What is a type of company?
A company form / type, also known as a legal form or corporate form, defines the legal and tax framework under which a company is founded and operated. Choosing the right corporate form is one of the most important decisions for founders, as it has far-reaching effects on liability issues, tax burden, capital procurement, administrative structures and many other aspects.
The legal form of the company defines who owns the company and what rights and obligations are associated with it. It regulates the decision-making structures and the way in which profits and losses are treated. Different forms offer different levels of personal control. Liability protection for the owners. There are also very different consequences from a tax perspective, depending on the legal form.
There are both simple forms such as sole proprietorships and more complex structures such as corporations. The right choice depends on many factors, such as the size, growth plans and capital requirements of the company as well as the desired degree of formalization and regulation.
Company forms in the USA and their corresponding abbreviations
| Type of company | Abbreviation | Brief description |
|---|---|---|
| Limited Liability Company | LLC | A hybrid company form that offers limited liability like a corporation and tax advantages like a partnership. |
| Corporation (general) | Corp. | An independent legal entity that is separate from its owners and offers limited liability and indefinite existence. |
| Incorporation | Inc. | Refers to a corporation that has been established through the state registration process and is legally separate from its owners. |
| Limited Partnership | LP | A form of partnership in which there are both partners with limited liability and at least one partner with unlimited liability. |
| Limited Liability Partnership | LLP | A form of partnership in which all partners enjoy limited liability, often used by professional groups such as lawyers and doctors. |
| General Partnership | GP | A simple form of partnership in which all partners have unlimited liability and manage the business jointly. |
| Professional Corporation | PC | A corporation established for the practice of certain professions (e.g. lawyers, doctors) with special liability rules. |
| Professional Limited Liability Company | PLLC | An LLC for certain professions that offers limited liability protection, like a regular LLC, but is specifically for licensed professionals. |
| Nonprofit Corporation | NPO | A corporation that does not distribute profits to owners or shareholders and is often used for charitable purposes. |
| Sole Proprietorship | No shortcut | A sole proprietorship that is managed by one person and has no separate legal existence; the owner is personally liable. |
| S Corporation | S Corp. | A special form of corporation that offers pass-through taxation like a partnership, but with certain restrictions. |
| C Corporation | C Corp. | The standard form of corporation, which is taxed separately and can have an unlimited number of shareholders, including foreign investors. |
Overview of US company forms for non-US citizens
When setting up a company in the USA, non-US citizens have various options, all of which offer different advantages and disadvantages. In the following tables you will find an overview of the most important company forms and their suitability for international investors as well as the possible management structures of LLCs (Limited Liability Companies).
US company forms and their suitability for non-US citizens
| US corporate form | Can non-US citizens incorporate? | Recommended for non-US citizens? | Notes on suitability |
|---|---|---|---|
| LLC (Limited Liability Company) | Yes | Yes | LLCs offer flexibility and protect personal assets. They require little formal recordkeeping and offer tax advantages for non-U.S. citizens. LLCs are the most common choice for foreign investors. |
| Corporation (C-Corp) | Yes | Yes | A C-Corp offers robust legal structures and is ideal for companies looking to raise external capital. However, it is subject to double taxation (at company level and shareholder level). |
| Corporation (S-Corp) | No | No | S-Corps are only available to U.S. citizens and residents, as shareholders must be U.S. residents. |
| Sole Proprietorship | Yes | No | This structure is generally not advisable for non-US citizens, as it offers no limitation of liability and the entrepreneur is personally responsible for all debts. |
| Partnership | Yes | Depending on the type of partnership | It depends on the type of partnership. General Partnerships (GP) have no limitation of liability, which can pose a risk. Limited Partnerships (LP) or Limited Liability Partnerships (LLP), on the other hand, offer more protection. |
| Nonprofit Corporation | Yes | Yes for charity | Nonprofit Corporations offer comprehensive limitation of liability for directors and members. They are ideal for charitable purposes and can be tax-exempt. |
Management structures and member types of LLCs
The structure of an LLC can be adapted depending on the number of members and the desired management structure. This offers flexibility, which is particularly advantageous for international investors. Below you will find an overview of the different types of LLCs and their management structures.
| LLC type | Number of members | Management structure | Eligibility for non-US citizens | Notes on suitability |
|---|---|---|---|---|
| Single-Member LLC | 1 (individual member) | Member-Managed | Very well suited | This structure is simple and offers complete control by the individual member. Ideal for foreign investors who want to act alone. |
| Multi-Member LLC | 2 or more members | Member-managed or manager-managed | Very well suited | Offers management flexibility. Members can exercise control directly (member-managed) or appoint a manager (manager-managed). |
| Member-Managed LLC | Any number of members | Members manage the company | Very well suited | Members have a direct influence on the company's decisions, which is particularly advantageous for smaller companies. |
| Manager-Managed LLC | Any number of members | One or more managers lead the company | Very well suited | Suitable for larger companies or if members want to take on a passive role. The manager does not have to be a member of the LLC. |
| Director-Managed Corporation (C-Corp) | Any number of shareholders | Director(s) manage the company | Suitable for larger investors | This structure is more formal and is suitable for companies that want to grow and raise external capital. It offers robust legal protection mechanisms. |
Further information on suitability
The company forms and management structures presented are based on established best practices and the specific legal framework conditions in the USA, which are particularly relevant for international investors. The tables are based on information from recognized legal and tax sources specializing in US company formations and thus provide a sound basis. All of the information provided is up to date and takes into account current US legal and tax regulations, enabling international investors to make informed and confident decisions.
Flexible or formally organized?
LLCs score points due to their more flexible structure and less complicated administration. They can be managed by one or more members without having to fulfill many of the formal requirements such as annual meetings, keeping minutes, etc. Corporations, on the other hand, require a more formal set-up with a board of directors, regular meetings and extensive reporting and documentation requirements.
Advantages of the individual company forms in the USA
| Type of company | Limitation of liability | Sale of shares | Suitable for company size | Goals |
|---|---|---|---|---|
| LLC (Limited Liability Company) | Yes | No | Small to medium-sized companies | Protection of personal assets, flexible management, tax advantages |
| Corporation (C-Corp) | Yes | Yes | Medium-sized to large companies | Raising external capital, expansion, IPO |
| Corporation (S-Corp) | Yes | No | Small to medium-sized companies | Tax advantages, limitation of liability |
| Sole Proprietorship | No | No | Small companies | Simplicity, full control over the business |
| Partnership (General Partnership) | No | No | Small to medium-sized companies | Joint business activity, no formal requirements |
| Limited Partnership (LP) | Yes (for limited partners) | No | Small to medium-sized companies | Equity participation with liability protection for passive partners |
| Limited Liability Partnership (LLP) | Yes | No | Small to medium-sized companies | Flexibility in management, protection of partners from personal liability |
| Nonprofit Corporation | Yes | No | Small to large organizations | Charitable purposes, tax advantages |
Explanations:
- Limitation of liabilityProtection of personal assets against the company's liabilities. This is particularly important when the company is faced with financial or legal risks.
- Sale of sharesThe ability to sell company shares to investors in order to raise capital. This is mainly limited to C-Corporations.
- Company sizeThe suitability of the corporate form depends on the size of the company. LLCs and partnerships are usually suitable for small to medium sized companies, while C-Corporations are often chosen for large companies that want to grow rapidly.
- GoalsThis column describes which goals can best be achieved through the respective company form. For example, companies seeking to raise capital from outside investors should choose a C-Corp, while an LLC is suitable for flexibility and protection of personal assets.
How do C-Corp and S-Corp differ?
Corporation (general) and Incorporation are general terms that can be used for any type of corporation, including both S Corporations (S-Corp) as well as C Corporations (C-Corp). The main difference between S-Corp and C-Corp lies in their taxation and some legal aspects:
- C Corporation (C-Corp):
- TaxationC-Corps are taxed as separate legal entities. This means that the company itself pays tax on its profits, and shareholders then pay tax on dividends, resulting in double taxation.
- ShareholdersThere is no limit to the number or type of shareholders, and foreign shareholders may also be involved.
- UtilizationThe C-Corp is the standard form for corporations and is often chosen by large companies that want to raise capital through the sale of shares.
- S Corporation (S-Corp):
- TaxationS-Corps enjoy pass-through taxation, which means that profits and losses are passed through directly to shareholders and taxed on their personal tax returns. This avoids double taxation.
- ShareholdersS-Corps may have a maximum of 100 shareholders, and these must generally be US citizens or resident aliens.
- RestrictionsNot all Corporations can elect S-Corp status and there are certain requirements and restrictions that must be met.
A Nonprofit Corporation in the USA - Summary Table
| Criterion | Information for Nonprofit Corporation |
|---|---|
| Limitation of liability | Yes |
| Sale of shares | No |
| Suitable for company size | Small to large organizations |
| Goals | Charitable purposes, tax advantages |
| Management structure | Director-Managed |
| Eligibility for non-US citizens | Yes, can be established by non-US citizens |
| Recommended for non-US citizens? | Yes, especially if the organization operates in the U.S. or wishes to solicit donations from U.S. donors |
| Notes on suitability | Nonprofit Corporations offer comprehensive limitation of liability for directors and members. They are ideal for charitable purposes and may be tax-exempt. Information comes from recognized legal and tax sources to ensure that international investors can make informed decisions. |
| Tax advantages | Yes, may be recognized by the IRS as a tax-exempt organization (e.g. 501(c)(3) status) |
| Opportunity to raise capital | Via donations, grants and subsidies; no share issue |
| Applicable legal framework | Regulated by federal and state laws; IRS monitoring for tax exemptions |
| Restrictions on profits | Profits must be reinvested to achieve the charitable objectives; no distribution of profits to members or directors |
| Additional requirements | Regular filing of reports and tax returns with the IRS and the relevant state authorities; compliance with specific laws for non-profit organizations |
| References | Information is based on the requirements of the IRS and the U.S. Small Business Administration (SBA) |
Explanations:
- Limitation of liabilityNonprofit Corporations provide protection of directors' and members' personal assets from the organization's liabilities.
- Sale of sharesNonprofit corporations are not allowed to issue shares. Capital is usually raised through donations, grants and subsidies.
- GoalsThis type of company is ideal for organizations that focus on charitable purposes and wish to take advantage of tax exemptions.
- Management structureA nonprofit corporation is usually managed by a board of directors.
- Eligibility for non-US citizensNon-US citizens can also form a nonprofit corporation in the USA, which is particularly advantageous if the organization wishes to raise funds in the USA.
- Tax advantagesNonprofit Corporations can be recognized by the IRS as a tax-exempt organization, which means that they do not have to pay federal taxes on their income.
- Restrictions on profitsAll profits generated must be reinvested in the organization in order to achieve the defined charitable goals.
- Additional requirementsNonprofit Corporations must file regular reports and tax returns with the IRS and the appropriate state authorities.
This table provides a comprehensive overview of all relevant information for the formation and administration of a nonprofit corporation in the USA, especially for non-US citizens.
The tax question: pass-through or double taxation?
The biggest difference is taxation. LLCs benefit from pass-through taxation: Income is attributed to the members who pay tax on it on their personal tax returns. Corporations may be subject to double taxation: As a C-corp, the company itself already pays taxes at company level, dividends to shareholders are then taxed again. To avoid this, corporations can qualify for pass-through taxation as S-corps.
Raising capital and attracting investors
Corporations have clear advantages when it comes to raising capital, as they can simply issue shares. This makes them more attractive to investors. With US LLCs, trading ownership shares is much more complex, which can deter many investors.
The right choice for your goals and size
LLCs are often recommended for smaller, unlisted companies that value flexibility, efficient operations and tax advantages. Corporations tend to be better suited for larger companies with capital raising plans or where a formal, clearly regulated structure is desired.
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What is an LLC, a corporation or a sole proprietorship?
An LLC can be treated as a partnership by the USA and as a corporation by Germany, as a corporation by the USA and as a partnership by Germany, or by both sides equally. On the one hand, for example, the profit of the LLC can be an assessment basis for income tax and on the other hand only Profit distributions with withholding tax in the USA. In addition, there are different effects of intergovernmental agreements. Read our article on this: LLC registration as a partnership in Germany
Corporate forms categorized according to US law
| Type of company | Category |
|---|---|
| Sole Proprietorship | Sole proprietor |
| General Partnership (GP) | Other (partnership) |
| Limited Partnership (LP) | Other (partnership) |
| Limited Liability Partnership (LLP) | Other (partnership) |
| Limited Liability Company (LLC) | Corporation |
| C Corporation (C-Corp) | Corporation |
| S Corporation (S-Corp) | Corporation |
| Incorporation (Inc.) | Corporation |
| Corporation (Corp.) | Corporation |
| Professional Corporation (PC) | Corporation |
| Professional Limited Liability Company (PLLC) | Corporation |
| Nonprofit Corporation (NPO) | Corporation |
Explanations:
- Sole proprietorForms of company in which a single person owns the company and is personally liable for all debts.
- CorporationForms of company in which the company operates as a separate legal entity, the owner's liability is limited and capital can be raised through the sale of shares or stocks.
- Miscellaneous: Forms of business that do not fit into either category, such as partnerships where two or more persons jointly manage and are liable for the business.
General comparison table
Differences between company forms
Differences between company forms
| Feature | LLC | C-Corp | S-Corp |
|---|---|---|---|
| Liability | Limited liability for members | Limited liability for shareholders | Limited liability for shareholders |
| Control system | Flexible, no formal management required | Formal management, board and annual meetings required | Formal management, board and annual meetings required |
| Taxation | Pass-through control (one-off taxation) | Double taxation (at company and dividend level) | Pass-through control (one-off taxation), must meet certain criteria |
| Ownership | Members, no shares | Shareholders, shares freely tradable | Shareholders, shares freely tradable, limited to 100 shareholders and only one class of shares |
| Capital procurement | More difficult, as no shares are issued | Easier through the sale of shares | Easier by selling shares, but with restrictions on the number and type of shareholders |
| Suitable for | Smaller, private companies or start-ups | Larger companies or those planning IPOs | Smaller companies seeking the advantages of a corporation without double taxation |
Conclusion for foreign founders:
For foreign founders who want to USA a company the LLC has some decisive advantages over the corporation.
The Limited Liability Company offers considerable tax relief thanks to its pass-through taxation. Income is only taxed at member level and there is no double taxation as with many corporations. This advantage is particularly important for start-ups from abroad with often limited financial resources.
Added to this is the more flexible and uncomplicated governance structure of the LLC compared to the more formal corporation. Foreign entrepreneurs need to worry less about complicated formalities such as shareholder meetings, keeping minutes, etc. and can organize their business more streamlined.
Read our article: LLC in Germany as a sole proprietorship (partnership) instead of a corporation.
The major disadvantage of the LLC in terms of raising capital through the sale of shares is not initially so significant for many foreign start-ups. In the early phase, the focus is initially on operating activities anyway.
Unless a marketable size and growth financing by investors is planned from the outset, the majority of foreign Start-ups in the USA LLC is therefore the better choice as a launch pad. The flexibility and efficiency of this company form makes it much easier to get started. A subsequent change of legal form to a corporation is still possible if the company grows accordingly.
References
IRS.gov - Information on the tax requirements for LLCs and Corporations:
U.S. Small Business Administration (SBA) - Guide to business forms in the USA:
Harvard Business Review - Article on choosing the right corporate structure:
Frequently asked questions (FAQ)
1. which US company form is best suited for non-US citizens?
The LLC (Limited Liability Company) is the most common choice for foreign investors due to its flexibility and protection of personal assets. It is easy to set up and requires less bureaucracy.
2. can I form an S corporation as a non-US citizen?
No, an S-Corporation is only available to US citizens and residents. For non-US citizens, LLCs or C-Corporations are better alternatives.
3. which management structure should I choose for my LLC?
The choice between member-managed and manager-managed depends on your business strategy. If you want to actively participate in day-to-day operations, a member-managed LLC is ideal. However, if you prefer a passive role, a manager-managed LLC may be more suitable.
4. which sources should I consider when setting up a company in the USA?
It is important to rely on information from reputable sources such as the IRS, the U.S. Small Business Administration and specialized legal counsel to make informed decisions.
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