S Corp category is only available to companies in which all shareholders are American. On the other hand, a C Corp or C Corporation can be formed by foreigners as well.
This company model has a more hierarchical structure, with shareholders, directors, and board members. A C Corporation adopts bylaws, holds frequent meetings among shareholders, fills annual reports, issues shares (stocks), and it’s subject to state and federal taxes.
C Corps are still very popular amongst non-resident entrepreneurs and with Globalfy you can open yours in different states in just one click and with comprehensive, continuous support.
What are the main benefits of a C Corp?
LLC vs. Corporation pros and cons vary depending on your needs and goals. Now let’s how C Corps can benefit your US venture.
Unrestricted ownership and stock issuance
C Corps are the best option for those companies that wish to be publicly traded, thanks to their provision for unrestricted ownership. This principle allows C Corps to participate in the stock market and acquire financing from unlimited investors. This aspect is key when comparing a C Corp vs. LLC since the latter has it much more difficult to get external capital.
Up-and-coming entrepreneurs with attractive ideas and business models could benefit from this fact, as their C Corporation would offer more security to external investors to participate in the business.
A natural person doesn’t need to file tax returns
Unlike LLCs, C Corp partners do not need to file US tax returns. This is only necessary when there is a distribution of profit to the shareholders. This is why many foreigners opt for a Corporation when creating a company in the United States.
Credits in the name of the company
Another element that attracts many foreigners to choose the Corporation vs. LLC is that it allows the structuring of credit lines in the name of the company. On the other hand, LLC credits need to be built through its members (owners), which is more difficult for non-US residents.
What are the disadvantages of a C Corp vs. LLC?
The main disadvantage of the C Corp is double taxation. First, you will have to pay taxes on the net profits of the company. Then, you must pay taxes again when the profits are distributed to the shareholders.
Contrary to this, LLCs do avoid double taxation as they don’t pay corporate income taxes, and their owners are only required to do so on an individual level. This is a major factor when deciding which entity category is better for non-residents starting a US company
Who should consider opening a C Corporation?
If your objective is to receive investments and want to compare LLC vs. Corporation pros and cons, the C Corp is a good alternative since it allows the issuance of preferred securities by having different classes of shares. This modality is also ideal for those owners who want to benefit from provisions of the tax code related to the exclusion of certain capital gains, or the deduction of certain losses.
Here’s a chart that may help you better understand some of the differences between an LLC and a C Corp.
LLC vs. Corporation pros and cons
|C Corporation||LLC (Limited Liability Company)|
|Company’s Liability |
|Limited personal liability of the partners regarding the obligations of the corporation.||Partially limited personal liability of the members of the board partners regarding the obligations of the company.|
|Tax Obligations||It is subject to double taxation. First, at the corporate level, and then at the time the shareholders receive their dividends. The company’s shareholders do not need to file a tax return (except for profit distributions).||An LLC is not taxed (unless the company elects to be taxed as a Corporation). Profits and losses are reviewed for its members. Annually, all members need to file US tax returns.|
|Property||Unlimited number of share classes. Unlimited number of shareholders.||Unlimited members.|
|Necessary Documents||Articles of Incorporation, Bylaws, Organizational Board Resolutions, Stock Certificates, and Stock Ledger.||Articles of Organization and Operating Agreement.|
|Management Structure||A more rigid structure, in which a Board of Directors has overall management responsibility, while managers perform day-to-day tasks.||Offers more freedom as a structure. The Operating Agreement decides how the business will be managed and a manager can be appointed.|
|Capital Contribution||Shares are purchased by shareholders.||In general, members contribute services or money at the time of creation.|
|Investment Raising||It can raise funds through the issuance of convertible debt and the sale of shares.||You can raise funds by issuing a membership interest.|
|Credit Risk Notation||Can build credit scores and credit lines on its own.||Has to use its members’ credit lines.|
Similarities between Corporation vs. LLC
- LLCs and C Corps enjoy transferable ownership, although always following each state’s laws.
- Both company models last indefinitely and can be taken over even after the death of their owners.
- Depending on state rules, an LLC can become a C Corp and vice versa. They can also be transferred to another state.
- Corps and LLCs have partial protection against personal liability.
We use the term partial, as there were cases in which American courts ruled against the protection of the individual in claims against the Corporation, even though the individual had no active participation in the specific case.
More on C Corp vs. LLC for non-resident entrepreneurs
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