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LLC Incorporation and Corporation are both limited companies but with profound differences between them
It cannot be said that the LLC or the Corporation is better; it all depends on the type of activity that you intend to carry out in America through the company
One question that always happens when we talk to our customers who are thinking about opening a company in the United States is whether it is better to open an LLC Incorporation or a Corporation.
The absolute right answer to this question does not exist. Which type of company to open depends on a series of operational factors and on fiscal and personal considerations? In this article we review the differences between LLC and corporation and highlight the factors that militate in support of the opening of an LLC or a corporation.
As always, we will focus on the fundamental aspects without going into the operational or theoretical detail relating to these two types of company: the aim is to give the key information to decide if it is better to open an LLC or a corporation according to your specific situation.
What is LLC Incorporation?
LLC offers an alternative for those who want to run a business in the United States without the formal complexities of the corporation
Here we must understand each other well : the corporation has more formal obligations than the LLC: shareholders 'meeting, board of directors' meeting, need to have the board of directors and the need to adopt resolutions or decisions in a formal way by writing a document that describe.
And that's all: there are no other formal obligations. We can understand that for those born and raised in America this may seem a lot, but for those who come from India it is nothing. So yes, LLC has fewer formalities than the corporation, but as we have seen, the corporation doesn't have much to follow.
In the case of uninominal LLCs [with a sole shareholder] the limitation of personal liability is a controversial issue and perhaps the formalities to pay attention to are even more stringent than in the case of the Corporation.
What are the characteristics of the LLC compared to the Corporation?
- Limitation of liability - Like the corporation, LLC is also a capital company and therefore offers the limitation of liability typical of capital companies: the liability of the company is limited to the value of the company's assets and the partners are NOT liable for the obligations and debts of the company [LLC or corporation] with its own personal assets.
- Ability to open uninominal LLCs [but not in California or Massachusetts]
- Management: the management of the LLCs can be managed by the members of the LLC or it can be delegated to non-member managers.
- LLC is a so-called “transparent" or even "pass through entity" company. It means that the LLC's income is taxed directly by the shareholders [we talk more about it in the next section dedicated to taxation]
What are the characteristics of corporations in America?
The quickest answer is that the American corporation corresponds to the joint-stock company [while the LLC corresponds to the SRL]
Lawyers, accountants on the other side, law professors and scholars, we know, will turn up their noses at this simplification but for us who are humble people I would say that simplification captures 90% of reality. It is clear then that the correspondence between LLC and SRL is only a simplification.
The corporation in America "IS" the joint stock company in India with some significant simplifications :
- No minimum share capital requirement;
- No Board of Auditors;
- No notes to the financial statements.
- Participation in the corporation is represented by shares as in the case of Indian SPAs.
- It is possible to open a corporation with only one partner. Mandatory corporate offices: President, Treasurer and Secretary.
- Obligatory to have the Board of Directors [the Board of Directors] even if formed by a single member [Sole Director]
The differences between LLC Incorporation And Corporation in taxation
Limited Liability Companies DO NOT present financial statements and DO NOT file tax returns . Taxable income flows to shareholders according to the percentage of participation in the capital.
The natural person partner will have to make the tax return in America also including the income of the LLC to the other income possibly produced [in other words, the portion of the income of the LLC makes accumulation with the rest of the income of the natural person] From this follows that, in the case of participation of an Indian resident, there is an obligation to file the tax return in America and to pay taxes in America for the income received from participation in an LLC.
The taxation of the income produced by the LLC will therefore take place with the tax rates on the income of individuals.
Self-Employment Tax - The members of the LLC are considered by the American tax authorities to be " self-employed " [...] as such, they must pay them social contributions [Pension and Healthcare, ie Social Security and Medicare] that are paid in the employment relationship [50% are paid by the employer and 50% are paid by the employee] In the case of the partner of an LLC, the latter will have to pay all social contributions.
To date the additional taxation for the shareholder of the LLC is 15.3% of the net income [therefore on the whole revenues less costs] It is an aspect often overlooked, especially by lawyers, when speaking of the differences between LLC and corporation. While the double taxation flaw is being introduced to corporations, one forgets to mention that at the end of the year the ACTIVE members of the corporations must pay the compulsory social contributions in the employment relationship.
The American Tax Reform of 2019
As of 2019, the taxation of corporations and LLCs will change significantly.
The profits of the corporations will be taxed with a single tax rate of 28% [up to 2018 they were instead taxed by income bracket]
For the LLC the changes in the regulations are much more complex and profound. For the calculation of the taxes on the LLCs and for an analysis of the new taxation of the LLCs, refer to the article recently published by Export USA: New rules for the taxation of the LLCs
Corporation Taxation in the United States
Corporations must file tax returns annually and, if they have profits, pay taxes with the corporate income tax rates.
Shareholders pay taxes only if the corporation declares and distributes dividends.
According to the provisions of the India - America Treaty against double taxation, the corporation will apply a withholding tax of 5% [dividends paid to a company] or 15% [dividends paid to a natural person] when the dividend is distributed .
The withholding tax will be recovered with the tax credit then in the tax return in India.
It is therefore NOT necessary to file the tax return in America when the only income received in America is the dividend paid by a corporation that applies the withholding tax as described above.
In the United States, corporate members do not receive a tax credit when a dividend is paid to them as is the case in India. In this sense, we often speak of double taxation of the shareholder: first the corporation pays taxes on corporate profits and then the shareholder is taxed personally on the dividend received.
Final notes on the differences between LLC Incorporation and Corporation: particularities to pay attention to
Undistributed profits of an LLC Note that in the case of the LLC, taxation also affects undistributed profits.
- Uninominal LLCs: New reporting obligations to the American Financial Administration Since last year, uninominal LLCs whose sole shareholder is an American non-resident have been obliged to request the EIN and to fil the Form 5472 even when they do not produce revenues in the United States.
- LLC owned by a capital company When the shareholders of an LLC are capital companies, the American tax authorities consider the LLC as a "disregarded entity" and equate it with an American subsidiary of the foreign parent company with all the consequences of the case, for example the subject to branch tax and the obligation to maintain double accounting.
- Donation Tax Donation by an American resident of a corporation's shares is not subject to the donation tax.
- LLC with sole shareholder: prohibited in California and Massachusetts
When the LLC is better and when the Corporation is better
How to choose whether to open an LLC or a Corporation
- Buying and making income of a property typically real estate investments of this type are made through an LLC: each property is a dedicated LLC. Depreciation on the property practically eliminates taxation at the end of the year.
- The ownership of the American company is a capital company. In this case it is better to open a corporation because the LLCs owned by capital companies are considered by the American tax authorities to be disregarded entities.
- Need to add more members to the corporate structure over time The corporation lends itself better to welcoming more members because of the more formal structure that differentiates it from the LLC.
- Need to file personal tax returns in America Unlike the corporation, LLC members must always file personal tax returns in America and then report the income earned and taxes paid in America to the tax return in India.