When starting a business, one of the most important decisions you have to make is the type of legal structure the company will operate under.
If you decide to set up your company in the United States, as thousands of Americans and non-resident foreigners do, you may face the big question: should I open an LLC, or am I better off registering a Corporation?
Indeed, these are the two most popular entities in the United States and around the world, thanks to the many advantages both offer. However, each one fits different situations.
In this post, we'll compare and analyze LLCs and Corporations (C-Corps), to help you understand their similarities and differences and allow you to select the one that is most beneficial for your company.
What is an LLC?
An LLC is a type of limited liability business structure in which the company is legally separate from its owner (single-member LLC) or owners.
An LLC combines the protection from personal liability offered by corporations with the direct taxation of the owners offered by partnerships. In an LLC, the members are the owners, although they can appoint managers to run the company.
Features of the LLC
Limited liability
Thanks to an LLC's limited liability, the personal assets of the LLC's members are separate from those of the company, so the company's creditors cannot go after the owners personally in the event of an accident or lawsuit, for example.
Anonymity
In some states, such as New Mexico, Wyoming, Delaware and Nevada, you don't need to provide the names of the LLC's members or managers.
Pass-through entities
LLCs are considered pass-through entities. This means that the LLC's owners are the ones who must report the profits they have received from the LLC on their personal tax returns, and pay tax on them in their country of residence.
The tax burden of a single-member or multi-member LLC falls at the personal level, not at the business level.
They can be taxed as corporations
By default, single-member LLCs are taxed as " sole proprietorships " and multi-member LLCs as partnerships, but they can also elect to be taxed as a C-Corp or S-Corp.
Operational flexibility
The way an LLC operates is very flexible, since the members determine how the LLC works through an operating agreement: who the members are, how new members can join, how profits will be distributed, how the LLC will be dissolved, etc…
Easy to open and manage
Opening an LLC in the United States is easy: it can be done online, the cost of registering an LLC is not high and the process takes about 2-3 weeks. There is little paperwork to keep it in compliance and renewal is easy.
What is a Corporation?
A corporation is a more traditional legal entity that, like the LLC, offers limited liability. A corporation is owned by its shareholders, who elect a board of directors to make decisions on behalf of the company. A corporation can issue shares to raise capital and can be publicly traded.
There are 2 types of corporations: C-Corps and S-Corps (the latter are only available to companies whose shareholders are all U.S. citizens, among other requirements).
Features of the C-Corp
Limited liability
Corporations, like LLCs, also offer limited liability. The personal assets of the corporation's owners are protected. The shareholders' exposure to losses is limited to the amount invested in the corporation.
Free transferability of ownership
A share of a corporation provides both economic and management rights. A shareholder can freely sell those shares, and the buyer becomes the shareholder with all of those rights.
More attractive to investors
One advantage of a C corp over an S corp or an LLC is that it finds it easier to attract investors. Venture capital investors prefer to invest in " C " corporations. In fact, many venture capital investors cannot invest in S-Corps. In addition, companies planning to go public usually prefer corporations to LLCs and cannot elect S corporation tax status because of the 100-shareholder limit. This factor can be especially important for capital-intensive businesses.
Shareholders do not manage the corporation directly
Corporations are managed by a board of directors. A shareholder is entitled to economic benefits from their shares, but has no right to manage the corporation. Shareholders' management rights are limited to electing directors and voting on major structural changes.
The C-Corp's owners don't have to file tax returns
Unlike with LLCs, the owners of C Corps do not have to file tax returns in the U.S., except when dividends are distributed to shareholders. Because of this, many foreigners prefer to form a Corporation when setting up a company in the United States.
Double taxation
A C corporation first pays tax at the corporate level on its profits. Then, if the corporation distributes dividends to its shareholders, they must pay income tax as individuals. This is known as double taxation.
Differences between an LLC and a Corporation
| LLC | C-Corp | |
|---|---|---|
| Taxes | Pass-through: profits and losses pass through to the members' personal tax returns. | Double taxation: taxes are paid at the corporate level and again when dividends are distributed. |
| Management | The members can manage the company themselves or appoint managers. Management is very flexible and set out in an Operating Agreement. | Managed by a board of directors, elected by the shareholders, and officers hired to run the company's day-to-day operations. Management is rigid and structured by law. |
| Liability | Members are not personally liable for the company's debts and obligations. | Shareholders are not personally liable for the company's debts and obligations, but officers and directors may be liable for their actions. |
| Ownership | Ownership is represented by shares, which are not publicly traded and are difficult to transfer | Ownership is represented by shares, which can be publicly traded on a stock exchange. |
| Formation paperwork | It is easier and less expensive to form than a corporation. | Requires more paperwork and formalities than forming an LLC. |
Similarities between an LLC and a C-Corp
- Ownership: LLCs and C-Corps allow ownership to be transferred in accordance with state law.
- Conversion: Some states allow LLCs to convert into C-Corps and vice versa, and they can also be transferred between states.
- Limited liability: Both Corps and LLCs offer limited protection against their members' personal liability, although this protection is not absolute and can be pierced in some cases.
- Duration: Neither type of company has a time limit, and both can be taken over after the death of their owners.
Corporation or LLC: which is the best option for my business?
Although you should consult an advisor to answer this question, at Business en USA we want to help point you in the right direction. Answer the following question:
- A : If what matters most to you is protecting yourself from personal liability and separating your assets from the company's, both do that. Because of how easy it is to open, its costs and its management, the LLC may be the most sensible option.
- B : If you plan to have multiple owners who are shareholders in the company, or if you are going to build a business that expects to raise investment, choosing a corporation may be more attractive.
- C : If you're looking for better tax conditions, LLCs have more flexibility in how they are classified by the IRS. You can set up your business as an LLC and request that it be classified as an S-corp or a C-corp by the IRS for your LLC's taxes. You could choose the tax status that works best for your company.
- D: If you're simply looking for a legal structure with low formation costs, easy management and operational flexibility, an LLC is without a doubt an excellent option.
It's important to conclude by noting that you won't be tied to the entity you choose when you first start a business. You can change entities later on. To make sure you take the right step for your type of company, we invite you to consult a professional who can advise you on this matter.
When does it make sense to open a corporation?
Corporations are better suited to business owners who want to scale their company by bringing in outside investors. Corporate shares are easier to transfer than an LLC's membership interests, and investors tend to prefer the predictable structure of a corporation.
Is it cheaper to open a corporation or an LLC?
The costs of both LLCs and corporations depend on the state you choose to register your business in. However, as a general rule, opening an LLC is easier, faster and cheaper than registering a corporation.
Does a corporation have better tax benefits than an LLC?
The answer depends on the type of business you have, its income, its goals and the company's ownership structure. There is no one-size-fits-all answer and it's always best to consult an expert. However, with an LLC you can choose to be taxed as a partnership (by default), as a C-Corp or as an S-Corp, so you'll have more options to choose from.
Can an LLC be converted into a corporation and vice versa?
Yes, it is possible to convert an LLC into a corporation or vice versa, although the process can be complicated and varies depending on the state of registration. In some states, it may be necessary to dissolve the original entity and form a new one, while in others the conversion can be achieved through a simple filing.
How do you dissolve an LLC and a corporation?
The dissolution and termination procedures for corporations and LLCs differ in several respects. In a corporation, the board of directors must pass a resolution to dissolve the company, which must be approved by a majority of the shareholders. The corporation must then file articles of dissolution with the state, pay off outstanding debts and distribute the remaining assets among the shareholders. In an LLC, the members can vote to dissolve the company and must file articles of dissolution with the state. Outstanding debts must be paid and the remaining assets are distributed among the members as set out in the operating agreement.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, founder of Start Companies and a specialist in U.S. companies for entrepreneurs, freelancers and digital businesses in Latin America. With training in international taxation and studies at UCEMA, he advises non-resident clients on forming and maintaining LLCs, opening bank accounts, invoicing, accounting and taxes. His experience combines tax strategy, compliance and practical vision for operating in the U.S. in a simple, organized and professional way.
