LLC and C-Corp compared
If you are thinking of setting up a company in the USA, there are several options open to you – an LLC, an S-Corp or a C-Corp. If you are neither a US citizen nor a US permanent resident, however, you can only form an LLC or a C-Corp.
To understand the differences between an LLC and a C-Corp, it helps to start by noting that the United States operates a three-tier tax system:
- federal income tax (rates from 0 to 35%)
- state income tax (rates from 0 to 10%)
- sales tax (rates from 0 to 10%)
With a C-Corp, you pay both corporate income tax and tax on dividends. A flat tax rate applies to C-Corps. Ordinary dividends are taxed as regular income, while qualified dividends are taxed at 0%, 15% or 20%. The impact of double taxation on a C-Corp can be reduced, for example by lowering the tax base.
One advantage of a C-Corp is that its owner or employees can join a Medical Reimbursement Plan, under which the C-Corp reimburses healthcare costs not covered by health insurance, with no further tax liability.
With an LLC, no tax is paid at company level – only at the level of the members – so you pay only personal income tax and can claim a tax-free allowance of up to $12,000. Members of an LLC who reside in the USA must also pay contributions of 15% of net income (self-employment tax).
Besides the tax rate, another difference between a C-Corp and an LLC is the start of the fiscal year: when you form an LLC in the USA, the fiscal year coincides with the calendar year, whereas a C-Corp is free to choose when its fiscal year begins.
C-Corps tend to be audited less often than LLCs. However, should an audit reveal a tax liability greater than the value of the corporation itself, the C-Corp can declare bankruptcy, allowing its owners to walk away from the bankrupt corporation without paying the tax debt. This is not possible with an LLC, whose owners would remain liable for the tax debt.
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