LLC vs. Corporation: how to choose the right form of business in the USA
When setting up a business in the United States, entrepreneurs often face a choice between an LLC (Limited Liability Company) and a Corporation. Both forms provide limited liability for the owners, but have key differences in taxation, governance and administrative requirements.
In this article, we'll break down the features of LLCs and Corporations to help you make an informed decision.
Key Differences Between LLCs and Corporations
When choosing between an LLC and a Corporation, it's important to consider:
- Taxation
- Management structure
- Annual requirements and reporting
- Ownership rights and solicitation of investments.
It is advisable to consult with a lawyer or tax professional to avoid errors in registration.
Corporation: peculiarities of establishment and taxation
Corporation is an analog of a joint stock company (JSC), but in the USA it is suitable even for individual entrepreneurs.
Registration Process
To create a Corporation, you need to file Articles of Incorporation in the chosen state.
This form of business requires more documents than an LLC, including:
- Articles of Incorporation (Bylaws)
- A Shareholder Agreement.
The corporation must follow a formal governance structure:
- Having a Board of Directors
- Hold annual meetings of shareholders.
Taxation
A corporation can be taxed in two ways:
- C-Corporation - double taxation is possible (both the company and shareholders pay taxes on dividends).
- S-Corporation - income passes directly to shareholders (pass-through taxation), which eliminates double taxation.
Disadvantages of Corporation
- More complex administration than LLC.
- Risk of double taxation if S-Corp status is not elected.
LLC: simplicity and flexibility
LLC is a simpler and more flexible structure popular among small businesses.
Incorporation Process
To form an LLC, you must file Articles of Organization in the state of your choice. Unlike a Corporation, an LLC does not require a complex management structure. It is recommended to draw up an Operating Agreement (articles of organization) to fix the rights and obligations of the members.
Taxation
By default, an LLC is taxed as:
- Sole Proprietorship (Sole Proprietorship) - if one owner.
- Partnership - if more than one owner.
You can also choose to be taxed as an S-Corp or C-Corp, which makes the LLC more flexible.
Disadvantages of LLCs
- Owners are considered self-employed and pay additional taxes (self-employment tax).
- Less attractive to investors than a Corporation.
Which is better for a small business: LLC or Corporation?
LLC is appropriate for those who:
- Wants to minimize bureaucracy.
- Plans for pass-through taxation.
Corporation (especially S-Corp) may be more beneficial if:
- You plan to attract investors.
- Want to avoid self-employment tax.
Professional Corporation: for licensed professionals
Doctors, lawyers, engineers, and other licensed professionals can form a Professional Corporation (PC).
PC Features:
- All owners must be licensed.
- Only the person responsible for mistakes is liable, not all members.
- Taxation is similar to Corporation (you can choose S-Corp or C-Corp).
Conclusion: what to choose?
- LLC - easier to administer, flexible taxation, but less attractive for investors.
- Corporation - more complicated to administer, but better for raising capital.
- Professional Corporation - required for some professions.
Before registering a business in the USA, consult a lawyer to choose the optimal structure!
This article is intended for informational purposes only and does not constitute legal advice. It should not be relied upon as a substitute for advice from qualified legal counsel familiar with your specific circumstances. No attorney-client relationship is created by the provision of this information.