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 between creating an LLC or a C-CORP.
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 your company in the United States, you need to know the difference between opening an LLC and opening a C-CORP.
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.
5 advantages of opening an LLC
Flexibility in management
Creating an LLC in the United States gives you flexibility in its management. In 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.
Avoiding double taxation
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 income taxes.
In this sense, in some American 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.
You can create an LLC from your country
As in the case of a 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).
No ownership restrictions
As in the case of a C-CORP, an LLC has no ownership restrictions.
Partial separation of liability
In some U.S. states (such as Florida), you can create an LLC with only one natural individual, separating the liability of the company from this member.
What are the disadvantages of an LLC?
It is not the ideal model 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.
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 (in a C-CORP you won’t need to).
Who should consider an LLC?
The LLC is a good alternative for those who like flexible management. As we have already mentioned, C-CORPs have a more traditional structure in which the directors are the decision-makers.
In addition, Corporations require annual and documented meetings of directors and shareholders.
An LLC is also a good option for those who wish to receive the earnings for a 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.
This company model has a more hierarchical structure, with shareholders, directors, and board members. To work, this model needs Articles of Incorporation.
The C-CORP is a more traditional company model that follows some specific rules. A C-CORP adopts bylaws, holds frequent meetings among shareholders, fills annual reports, and issues shares. In addition, it is subject to state and federal taxes.
What are the main benefits of a C-CORP?
C-CORPs are the best option for those companies that wish to be publicly traded, thanks to their provision for unrestricted ownership.
A natural person does not need to file tax returns
Unlike LLCs, C-CORP partners do not need to file U.S. 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 C-CORP is that it allows the construction of credit in the name of the company.
In LLCs, on the other hand, credit is built through the partners, which is more difficult for non-U.S. residents.
Access to shares
With the Corporation, you will also have access to different types of shares.
What are the disadvantages of the Corporation?
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.
Who should consider a C-Corporation?
If your objective is to receive investments, 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.
We have made a chart that may help you better understand some of the differences between an LLC and a CORP:
Some differences between an LLC and a CORP
|C-CORP – Corporation||LLC – Limited Liability Company|
|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 U.S. 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 y Stock Ledger.||Articles of Organization y 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||Build a credit score.||It uses the credit of its owners.|
What else should you consider when choosing the category of your company?
Both LLCs and C-CORPs enjoy transferable ownership, which implies the possibility of transferring ownership to another person (although always following each state’s laws).
Both company models last indefinitely and can be taken over even after the death of their owners.
Also, 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 (partially protecting at the individual level their respective members from business obligations).
Here we use the term partial, as there were cases in which American courts were against the protection of the individual in claims against the Corporation, even though the individual had no active participation in this specific case.
Do you understand the difference between an LLC and a CORP?
When you decide to expand your business to America, it is important to have the support of professionals in Business Formation in the United States.