For many companies, incorporating in the United States can be a strategic or even essential move from both business and financial perspectives. This could be to access international markets, attract investment from U.S. investors, or as part of a branding strategy. Whatever the reason, choosing the right type of incorporation is critical for tax planning and avoiding compliance issues with U.S. authorities.
Like in other countries, the U.S. offers several types of incorporation. Below, we’ll examine three incorporation types that are particularly relevant to growing companies and their key features.
LLC: Limited Liability Company
This type of entity is relatively flexible in several ways, particularly in terms of ownership. LLCs can be owned by individuals, other corporations, and even foreign entities.
A major advantage of an LLC is that it provides personal liability protection for its owners. The principle of a separate legal entity applies, meaning that any disputes or claims (e.g., customer dissatisfaction) are directed at the company rather than its owners.
From a tax perspective, LLCs are treated as partnerships, meaning the company’s income and expenses are passed through to the owners according to a predefined distribution. Taxes are then paid as part of each owner’s personal income, effectively bypassing corporate tax.
LLC incorporation is often recommended for companies in their early stages. However, as businesses grow and begin expanding to other countries, considering public offerings, or raising significant capital, the LLC structure can pose challenges. At this point, one of the following incorporation types may be more appropriate.
C-Corporation (C-Corp)
C-Corps are ideal for companies and startups entering a growth phase or expecting to do so soon. There are no restrictions on the number of shareholders, and these shareholders can be foreign. Like LLCs, C-Corps also protect owners from personal liability under the principle of a separate legal entity.
C-Corps are particularly attractive for startups and growing businesses because:
- They are subject to a uniform federal corporate tax structure across the U.S.
- They have no restrictions on the number or nationality of shareholders, making them appealing to global investors.
These features make C-Corp incorporation a popular choice for companies planning to raise capital from diverse sources, including international investors.
S-Corporation (S-Corp)
S-Corps share many similarities with C-Corps but have two significant differences:
- They are limited to 100 shareholders.
- All shareholders must be U.S. citizens or residents.
This type of incorporation is suitable for companies that do not anticipate significant fundraising efforts and have U.S.-based ownership.
How Do You Choose the Right Incorporation for Your Company? With so many options available, it can be challenging to determine which incorporation type is the best fit for your business. Contact us for a financial analysis of your company, and together we’ll identify the structure that best serves your needs.