Organizational and legal forms of companies in the USA

Every potential business owner who plans to register a company in the USA, first of all, must decide on its organizational and legal form. The importance of this question lies in the fact that this choice influences the legal status, scope and responsibilities of such a company. The form depends on the type and rates of taxes, reporting and ways of interaction with contractors/investors, etc. To avoid mistakes in building your business structure, it is necessary to familiarize yourself with the features of all acceptable variants.

The US corporate legislation offers non-residents two main and most popular forms of corporate entities in the business environment: LLC and C-corp.

Features of LLC in the USA

LLC (Limited Liability Company) – IRS defines it as a business structure permitted by state laws. As a rule, there are no restrictions on the subject of its establishment, that is, it can be both an individual and a legal entity. There are no restrictions on the number of founders. However, when registering an LLC in the USA, it is necessary to take into account the legislation of the state in which the company is planned to register, as the requirements in each of them are different. For example, according to the State Law of Wyoming on the activities of LLC, the company may be created for any legal purpose other than financial and insurance activities.

Types of LLC companies

In turn, LLC is qualified for several types, each of which is accessible to non-U.S. residents and has different taxation.

1. Single-Member LLC

The main feature of this type is the unusual way of taxation, which is the fact that the company’s profits belong to its founder. Thus, LLC does not pay corporate income tax. Instead, the founder reports as an individual and pays an individual income tax on a progressive rate from 10 to 37%. In this case, IRS considers LLC as part of the individual tax return of the owner – “disregarded entity”, if he did not announce the choice of another form of taxation.

2. Partnership LLC 

If an LLC is formed by at least two members, the IRS classifies it as a partnership for federal tax purposes. This type of company does not differ significantly from the first option, since Partnership LLC also does not pay corporate income tax. When opening an LLC company in the USA, the founders indicate their share in percentage value. At the end of the reporting period, the net profit is distributed between them, according to the specified shares. This information is noted on the partnership’s income tax return. After distribution of profits, each founder reports as an individual and pays individual income tax on a progressive rate from 10 to 37%.

3. LLC as a c-corp

When registering an LLC, the founders may submit a form 8832 to IRS at their own discretion and declare how they wish to classify their company. One such option is the legal activity of LLC on the principle of organizational and legal form c-corp. This means that for tax purposes the company will be considered as a corporation and will pay a corporate income tax of 21%. Thus, the founder can have a simplified form of the company, but its revenues will not “cross” in his personal and will be taxed as income of a separate taxpayer.

Features of the c-corporation in the USA

C-corp (corporations) are a separate organizational and legal form in the corporate legislation of the USA.

C-corp is one of the most popular business structures in the USA. The founders of the company are identified as shareholders, holding a certain number of shares. For tax purposes, IRS classifies the corporation as a separate business tax payer, that receives profits or losses, and pays the corporate income tax in the amount of 21%.

The difference between LLC and c-corp

Company registration. Both organizational and legal forms are registered by submitting statutory documents (their name may differ depending on the state). This requirement exists for the purpose of “informing” about the existence of the company. However, the c-corp is submitted to the federal government and is more important, since it may contain provisions on corporate governance, rights and obligations of shareholders that come into force only when they are included in the statute. Instead, the LLC statute is submitted only to the state of registration and performs the function of “announcing” document, since the provisions regulating management and activity of LLC are contained in the operating agreement (private document of the company which is not submitted to the state bodies).

Company structure. C-corp has a fixed structure. Shareholders elect a Board of Directors, which should appoint officials (President, Secretary, carbnik) for daily management of the company. In turn, LLC’s founders can build the company’s structure at its own discretion, writing management details in the operating agreement.

Reporting. C-corp as well as LLC are obliged to submit annual reports to IRS and to the state of company registration. Since the corporation is a separate taxpayer, it also reports on a separate tax return provided for such companies (form 1120). The LLC’s revenues are not segregated from its owner, so it is obliged to report as a natural person on the form 1040 till April 15 annually. If LLC is a partnership, it is required to submit an information declaration on the company’s activity in form 1065, as well as individual declarations for each member.

Taxation. LLC is not considered as a separate tax payer, because the income of the company belongs directly to its owner. While c-corp is an independent legal entity and is subject to corporate income tax.

Responsibility. C-corp is a more protected structure, because no one can pursue the personal assets of shareholders in case of debts or legal claims of the corporation. This significantly allocates c-corp to the best, since the income of the sole LLC is the income of the owner, and thus directly risks its own assets.

Capital attraction. Corporations in the US are a great option for budget-constrained startups, because the founders can attract investors by selling the company’s shares. In turn, additional financing in LLC is possible by means of a personal financial contribution of the founder to the company’s corporate account, which is not subject to taxation when preparing annual reports, as well as sale of company shares.

To sum up, it is worth noting, when choosing the form of the company it is necessary to focus on the set goals of the business and the plan of its development. However, if you choose not to register a company in the USA, you will receive:

• entry into the American market;
• possibility of attracting foreign investors;
• status in the eyes of American and foreign subcontractors.