LLC or Corporation? Which US Company Type Fits You?

Both are US companies — so what’s the difference?

An LLC and a corporation are both formed in a US state and both protect their owners from the company’s debts. The real difference is in taxation and in how the company will grow later.

LLC: simple and flexible

A single-member LLC is disregarded for federal income tax; an LLC with two or more members is taxed as a partnership unless it elects otherwise. Management rules are written in the operating agreement.

A single-member LLC wholly owned by a foreign person files Form 5472 with a pro forma Form 1120 every year, even with no income.

C Corporation: a separate taxpayer

A C Corporation is a separate federal taxpayer: profit is taxed at company level, then taxed again for shareholders when paid out as dividends. Its yearly federal return is Form 1120, filed even with no taxable income.

A corporation that is at least 25% foreign-owned also files Form 5472 for transactions with related parties. Depending on the state there may be annual reports and state taxes too; in Delaware, for example, corporations pay franchise tax every year.

If you plan to raise investment

Investors such as venture capital funds usually prefer a Delaware corporation; issuing shares and adding new shareholders is more familiar in that structure. If you’ll simply sell and keep the profit yourself, an LLC is often enough.

Changing the company type later may be possible, but it can have tax consequences — so it pays to get the decision right at the start.

Why isn’t an S Corporation an option?

An S Corporation is a special tax status that passes income through to its shareholders. Under IRS rules its shareholders can’t be nonresident aliens. A founder living in Turkey who isn’t a US tax resident can’t be an S Corporation shareholder; getting an ITIN doesn’t change that.