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Company types in the USA: LLC or Corporation, which one is the right choice?

Company types in the USA: LLC or Corporation, which one is the right choice?

Table of Contents

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. A careful analysis of the opportunities and risks of each option is essential for founders.

Limitation of liability - the key advantage

Both US LLCs and US corporations offer their owners a key advantage:

Liability protection. This means that the personal assets of the owners are generally protected from company liabilities and lawsuits. The two company forms do not differ in this respect. Instead, the main difference lies in the organizational structure and taxation.

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.

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 tax at the corporate 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.

Comparison table

Differences between company forms

A comparison table showing the main differences between a LLCa C-Corp and an S-Corp

FeatureLLCC-CorpS-Corp
LiabilityLimited liability for membersLimited liability for shareholdersLimited liability for shareholders
Control systemFlexible, no formal management requiredFormal management, board and annual meetings requiredFormal management, board and annual meetings required
TaxationPass-through control (one-off taxation)Double taxation (at company and dividend level)Pass-through control (one-off taxation), must meet certain criteria
OwnershipMembers, no sharesShareholders, shares freely tradableShareholders, shares freely tradable, limited to 100 shareholders and only one class of shares
Capital procurementMore difficult, as no shares are issuedEasier through the sale of sharesEasier by selling shares, but with restrictions on the number and type of shareholders
Suitable forSmaller, private companies or start-upsLarger companies or those planning IPOsSmaller companies seeking the advantages of a corporation without double taxation

Conclusion for foreign founders:

For foreign founders who want to USA If you want to set up 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.

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 publicly traded size and growth financing by investors is planned from the outset, the LLC is therefore likely to be the better choice as a launch pad for most foreign start-ups in the USA. The flexibility and efficiency of this form of company makes it much easier to get started. A subsequent change of legal form to a corporation is still possible if the company grows accordingly.

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Disclaimer: Please note that the above dates, tax rates and regulations may change over time. Do not make any independent decisions without first consulting an expert for your individual situation. It is in your interest to always receive individual information from an experienced expert who knows your situation.

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