C-Corp vs. LLC:
Which is the Better Choice for International Founder?

• Why Not An S Corporation (S-Corp)?
• Factors To Consider When Deciding Between An LLC And A C-Corp
• Potential Benefits Of A C-Corp For International Person(s)
• When And Why A C-Corp May Be A Good Choice For Foreign Shareholder(s)?
• What Is The Best State To Incorporate In?
• Conclusion
• FAQ
• How Triple B Business Can Help You?

Why Not an S-Corporation (S-Corp)?

The default tax classification for corporations established in the U.S. is that of a C-Corporation. On the other hand, S-Corporations are corporations that have elected to be taxed under Subchapter S of the Internal Revenue Code. They provide their owners with limited liability protection like a traditional corporation, but also have the added benefit of pass-through taxation, which means that business income is taxed only at the individual shareholder level, not at both the corporate and individual levels.

S-Corporations are widely favored by U.S. individuals for their tax advantages (excluding certain exceptions) and straightforward regulations. However, non-U.S. residents are unable to directly hold shares in an S-Corporation, making it unavailable as an option for them. In this case, their company would need to be structured as an LLC or a C-Corporation.

factors to consider when deciding between an LLC and a C-corp

The choice between a Limited Liability Company (LLC) and a C corporation (C-corp) will depend on your specific business needs and circumstances. Both LLCs and C-corps are legal entities that offer certain protections to their owners, but they differ in some key ways.

Here are some general factors to consider when deciding between an LLC and a C-corp:

1. Ownership and management: LLCs are typically owned by one or more individuals or entities and are relatively easy to set up and operate. C-corps, on the other hand, have a more formal structure and may be owned by multiple shareholders.
2. Liability protection: Both LLCs and C-corps offer liability protection to their owners, meaning that the owners’ personal assets are generally not at risk if the business incurs debts or is sued. However, the level of protection may differ between the two types of entities.
3. Taxation: LLCs are generally taxed as pass-through entities, meaning that the business itself is not taxed on its profits. Instead, the profits and losses of the LLC are passed through to the owners, who report them on their personal tax returns. C-corps, on the other hand, are taxed as separate entities, and the profits of the corporation are taxed at the corporate level.
4. Potential for growth: C-corps have the ability to issue stock, which can make it easier to raise capital and potentially attract investors. LLCs do not have this capability, though they may be able to raise capital through other means.
5. Establishing Business Credit: Many international individuals choose C-Corporations over LLCs due to the ability to establish credit lines under the company’s name, as opposed to the LLC structure where credit must be established through its members, which can pose challenges for non-U.S. residents.

Potential Benefits of a C-Corp for International Founder(s)

One of the main benefits of forming a C-Corp is its ability to raise capital. C-Corporations are able to issue stocks and bonds, which means that they can attract investors from all over the world. This is particularly useful for international persons, as it allows them to tap into a larger pool of potential investors.

Another advantage of a C-Corp is its ability to have multiple classes of stock. This means that the company can issue different types of stock with varying rights and privileges. This can be useful for international persons, as it allows them to create a more complex ownership structure that can better accommodate the needs of their foreign investors.

In contrast, LLCs are not able to issue stocks or bonds, and they are limited to one class of membership. This can make it more difficult for international persons to raise capital and attract investors.

Additionally, C-Corporations also offer more flexibility in terms of management structure. C-Corporations are required to have a board of directors, which allows for a more formalized management structure. This can be beneficial for international persons, as it allows them to have more control over the direction of their business.

LLCs, on the other hand, are typically run by the members, which can make decision making more difficult, especially for international persons.

Also, setting up business credit through an LLC structure can present difficulties, as credit must be established through its members, which can be challenging for non-U.S. residents.

Taxation is a significant factor to consider when deciding between a C-Corp and an LLC. C-Corporations are typically subject to double taxation, where the company is taxed on its profits and then shareholders are taxed on their dividends. However, international persons may not be affected by this as they are typically not subject to US taxes on their foreign-sourced income. Additionally, incorporating in Wyoming can eliminate the concern of double taxation as Wyoming does not have a corporate income tax.

When and Why a C-Corp may be a Good Choice For Foreign Shareholder(s)?

As we outlined above, there are many benefits to incorporating a C-Corporation (C-Corp) instead of a Limited Liability Company (LLC).

That being said, the most suitable business entity for you depends on various factors such as the size and nature of your business, your projected profits, the number of employees, your immigration status, and more. In particular, incorporating a C-Corp as a foreign shareholder may be a good choice if you are looking to raise capital and have a more formalized management structure.

Non-Resident Aliens Can Own C-Corporations Directly

Non-resident aliens, or individuals who are not citizens or permanent residents of the United States, are not restricted from becoming direct shareholders and owners of C-Corporations. This is in contrast to S-Corporations (S-Corp), where foreign shareholders cannot hold direct ownership or become partners. Non-U.S. shareholders can only hold indirect ownership of an S-Corp through becoming trustees of an entity called Electing Small Business Trust (ESBT). This option allows non-resident aliens to have ownership and control over a C-Corp, unlike the limitations imposed on S-Corps.

LLCs are not ideal to receive investments

LLCs are not suitable for attracting investments. If the objective is to set up an American company and attract investments, an LLC is not the optimal choice. Generally, investors prefer the conventional C-Corporation structure because it is the only structure that can issue common and preferred stocks. As a result, the only way for LLCs to secure external funding is by offering equity or debt.

No Personal Tax Returns Required

Owners of a foreign-owned company with Limited Liability Company (LLC) status are required to file U.S. personal income tax returns. Any quarterly income distributed as profit to foreign members is subject to a maximum graduated rate of 39.6% for individuals and 35% for corporations.

On the other hand, a foreign-owned corporation with C-Corp status does not have to file U.S. personal income tax returns unless there is a distribution of profit to the shareholders. This is why many non-U.S. individuals prefer to establish a C-Corp in the United States.

C-Corp Foreign Ownership Tax Rates

The Tax Cuts and Jobs Act of 2017 established that foreign-owned corporations are subject to state income taxes and a federal corporate tax rate of 21% on their worldwide taxable income. Wyoming has no state corporate income tax, which can be a significant advantage for businesses looking to minimize their tax burden.

It’s important to note that even though Wyoming does not have a state income tax, you may still be required to pay federal income taxes to the IRS if your income is sourced in the United States. On the other hand, income sourced outside the United States is generally not subject to taxation.

Payment Of C-Corp Dividends to Foreign Shareholders

Non-U.S. citizens who own stock in U.S. corporations may be eligible to receive corporate profits in the form of dividend distributions, which are considered U.S. source income. This applies to both C-Corporations and LLCs that have elected to be treated as C-Corporations for tax purposes.

In the case of dividend distribution, shareholders of a C-Corporation are required to pay taxes on the dividends received. Dividends paid to non-resident shareholders are subject to a 30% withholding tax on the gross amount. For example, if the company owes you $1,000 in dividends, it will withhold $300 and pay it to the IRS. You must report both the withholding taxes and dividend amount on Form 1042-S and Form 1042 at the end of the year.

However, it is possible to benefit from a lower withholding tax rate if a tax treaty exists between the U.S. and your country of residence. For example, U.K. residents are subject to a 15% withholding tax rate. To claim this benefit, you must submit Form W-8BEN, a withholding certificate to the company.

Also the issue of double taxation can still be eliminated, as long as the owner’s tax-resident country complies with U.S. dividends rules or the C-Corp is incorporated in a state where there is no corporate income tax such as Wyoming. This can result in significant tax savings for the owners of a foreign-owned C-Corp.

Credits In The Name Of The Corporation

International persons often opt for C-Corporations over LLCs due to the ability to structure credit lines in the company’s name, which can be more challenging for non-U.S. residents in the case of an LLC, where credit must be established through its members.

Working In A C-Corp As A Foreign Owner

When working in a C-Corporation as a foreign national, it’s important to keep in mind that proper documentation is required in order to legally work for the business in the U.S. Failing to do so can result in fines and potential deportation.

The type of visa needed will depend on the nature of your work and personal circumstances. Some options include:

• E-1 Treaty Trader Visa: This visa allows you to perform functions related to the trade of goods, services, or banking, and is only available to citizens of countries that have signed a treaty of commerce and navigation with the U.S. It is valid for two years and covers your spouse and unmarried children under 21.
• E-2 Treaty Investor Visa: This visa allows you to work in a business that is your primary investment vehicle, and requires that you come to the U.S. with the intention of developing the business and have control over the investment funds. It is valid for five years and can be renewed with two-year extensions.
• EB-5 Job Creation Visa: This visa requires an investment of a minimum of $1,800,000 in a U.S. business and the creation of 10 jobs for U.S. workers over two years. This amount can be lowered to $900,000 if the investment is made in a targeted employment area (TEA) with high unemployment. The visa holder, their spouse, and their unmarried children under 21 are eligible for a green card and may apply for citizenship 90 days before the five-year anniversary of the visa.
• L-1 Multinational Transfer Visa: This visa allows foreign companies to transfer highly specialized employees, such as managers and executives, to a U.S. branch, affiliate, or subsidiary.
• H-1B Visa: This visa enables U.S. companies to hire workers from specialized fields such as finance, legal, accounting, IT, engineering, medicine, etc. and require a bachelor’s or master’s degree, a foreign equivalent, or 12 years of specialized work experience. The employer must also show a lack of qualified U.S. applicants. It is valid for three years and can be extended up to six or 10 years.

An alternative to obtaining a work visa is to act as a consultant to the corporation. This can be done from your home country and involves charging the corporation for your services under a written consultant’s agreement. This strategy may also reduce profits and taxes payable in the U.S.

What is the Best State to Incorporate In?

It’s important to note that the best state to incorporate in will vary depending on the specific needs and circumstances of the business. Delaware and Wyoming are both popular choices for non-residents and those living overseas.

Delaware is known for its business-friendly laws and is a popular choice for larger businesses looking to raise capital or go public. If your goal is to create a large American company that appeals to investors or goes public, incorporating in Delaware is a wise choice.

Wyoming, on the other hand, is currently the most popular state for small businesses and start-ups, due to its simplicity in forming and maintaining a C-Corp. In Wyoming, there are no state taxes or tax returns to file, and everything can be handled online, without the need to visit the state or the U.S.

When choosing a C-Corp as a business structure, it’s important to be aware that it typically requires more maintenance compared to other options, such as maintaining records, holding meetings, and filing annual reports. However, there is an exception in the form of a Wyoming Close C-Corp, which has fewer formalities for start-up companies with 35 or fewer shareholders. Please read the pros and cons of incorporating a Wyoming Close C-Corp.

Conclusion

In conclusion, while forming an LLC may be more suitable for domestic individuals, incorporating a C-Corp can be a better choice for international persons due to its ability to raise capital, its ability to have multiple classes of stock, and its more formalized management structure.

Many small businesses or start-ups often choose to form an LLC without considering alternatives like a C-Corp. This is due to the misconception that C-Corps are only suitable for large businesses while LLCs are best for small businesses. International individuals may also form an LLC taxed as a C-Corp without realizing its potential drawbacks. It’s important to note that an LLC taxed as a C-Corp may have similar requirements but not the same benefits as a regular C-Corp.

For this reason, small businesses or start-ups owned by international individuals may benefit from directly incorporating as a C-Corp to maximize benefits and avoid drawbacks. A C-Corp may still be a better option for small businesses not looking to attract investments, such as a Wyoming Close C-Corp that offers reduced formalities and increased flexibility like an LLC. However, potential owners should carefully consider restrictions on ownership and limited access to capital before choosing a Wyoming Close C-Corp.

It’s always recommended to consult with a professional accountant before making a decision on the best incorporation type based on specific circumstances.