C corporation or LLC , what to register when starting a business in the USA as a foreigner. Each has its own benefits and requirements. Here’s a detailed comparison to help you decide.
Basic Requirements
| Feature | Incorporation (C Corp) | LLC |
|---|---|---|
| Formation | Filed with state, Articles of Incorporation | Filed with state, Articles of Organization |
| Ownership | Shareholders | Members |
| Management | Board of Directors | Members or Managers |
| Annual Meetings | Required | Not required |
| Compliance | Moderate | Low |
Formation: Both types of entities require filing with the state. Incorporation involves Articles of Incorporation, while LLCs need Articles of Organization.
Ownership: C Corporations are owned by shareholders. LLCs are owned by members, who can be individuals or other entities.
Management: C Corporations are managed by a Board of Directors. LLCs can be managed by members or appointed managers.
Annual Meetings: C Corporations must hold annual meetings and maintain meeting minutes. LLCs generally do not have this requirement.
Compliance: C Corporations face higher compliance demands, including regular filings and formalities. LLCs have fewer ongoing requirements.
Taxation
| Feature | Incorporation (C Corp) | LLC |
|---|---|---|
| Federal Tax | Double taxation: corporate and individual | Pass-through taxation |
| State Tax | Varies by state | Varies by state |
| Self-Employment Tax | Not applicable | Applicable if member-managed |
| Tax Forms | Form 1120 | Form 1065 |
Federal Tax: C Corporations are subject to double taxation, meaning the corporation pays taxes on its income, and shareholders also pay taxes on dividends. LLCs enjoy pass-through taxation, where profits and losses are reported on the owners’ personal tax returns.
State Tax: Taxation varies by state for both C Corporations and LLCs. It’s important to check specific state requirements.
Self-Employment Tax: LLC members may need to pay self-employment taxes if the LLC is member-managed. This is not applicable to C Corporation shareholders.
Tax Forms: C Corporations file Form 1120. LLCs file Form 1065, with members receiving a Schedule K-1.
Advantages
| Feature | Incorporation (C Corp) | LLC |
|---|---|---|
| Limited Liability | Yes | Yes |
| Perpetual Existence | Yes | Depends on state |
| Investor Attraction | High | Moderate |
| Profit Distribution | Flexible through dividends | Flexible through distributions |
| Public Offering | Possible | Not possible |
Limited Liability: Both structures offer limited liability protection, meaning personal assets are generally protected from business debts and liabilities.
Perpetual Existence: C Corporations have perpetual existence, continuing even if the owner dies or sells shares. LLCs may have a limited lifespan depending on state law.
Investor Attraction: C Corporations are often more attractive to investors, especially venture capitalists, due to their structure and ability to issue stock.
Profit Distribution: C Corporations distribute profits through dividends. LLCs have more flexibility in distributing profits and losses among members.
Public Offering: Only C Corporations can go public and offer shares to the public.
Disadvantages
| Feature | Incorporation (C Corp) | LLC |
|---|---|---|
| Complexity | High | Moderate |
| Cost | A bit high initial cost and ongoing cost | Lower initial and ongoing costs |
| Double Taxation | Yes | No |
| Compliance Requirements | Stringent | Less stringent |
Complexity: C Corporations are more complex to establish and maintain due to stringent compliance requirements. LLCs are simpler to form and operate.
Cost: C Corporations have higher costs associated with formation, compliance, and ongoing operation. LLCs are generally cheaper to start and maintain.
Double Taxation: C Corporations face double taxation, whereas LLCs do not.
Compliance Requirements: C Corporations have stringent compliance requirements, including detailed record-keeping and regular filings. LLCs have less stringent requirements.
Which One Should You Choose?
- Incorporation (C Corp) is suitable if you plan to attract investors, go public, or want perpetual existence. However, it comes with higher costs and complex compliance.
- LLC is ideal for simplicity, tax benefits, and flexibility. It’s easier to manage and has fewer compliance requirements.
By understanding these differences, you can make an informed decision on whether to register a C Corporation or an LLC in the USA. Choose the structure that best aligns with your business goals and compliance capabilities.
Frequently asked questions
C Corporation:
- Owned by shareholders
- Managed by a Board of Directors
- Double taxation (corporate and individual taxes)
- Higher compliance requirements
- Can attract investors and go public
LLC:
- Owned by members
- Managed by members or appointed managers
- Pass-through taxation
- Lower compliance requirements
- Flexible profit distribution
Yes, foreigners can be shareholders in a C Corporation and members of an LLC in the USA.
C Corporations have stringent compliance requirements, including:
- Holding annual meetings
- Maintaining meeting minutes
- Filing regular reports
- Detailed record-keeping
Yes, state laws vary, so it’s important to check specific state requirements for forming and maintaining an LLC or C Corporation.
C Corporation:
- File Form 1120 for federal taxes
- Pay corporate income tax and shareholders pay tax on dividends
LLC:
- File Form 1065 for federal taxes
- Members receive Schedule K-1 for reporting on personal tax returns