When starting a business, one of the most important decisions to make is the type of legal structure in which the company will operate.
If you make the decision to create your company in the United States, like thousands of Americans and non-resident foreigners do, you may be faced with the big question: should I open an LLC or should I register a Corporation?
Indeed, they are the two most popular entities in the United States and in the world, due to the numerous advantages that both present. However, each one adapts to different situations.
In this post, we will contrast and analyze LLCs and Corporations (C-Corps), with the aim of helping you understand their similarities, their differences and allowing 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 distinct from the owner (Unipersonal LLC) or owners.
An LLC combines the protection against personal liability offered by Corporations and the direct taxation of its owners offered by partnerships. In LLCs, the members are the owners, although they can appoint managers to run the company.
Characteristics of the LLC
Limited Liability
Thanks to the limited liability of LLCs, the personal assets of the LLC members are separate from those of the company, so the company's creditors cannot pursue the owners personally in the event of an accident or legal suit, for example.
Anonymity
In some states, how New Mexico, Wyoming, Delaware, and Nevada, it is not necessary to provide the names of the members or managers of the LLC.
Passage entities
LLCs are considered pass-through entities. This means that it is the owners of the LLC who must report on their personal tax returns the benefits they have received from the LLC, and pay them in their country of residence.
The tax burden of an LLC with one or more members is carried out at the personal level, and not at the business level.
They can pay taxes as corporations
By default, single-member LLCs are taxed as Sole Proprietorships, and multi-member LLCs are taxed as Partnerships, but you can also choose to be taxed as a C-Corp or S-Corp.
Operational flexibility
The way an LLC operates is very flexible, since the members determine the operation of the LLC through an operating agreement: who the members are, how new members can join, how the profits will be shared, how the LLC will be dissolved, etc...
Ease of opening and management
Opening an LLC in the United States is easy: It can be done online, the cost of registering an LLC is not expensive and the process takes about 2-3 weeks. There is little paperwork to manage 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 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 go public.
There are 2 types of corporations: the C-Corp, and the S-Corp (the latter only available for companies where all of their shareholders are of American nationality, among other requirements).
Characteristics of the C-Corp
Limited Liability
Corporations, like LLCs, also offer limited liability. The personal assets of the corporation's owners are protected. Shareholders' risk of loss is limited to the amount invested in the corporation.
Free transfer of ownership
A share of a corporation provides both economic and management rights. A shareholder can freely sell those shares and the buyer will become the shareholder with all those rights.
More attractive for investors
One advantage of a C corp over an S corp or LLC is that it is easier for you to attract investors. Venture capital investors prefer to invest in C corporations. And in fact, many venture capitalists cannot invest in S-Corps. Additionally, companies planning a public listing often prefer corporations over LLCs and cannot elect S corporation tax status due to the 100 shareholder limit. This factor may be especially important for capital-intensive companies.
Shareholders do not directly manage the corporation
Corporations are managed by a board of directors. A shareholder has the right to economic benefits for his or her shares, but does not have the right to manage the corporation. Shareholders' management rights are limited to electing directors and voting for major changes in structure.
The C-Corp does not have to file taxes
Unlike LLCs, C Corp partners are not required to file U.S. tax returns, except if dividends are distributed to shareholders. Because of this, many foreigners prefer to form a Corporation when establishing a business in the United States.
Double taxation
A C corporation first pays a corporate-level tax on its profits. Then, if the corporation distributes dividends to its shareholders, they must pay an income tax as individuals. This is known as double taxation.
Differences between LLC vs. Corporation
| LLC | C-Corp | |
|---|---|---|
| Taxes | Pass-Through: Profits and losses are passed through to members' personal tax returns. | Double taxation: they are taxed at the corporate level and again when dividends are distributed. |
| Administration | Members can manage the company themselves or appoint managers. The administration is very flexible and determined in an Operating Agreement. | Managed by a board of directors, elected by shareholders, and officers hired to manage the daily operations of the company. The administration is rigid and structured under the law. |
| Responsibility | Members are not personally responsible for the debts and obligations of the company. | Shareholders are not personally liable for the debts and obligations of the company, but officers and directors may be liable for their actions. |
| Property | 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. |
| Paperwork for creation | It is easier and less expensive to form than a corporation. | Requires more paperwork and formalities than forming an LLC. |
Similarities between LLC and C-Corp
- Ownership: LLC and C-Corp allow the transfer of ownership following state laws.
- Conversion: Some states allow LLCs to convert to C-Corp and vice versa, and they can also be transferred between states.
- Limited Liability: Both Corps and LLCs offer limited protection against the personal liability of their members, although this protection is not absolute and may be violated in some cases.
- Duration: Both types of companies have no time limit and can be assumed after the death of their owners.
Corporation or LLC: Which is the best option for my business?
Although you should consult with an advisor to answer this question, at Business in USA we want to help guide you. Answer the following question:
- A : If what you are most interested in is protecting your personal liability and separating your assets from those of the company, both do it. Due to the ease of opening, costs and management, the LLC may be the most sensible option.
- B : If you plan to have multiple owners who are shareholders of the company, or if you are going to create a business that hopes to raise investment, choosing a corporation may be more interesting.
- C : If you are looking for better tax conditions, LLCs have more flexibility in your classification before the IRS. You can establish your business as an LLC and request that it be categorized as an S-corp or a C-corp with the IRS for taxes on your LLC. You could choose the tax status that works best for your company.
- D: If you are only looking for a legal structure with low opening costs, ease of management, and operational flexibility, an LLC is undoubtedly an excellent option.
It is important to conclude from the fact that you will not be tied to the entity you choose in the first place when starting a business. You can change entities later. To ensure you are taking the right step for your type of business, we invite you to consult with a professional who is able to advise you on this issue.
Frequently Asked Questions
When should I open a corporation?
Corporations are best suited for business owners who wish to scale their company by obtaining outside investors. Corporate shares are easier to transfer than membership interests in an LLC, and investors tend to prefer the predictable structure of a corporation.
Is it cheaper to open a corporation or an LLC?
The costs of LLCs as well as corporations will depend on the state you choose to register your business. 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 objectives and the ownership structure of the company. There is no single answer and it is always best to consult with 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 will have more options to choose from.
Can an LLC be converted to a corporation and vice versa?
Yes, it is possible to convert an LLC to a corporation or vice versa, although the process can be complicated and varies by registration state. In some states, it may be necessary to dissolve the original entity and form a new one, while in others, the conversion can be accomplished with a simple application.
How do you dissolve an LLC and a corporation? ?
Dissolution and termination procedures for corporations and LLCs differ in several aspects. In a corporation, the board of directors must pass a resolution to dissolve the company, which must be approved by the majority of shareholders. Next, the corporation must file dissolution articles with the state, pay any outstanding debts, and distribute remaining assets to shareholders. In an LLC, members can vote to dissolve the corporation and must file dissolution statutes with the state. Outstanding debts must be paid and the remaining assets are distributed among the partners in accordance with the provisions of the operating agreement.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, graduated in 2020 from the National University of Tucumán. Founder of Start Companies since 2023, he advises clients worldwide on forming LLCs in the United States and on proper tax filing. His expertise combines legal, tax, and practical knowledge, offering a comprehensive service that spans from company formation to bank account setup and sales platform integration.
