LLC or C-Corp, decided from outside the United States

The structural difference

A C-Corp is a taxpayer in its own right. It pays federal corporate income tax on its profits at a flat 21%, and shareholders are taxed again when profits are distributed as dividends. That second layer is the double taxation everyone warns about.

An LLC is flexible. By default a single-member LLC is disregarded and a multi-member LLC is a partnership, so profits pass through to the owners and are taxed in their hands rather than at entity level. An LLC can also elect to be taxed as a corporation where that suits it.

Both give you limited liability. That part is not the deciding factor, and the amount of advice online that treats it as one is a good filter for advice worth ignoring.

What changes when the owner is not American

Pass-through taxation sounds like the obvious win until you look at what it passes through to. Income that is effectively connected with a U.S. trade or business flows to a non-resident owner and can create a personal U.S. filing obligation for that owner, along with withholding on the entity's side.

A C-Corp contains the tax inside the company. The company files, the company pays, and your personal exposure arrives only when money is distributed. For a founder who does not want to become a U.S. taxpayer personally, that containment is often worth more than the theoretical efficiency of pass-through treatment.

Whether your activity amounts to a U.S. trade or business at all is a real question with a fact-specific answer, and it turns on things like where the work is performed, whether you have people or premises in the country, and how much of the value is created inside it. It is worth getting a view on before you choose the entity rather than after.

Withholding on the way out

Dividends paid by a U.S. corporation to a non-resident shareholder are subject to withholding at a statutory 30%, which an applicable income tax treaty may reduce, often to 15% or lower on portfolio dividends. Treaty relief is not automatic. It has to be claimed, with a valid Form W-8BEN-E on file with the payer before the payment, and a taxpayer identification number to support it.

Partnership distributions have their own regime. A partnership with income effectively connected to a U.S. trade or business must withhold under section 1446 on the effectively connected taxable income allocable to its foreign partners, at 37% for non-corporate partners and 21% for corporate ones, and report it on Forms 8804 and 8805.

Either way, plan the route the money takes out at the same time as you plan the entity. Retrofitting an exit is expensive, and treaty positions in particular are much harder to establish after the fact than before the first payment.

The same profit, two routes out

Numbers make this concrete faster than any amount of explanation. The example below is federal only, and it assumes the activity is effectively connected income, which is the assumption that does most of the work.

Retained profit changes the arithmetic

The comparison above distributes everything, which is the worst case for a corporation. If the plan is to leave profit inside the company and reinvest it, the second layer of tax is deferred rather than incurred, and the corporate route looks considerably better than the table suggests.

So the question that decides it is not which structure is cheaper in the abstract. It is how much of the profit you actually need to take out, and when. A business paying its owner a living every month and a business compounding cash for four years are not the same problem, and they do not have the same answer.

What investors expect

If you intend to raise venture capital, the answer is usually a Delaware C-Corp, because the entire apparatus of U.S. venture financing assumes one. SAFEs, priced rounds, option pools, standard investor documents and the diligence checklists that go with them are all written for that entity in that state.

Converting an LLC to a C-Corp later is possible and routinely done, but it costs legal fees, tax analysis and several weeks at exactly the moment you are trying to close a round. If institutional funding is a real plan rather than a distant maybe, paying for the right structure at the start is cheaper than paying for it under time pressure.

Employees and equity

A second thing pushes towards a corporation, and it comes up earlier than fundraising does. If you want to give equity to people who work with you, a corporation issuing stock options is a well-worn path with settled tax treatment and software that handles it.

The LLC equivalent, profits interests and similar arrangements, can be made to work and is materially more complicated to explain, to document and to value. If your second or third hire is going to ask for equity, factor that in now.

The Form 5472 overlap

Both routes can put you in Form 5472 territory. A foreign-owned single-member LLC files it because of the rule that took effect for tax years beginning on or after 1 January 2017. A U.S. corporation files it when a foreign person holds 25% or more.

So choosing an LLC to keep things simple does not remove the reporting. It moves it. Budget for the filing either way, and read the 5472 guide on this site before you convince yourself a dormant year is a year with nothing to file.

A short way to decide

Four questions get most founders to the right answer quickly, and the first one that produces a clear yes usually settles it.

• Do you intend to raise institutional funding in the U.S.? If yes, Delaware C-Corp, and stop reading.
• Do you need to issue equity to employees? That points at a corporation too.
• Do you want to avoid a personal U.S. filing obligation, even at some cost in total tax? That points at a C-Corp.
• Is this an owner-operated business taking profits out steadily, with activity that is probably not a U.S. trade or business? An LLC is usually cleaner and cheaper.

Before you act on this

This is general information, not advice for your particular situation. Thresholds, forms and deadlines change, several of the rules described here differ by state and by the year in question, and the figures above were checked on the date at the top of this page rather than today. Confirm the current position before you rely on any of it.

If you want the version that applies to your entity specifically, send us the details and we will tell you what you actually owe and when.