Features of Doing Business in the USA

Before discussing corporations and LLCs, it’s worth noting that there are four main types of business structures in the United States. These include corporations and limited liability companies, as well as partnerships and private companies. Private companies, in turn, are divided into sole proprietorships and general partnerships. Unfortunately, establishing a business in these categories is not possible if you lack either a residency status in the United States or if you are a foreigner without permanent legal residence in the States. The main reason is that U.S. residents (including foreigners with a green card) have a Social Security Number (SSN). This is a unique number in the electronic tax registry, used to track all your paid taxes and fees. Unfortunately, foreign nationals are not assigned a Social Security Number, so this business form is not accessible to them. 

This is why the two most accessible business structures for foreigners are corporations and LLCs.

For this reason, this article will focus on these two forms of business organization—corporations and limited liability companies (LLCs).

The main differences between these forms are in tax specifics and the liability limitation mechanism in business. We are often asked about the advantages and opportunities available with both corporations and LLCs. Unfortunately, some benefits of U.S.-based LLCs are unavailable to foreigners, so we won’t cover them in this review.

The main drawback of a sole proprietorship and a general partnership is the unlimited personal liability of the owner or partners. LLCs and corporations were developed largely to address this issue.

A corporation in the U.S. is considered the most formal structure for organizing and running a business. Corporations have a unique tax ID known as an EIN (Employer Identification Number), which is issued after incorporation, and this number is used for all tax payments.

Limited Liability Company (LLC) is a structure that sits between a sole proprietorship and a corporation. If you are a U.S. citizen with an SSN, you can choose how to pay taxes for your LLC: either as a private entity (through your personal SSN) or as a corporation (using an EIN). If you are a foreigner, you don’t have an SSN, so you will have to pay taxes through an EIN, similar to a corporation. Therefore, most of the LLC advantages do not apply to foreign LLC owners.

For corporations, a board of directors and a management team are mandatory. Regarding taxes, corporation owners face double taxation: first on corporate income, then on dividend distributions to shareholders. However, dividends are now rarely used as a profit distribution method because it is not cost-effective. 

Which Business Structure is Right for You?

Let’s look at which structure (corporation or LLC) might be better suited for starting a business in the United States. For clarity, this information is presented in a table.

It is impossible to definitively say which is better: a C-corporation or an LLC. Each business will have its own best option. Furthermore, each form of business has both advantages and disadvantages, which can, with effort, be turned into advantages. To achieve this, it is necessary to:

• Determine the preferred form of business for yourself;
• Seek consultation with our company's attorneys and specialists.

The fact is that in each specific case, everything is strictly individual, and all practical recommendations cannot be fully covered in one review.

LLC (LIMITED LIABILITY COMPANY): PROS AND CONS

This form of business is also widespread among non-residents of the United States. 

The structure of an LLC somewhat resembles a sole proprietorship. Some entrepreneurs tend to believe that an LLC is similar to a general partnership.

A limited liability company, as the name suggests, provides limited liability similar to a C-corporation. In addition, it benefits from partnership tax breaks. In general, this form of business offers significant flexibility, including company structure, operations, and taxation. Flexibility in management and profit distribution is, of course, extremely important for LLC owners. 

An LLC has pass-through taxation, meaning that all profits and potential losses are transferred to all members, including the owners. Each member of an LLC is required to file income declarations, which include company losses, making it similar to a partnership in this regard. 

Profit tax is also collected, although not in all states. Additionally, the registration process varies slightly from state to state. For a qualified response, it is better to consult a CPA practicing in the specific state. 

As for the responsibility of all members or owners, in the case of an LLC, it is proportional to the amount each member has invested in the company. In this respect, an LLC is much more lenient than a general partnership. In this form of ownership, all members and owners (who are individual entrepreneurs) are fully responsible for the company's possible debts. However, it is worth noting that both LLCs and corporations may face lawsuits, for example, to recover damages due to an accident involving an employee.

One of the main advantages of LLCs is the minimal paperwork required to be submitted to state regulatory authorities when registering the enterprise. 

The income tax declaration process for an LLC is also simpler than for corporations, as it only needs to be filed once a year with government tax authorities. It is crucial to do this by March 15 (2.5 months after the company's fiscal year ends). If the LLC has only one founder and owner, in addition to the declaration, Form 1040 with Schedule C must also be submitted, similar to sole proprietors. In cases where there are multiple founders or members, all of them must file Form 1065, as with traditional partnerships. We do not recommend filing these forms independently; errors in filling them out can be costly. 

Another “life-simplifying factor” for LLC founders is the absence of a requirement to hold formal meetings and maintain minutes. Meetings are only recommended, not required, and take place at the discretion of the LLC members. However, if there are changes within the company, it is advisable to hold meetings with minutes. 

It is also favorable that profit distribution is managed by all LLC members, typically done by agreement, taking into account each member’s personal and labor contributions.  

To avoid property disputes over profit distribution, it is essential to enter into agreements with LLC members detailing the terms after opening the company. This agreement should cover:

• features of profit distribution;
• participation of management bodies;
• responsibility of each LLC member;
• rights regarding company capital withdrawal;
• conditions for introducing new capital into the LLC;
• responsibilities of all members.

Sometimes it is very difficult to understand all the nuances of this agreement. And then it may be too late. Disputes with the members of the company rarely lead to anything good. To avoid possible disagreements, it is better to consult a lawyer in advance and prepare and sign the contract with the specialists of our company. This will help avoid many problems and conflicts, especially in case one of the founders or partners exits the LLC. 

Now it makes sense to focus exclusively on the disadvantages of a limited liability company.

Disadvantages of LLC

Regarding the disadvantages of a limited liability company, one of the main ones is the need to pay a single tax. Its rate is 21%. It is calculated on the net profit of the company. This also includes contributions to medical care and social security. Why is this so? This is because the founders and owners of the LLC are private entrepreneurs engaged in labor activity.

As for possible benefits for members of limited liability companies, they can also be obtained, but you must be a citizen of the United States of America to do so. This is how the government stimulates the creation and development of LLCs, as they often represent micro-entrepreneurship in America. Unfortunately, tax benefits do not extend to individuals with other citizenships. 

Micro-entrepreneurship usually means that LLCs are very small companies consisting of 1 to 2 people. The so-called “mom and pop shop.” This term in the USA refers to a small, independent, usually family-owned, controlled, and managed business that has a minimal number of employees, a small volume of business, and usually does not have a franchise, so it is open for business only in one location.

Often, such a business is a private company, but when the parents approach retirement age, they try to protect their assets through limited liability. That is why they register an LLC. This is both an advantage and a disadvantage. If you do not want to be perceived as a very small company, register a corporation immediately. 

If the limited liability company is growing and there are enough employees, LLCs are like corporations. When the founders and partners begin to understand this, they often come to us after the registration of the LLC and ask for a re-registration of the company into a “clean” C corporation.

The next disadvantage, which should be elaborated on a bit more, is the possibility of quick liquidation of a limited liability company. Unfortunately, this is possible in the event of bankruptcy or the death of the owner of the LLC. In this case, the LLC also has to be closed. To partially prevent this, the owners of the company specify in the founding documents the expected “lifespan of the firm” during the registration of the company. If, for example, it is necessary to issue shares of the company, it will need to be re-registered as a corporation. 

This means that the disadvantage is that the LLC cannot be inherited. 

Another disadvantage of a limited liability company is the need to choose only two options for the company that are characteristic of a corporation. These may include:

• limited liability within the assets, 
• continuity of existence,
• centralized management 
• free transfer of ownership shares. 

Sometimes it can be quite difficult to make your choice. In this case, we sincerely recommend our clients to register a C corporation right away. 

Moreover, limited liability even within insignificant assets can play a cruel joke on you, as a limited liability company allows lawsuits to be filed against both the company and its members directly. And sometimes, unfortunately, not entirely scrupulous lawyers take advantage of this. Thus, if limited liability is a key criterion for you, it is better to register your company as a corporation immediately.  Then you will be fully protected both as a member of the company and as an individual. 

C Corporation as a form of business in the United States

What is a C Corporation?

A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and obligations that people, its owners, have: they can enter into contracts, take loans, raise funds, file lawsuits and be sued, hire employees, own assets, and pay taxes.

How Corporations Work

All types of businesses in the USA and around the world use corporations. Although its exact legal status varies somewhat from jurisdiction to jurisdiction, the most important aspect of a corporation is limited liability. This means that shareholders can participate in profits through dividends and increases in stock value, but they do not bear personal responsibility for the company’s debts.

Almost all well-known companies are corporations, including Microsoft Corporation, Coca-Cola Company, Facebook Inc., Ford Motors Company, and others. Some corporations do business under their names as well as under business names, for example, Alphabet Inc., which is known as Google.

Creating a Corporation

A corporation is created by a group of shareholders who subsequently become the owners of the corporation. First, the corporation is registered, and at the time of registration, a package of shares of the corporation is also registered. Then these shares are distributed among the shareholders (in the USA, the corporation belongs to the shareholders, not the founders). A little later, a shareholder agreement is concluded between the shareholders, and the company’s charter is adopted.  The purposes of the corporation can be both commercial and non-commercial. This is also a significant advantage.  Corporations can be charitable organizations. However, the overwhelming majority of corporations aim to provide profits to their shareholders. Shareholders, who are the owners of the corporation's shares, are only responsible for paying the value of their shares to the company's treasury after they are issued.

A corporation can have either one shareholder or several. Public corporations often have thousands or even hundreds of thousands of shareholders.

Corporations are created and regulated according to corporate law within the jurisdiction of their registration and operation. In the United States, the most common type of corporation is the C-Corporation.

Typically, a corporation's name is defined by the words Corporation (Corp.), Incorporation (Inc.), or Company (Co.). All these words simply indicate that it is a corporation. There is no difference between them.

How to create your corporation

The process of creating a corporation varies depending on the state where you do business and the state where you live. Generally, you need to file articles of incorporation with the state and then issue shares to the company’s shareholders. Shareholders will then elect a board of directors at the annual meeting.

 What is the daily operation of a corporation

Shareholders, who typically receive one vote per share, annually elect a board of directors that appoints management to oversee the corporation's ongoing operations and control it.

The board of directors executes the corporation's business plan and must take all necessary steps to fulfill its stages. While board members typically are not liable for the corporation's debts, they are obligated to care for the corporation and may incur personal liabilities in certain cases. Some state tax laws also impose personal liabilities on the board of directors.

How a corporation works

Incorporation offers many benefits for businesses and their owners, including:

— Protecting the owner's assets from the company's liabilities.

— Allowing easy transfer of ownership to another party.

— Achieving a lower tax rate than the rate applicable to individual citizens' income.

— Receiving softer tax restrictions on losses.

— Providing the ability to raise capital through the sale of shares.

Worldwide, corporations are the most widely used legal means of conducting business. While the legal details of forming and organizing a corporation vary across jurisdictions, most have certain common elements.

Creating and organizing corporations

Incorporation involves drafting "articles of incorporation," which state the corporation's primary business purpose and location, as well as the number of shares and class of shares issued, if any. The company's shares are owned by its shareholders. A small business may have one shareholder, while very large and often public companies can have several hundred thousand shareholders.

Typically, shareholders are only responsible for paying for their shares. As owners, shareholders are entitled to receive the company's profits, generally in the form of dividends. Shareholders also elect the company's directors.

The company’s directors are responsible for the day-to-day operations of the corporation. They are required to act in the company’s best interest and must take care of it. They are usually elected annually. Smaller companies may have one director, while larger ones may have a board of directors consisting of ten or more directors. Except in cases of fraud or specific tax laws, directors are not personally liable for the company's debts.

Features of corporate taxation

Corporations are taxed as separate legal entities that can earn their own income. Corporations are responsible for paying tax on their profits (corporate tax) and tax on dividends that the organization distributes to its shareholders. Dividends are paid out of the corporation's net profits after all taxes have been paid. Since dividends are not subject to tax (unlike wages and bonuses), they are taxed twice. This is known as double taxation. This is not a problem for small corporations where only the owners work in the corporation. Generally, foreign owners receive not dividends but non-taxable wages and bonuses.

While double taxation is viewed as a disadvantage for companies choosing to apply as a corporation, this additional tax liability can often be offset by federal deductions that are available only to corporations.

For example, a corporation can deduct all its business expenses. Its founders can include advertising and operating expenses, as well as some additional benefits for employees, such as health insurance and retirement plans. These deductions (also known as write-offs) collectively provide significant savings for the business. There are currently 1,728 deductions available for corporate taxes.

As of 2018, corporations pay a flat income tax rate of 21%, which is lower than the top five individual tax rates. Although this is largely offset by double taxation, any income that the corporation chooses to retain at the end of the year will be taxed only once at the new 21% rate. This allows corporation owners to save on taxes by reinvesting part of the profits back into the business.

What you need to know

Keep in mind that if a corporation has fewer than 100 shareholders, it can apply for S Corporation status. This tax status allows the business to be treated as a pass-through entity, much like an LLC. This can be a good option for businesses that want to be taxed as an LLC while still wanting some of the formalities that a corporation provides. The S Corporation designation allows for pass-through taxation (without corporate tax), but there are specific requirements for qualification as an S Corp that may limit its usefulness for the business. It is particularly important to remember that S Corporation shareholders can be only U.S. citizens and permanent residents.

 LLC vs. Corporation (Corporation). Management Features

An LLC has a flexible management structure. The entity can be managed by its members or a group of managers, and any member can act as the manager of the LLC. The LLC may also decide not to distinguish between the owner and the manager of the business. Due to its flexible nature, LLC management is less formal, which may make it an ideal enterprise for some entrepreneurs.

What is the difference between a "manager-managed" LLC and a "member-managed" LLC? In a member-managed LLC, the owners themselves oversee the day-to-day operations, while in a manager-managed LLC, there are usually investors who, so to speak, "sit on the sidelines" and do not play any other active role in the business.

The management structure of a corporation is much stricter. A corporation must have an official structure with a Board of Directors performing management duties to generate profits for shareholders. Corporate officers may only be assigned to handle the daily operations of the business. Shareholders are considered owners of the corporation but remain separate from business decisions and the day-to-day activities of the corporation (except for approving major corporate decisions).

However, shareholders retain the right to elect directors, and individual shareholders may be elected as directors or appointed as officers. The specific rules of any corporation are dictated by its corporate bylaws, which are a detailed set of rules adopted by the Board of Directors after the corporation's formation.

LLC vs. Corporation: Formal Requirements

Both corporations and limited liability companies must meet maintenance and/or reporting requirements set by the state in which their organization was formed. This keeps the business in good standing and maintains the limited liability protection acquired through registration. While each state has its own rules and regulations governing the activities of both corporations and limited liability companies, corporations generally have more annual requirements than limited liability companies.

All corporations and LLCs must submit annual federal reports. There are a number of states where corporations and LLCs are exempt from corporate taxes, and reporting is not required for these states (for example, Nevada, Wyoming). But this reporting should not be confused with federal reporting, which must always be submitted.

Maintaining accounting for LLCs and corporations is mandatory.

Corporations are required to hold annual shareholder meetings every year. These details are documented along with any discussions in the form of notes called corporate minutes. A corporation is typically also required to file an annual report. This helps keep the business information up-to-date with the secretary. Any serious actions or changes in the business will require a vote on a corporate resolution at a meeting of the Board of Directors.

LLCs, on the other hand, have fewer record-keeping requirements than corporations. For example, LLCs are not required to keep minutes, hold annual meetings, or have a board of members or managers. While some states still require LLCs to file annual reports, others do not. Check with the Secretary of State of your registration to determine which requirements apply to your LLC. If the business (LLC) is registered in more than one state, reporting must be submitted in each state of registration according to the laws and requirements of each state where the company operates. In this case, financial and tax reporting is submitted only for the business that went through the state where the reporting is submitted. State taxes (where applicable) are also paid only on the amount that was earned in that state. 

In addition, you can also consult with our company's staff on this issue. 

Since business in the USA is regulated by the states, each state has its own laws governing business regulation. In some states, they are almost identical. Meanwhile, in several states, the laws are the most advanced for business (California, Nevada, Wyoming). In some states, they differ sharply from all other states (Delaware) and are oriented (as in Delaware) towards protecting the interests of minority shareholders.

In any case, it is always better for you to contact a corporate attorney who is licensed and practices in the state of the company's registration to prepare a complete package of documents for the company after its registration. 

To contact the employees of our company:

• formulate a list of questions and expectations; 
• get in touch with us using any convenient means of communication.