Both the LLC and the C-Corp can be suitable for a Foreign Investor to use when establishing their U.S. Business. But which structure is best for your business? Below we explain the key attributes of both the LLC and C-Corp and finish with our suggestion for which entity type is best for a foreign company looking to establish itself in the US market.
The Limited Liability Company, or LLC, is one of the simplest corporate entity forms in the U.S., benefiting from an increased ease of formation and reduced compliance requirements as compared to corporations. LLCs are regulated at the state level and are subject to the laws of the individual state in which they are registered.
A classic LLC formed by two or more owners (known as “members”) is similar in concept to a hybrid partnership/limited company in other jurisdictions. Most US states also allow an LLC to be formed by a single member. The financial liability of the members is limited, and the formation of an LLC allows members to segregate their personal assets from those of the entity, unlike a pure partnership.
Members in an LLC can be individuals, corporations, other LLCs, foreign entities or a mix of any of these legal personalities. The members of an LLC are protected from personal liability for the LLC’s debts and liabilities.
Annual compliance requirements are minimal, and an annual meeting of the members is not required.
An LLC does not pay federal income tax on its profits unless it elects to be treated as a corporation for taxation purposes. The US LLC is a disregarded entity sometimes known as a pass-through entity. By default, the partnership nature of an LLC means that the entity’s profits will be reported in its’ members own tax returns.
Some businesses, particularly banks and insurance firms, cannot use the LLC legal form and must instead form a corporation.
A C-Corp is a more complex entity type than an LLC, but closer in structure to a purely limited liability company in other jurisdictions. Unlike an LLC, membership of a Corporation is based on shares or stock, and the owners are “shareholders”. Shares or stock can be transferred between shareholders or to new shareholders with relative ease. The financial liability of the shareholders is limited to their capital contributions.
Compliance requirements are greater than an LLC: a C-Corp should hold at least an annual shareholders’ meeting and regular meetings of the board of directors to manage the business. An annual report is also required to be filed with the Secretary of State in the state of incorporation, alongside payment of an annual filing fee.
LLC vs. C-Corp
A C-Corp, 8 times out of 10, is a more suitable entity type for a foreign investor, particularly if planning for steady business operations. Key characteristics of the C-Corp that result in this fact are:
1. Fundraising – the C-Corp has the ability to sell shares and thereby raise capital by selling equity. The LLC is unable to do this.
2. Intercompany Actions – intercompany loans, agreements, or transactions are more clearly treated according to a transfer pricing policy.
3. No Parent Company Tax Liability – An LLC as a pass-through entity means that the LLC member (usually a foreign corporation) is liable for US tax. This creates a more complicated tax situation for the parent company with potential commingling of profit.
Foreign Investors typically are looking to hire employees as part of their market entry strategy coupled with other factors. Most operating situations would best fit the use of a C-Corp for a US Subsidiary. The LLC is often used for a narrow scope of operations most often with an Individual as a single member of the entity.
Regardless of which Entity makes sense for your business, weConnect can walk you through the Entity Establishment and the subsequent steps including bank account opening, accounting and payroll setup, benefit underwriting and tax compliance planning to start up your US subsidiary. Contact us to help today.
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