U.S. Business Entities – LLC vs. Corporation
Corporation vs Limited Liability Company, it is always a hard choice and you need to be supported by the best professionals.
General. The Limited Liability Company, typically referred to as LLC, offers to its members the same protection afforded to the shareholders of a Corporation: LLC members won’t be held personally liable for corporate debts should the business be unable to pay its creditors. Members, generally, will risk only up to the value of their capital contribution. The creditors of the LLC, likewise, may only collect on their debts by going after the assets of the company. The main difference with respect to a Corporation, however, is that the LLC is a pass through entity, i.e. the LLC does not pay income taxes at the corporate level, whereas corporate income is allocated among the members, and income taxes are only collected at the individual owners’ level. The advantage is, therefore, that the income of an LLC is taxed only once, unlike the Corporation which income is taxed both at the corporate and shareholder level. See post: USA Companies – The Corporation.
The aforesaid peculiarity makes the LLC the business entity which best meets the needs of American small and medium businesses due to its undisputed tax advantages – compared to the Corporation – and its management flexibility. Unfortunately, the LLC is not a convenient choice for Italian or non-US owners, as the non-US LLC partner is required to file the tax return in the United States, reporting all the income generated both inside and outside the United States, according to the worldwide taxation principle.
In this regard, however, it is worth noting that, where the Italian (or non-US) LLC owners are individuals willing to move and reside in the US through a treaty-trader or treaty-investor visa (E-1 or E-2 visas), the most suitable business entity choice goes back to the LLC. Indeed, once holding a visa and a social security number, the foreign individual owners will be treated like Americans from a taxation standpoint and shall, therefore, be able to enjoy the same LLC tax treatment reserved to U.S. citizens and green card holders.
Flexibility in Management. The Limited Liability Company is the Americans’ favorite business entity also because, unlike the Corporation, it does not call for compliance with certain formalities, such as holding annual meetings and adopting corporate resolutions. In addition, the LLC structure is much simpler than that of the Corporation, as it only requires the presence of a member who may also act as a manager or delegate such office to a non-member.
Governance. The LLC governance is regulated by a legal document called Operating Agreement, which outlines the members’ duties and sets out the relations among members and between members and managers. Via the Operating Agreement, inter alia, the LLC members:
- Set forth the members’ respective ownership percentage (represented by membership interests or units) and their respective capital contribution;
- Appoint the managers and define the areas and limits of their powers;
- Establish how the membership interest may be transferred or disposed;
- Discipline the company’s dissolution and liquidation.
LLC vs. Corp. The choice between Corp. and LLC is never an easy one and should be made under the guidance of a professional. Here are some basic suggestions that summarize the concepts expressed above:
- If the US business entity is owned by Italian (or non-US) shareholders, the Corporation might be the best legal entity choice.
- However, if the members are Italian (or non-US) natural persons who intend to move and lawfully reside in the USA and no longer generate significant income in Italy or in their country of origin, the LLC generally goes back to be the most appropriate choice.
- The Corporation becomes burdensome from a taxation standpoint when dividends get distributed. If in the first years of activity your company plans on reinvesting in the business without declaring dividends, the best choice is probably the Corporation. It’s worth noting that the LLC income is taxed at owners’ level regardless of whether it is actually distributed among members.
- If you plan to go public at some point down the road, most likely you will form a Corporation (possibly a Delaware C-Corp). Listing a a Limited Liability Company on the stock market, even when permitted, is extremely complicated and generates significant tax problems.
- If your company wishes to attract venture capital, the Corporation is far preferable, as it allows the creation of different classes of stock, including the preferred stock which is the most attractive for investors; in addition, the shares of the Corporation are much more easily transferable than those of the LLC; finally, investors almost always refuse to deal with the numerous tax complications associated with the pass through entity nature of the LLC.
In conclusion. We may say that Americans tend to choose the Corporation if their company has numerous shareholders and employees and complex decision-making mechanisms, or when it aims to attract investments and / or go public. In all other instances, the best choice falls on the Limited Liability Company.
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