LLC vs Corporation
Find out the most suitable corporate structure for your business in the USA
In our Guide on How to Expand a Business to the United States, we already advanced certain doubts that business use to face when are seeking to expand itself to United States.
But now, the time has come to go deeper into the details. It is time to analyze the different types of companies that exist in the United States, and thus shed light on which company you should incorporate in your international expansion project.
How many types of companies are there in the United States?
Putting away civil partnerships and associations, which are not useful when it comes to expanding a business, there are five types of companies in the United States. Below, we list them and assimilate them to some European Union entities that could best fit in conceptually and in terms of operation. Although it must be taken into account that the difference in legal systems makes it impossible to completely equate U.S. companies with Spanish companies:
- Corporation or C Corporation. We can relate it to which in Spain is called “Sociedad Ánonima”, in Italy “Società per Azioni”, “Société Anonyme” in France, or “Dutch NV” in The Netherlands. It is composed of shareholders, whose responsibility will be limited to their capital contributions. Shareholders will be able to freely trade with their shares. It is organized through an executive body, normally a Board of Directors.
- General Partnership. In Spain it could be related to "Sociedad Civil Privada" and “Sociedad Comanditaria”, in France “Société en nom collectif” and “Société civile professionnelle”, in Italy “Società in nome collettivo”. It is composed of partners who do not enjoy the privilege of limited responsibility. In this case, like the Spanish equivalent, the partners are responsible for the debts and obligations of the company with their personal patrimony. The partnership may be regulated by a Partnership Agreement, but in the absence of this, each partner may act in the name and on behalf of the business without having to hold a specific position.
- Limited Partnership. There is no usual equivalent company in the European Union. This type of company is composed of a General Partner, who does not enjoy limited responsibility, and who will be the manager, organizer and director of the company. On the other hand, there will be one or more limited partners, who will enjoy limited responsibility, but who will not be able to exercise any control over the company, which is why they are usually called silent partners. Basically in this type of society we have capitalist or investor partners, whose personal patrimony is protected, and a director partner, whose personal patrimony is not protected.
- Limited Liability Company or LLC. We can relate it to which in Spain is called “Sociedad Limitada”, in Italy “Società a responsabilità limitata”, in France “Société à responsabilité limitée”, or “Dutch BV” in The Netherlands. It is composed of members, whose responsibility is limited, but they are not able to freely trade with their interests. This companies are organized through an executive body, normally a single Director.
- S Corporation. In general, there is no such company in any country of the European Union. This type of company works like a Corporation, but have some limitations. The most important limit is the foreign capital forbidden.
Do we have to consider the five types in order to expand our business?
We can do it, but we do not have to. Indeed, we do not should. S Corporation is easily disposable since it cannot admit foreign capital. General Partnership and Limited Partnership are too risky because they do not offer us limited responsibility. An internationalization or expansion project is risky by itself; we would hardly think of incorporating this type of companies. Usually we will only consider choosing either a Corporation or an LLC.
What are the differences between Corporation and LLC?
This is not a trivial question, if we compare the types of companies from the perspective of Spanish corporate law, for example, there would hardly be any difference between one type or another.
We can highlight three categories of differences.
A C Corporation files corporate income taxes while single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships by default. However, LLCs can choose to be taxed as either a C-corp or an S-corp as well.
This is why there is often talk of double taxation at the C Corporation. It would be taxed a first time on the corporate income tax, and a second time on the personal income tax of each shareholder when dividends are distributed.
An LLC does not work exactly like the EU equivalent companies, but they share a common feature, membership interest is not easily transferable.
LLC owners are called members, who owns a percentage of the company known as membership interest. The owners of a Corporation are called shareholders. Shareholders also owns a percentage of the company, but in this case by company we are talking about corporate stock, which is divided in shares.
While shareholders can freely transfer their shares, members cannot. Typically, a member needs the approval of the other members before transferring interest, but the Operating Agreement can outline specifics requirements or even forbidden it at all.
In any case, contrary to what happens in many legal systems of the countries of the European Union, in the United States there is not a very extensive regulation on the transferability of shares. The provisions of the Operating Agreement shall apply.
For the incorporation of a Corporation, the Articles of Incorporation must be filed to the corresponding Secretary of State Government. In this document the incorporation is requested, and the basic information that the State must know about the Corporation is informed. Once the application has been processed, the Secretary of State issues the Certificate of Incorporation, a document that in Spain could be compared to the so-called "Escritura de Constitución". However, unlike the Spanish document, the Certificate of Incorporation does not include the Bylaws, which is a private document of the Corporation that will be drafted later by its partners.
There are no Articles of Incorporation in an LLC. For the incorporation of an LLC, the Articles of Organization are submitted with the application. In this sense, we do find greater similarity between the Spanish "Escritura de Constitución" and the Certificate of Incorporation of an LLC, since both contain the regulation of the company.
In addition to the above, LLCs have far fewer obligations than a Corporation: in terms of corporate records and books, accounting obligations, tax filings, etc.
What about Social Capital?
The social capital adopts different names according to the type of company chosen, as we have already seen. If we talk about a Corporation, then we will call it corporate stock. If we talk about an LLC, then we will call it membership interest.
In any case, the mechanics of determining the social capital will be similar to the majority of States of the European Union. It is worth noting the important difference with Spain. In Spain companies usually have a minimum social capital, that is, to incorporate a Corporation you would have to set a minimum social capital of 60,000.00 €, and to incorporate an LLC you would have to set a minimum social capital of 3,000.00 €. In the United States, and in most European Union member states, these strict minimum social capital rules do not exist.
In this sense, Spanish businesses can fall into the confusion that the incorporation of a Corporation requires much more economic capacity than the incorporation of an LLC. This is not true. In the United States, the difference in costs of incorporating a Corporation or an LLC is established by the incorporation fees, and although the fees for incorporating a Corporation are usually higher than those for an LLC, the difference is not significant.
How can I know which company I should incorporate?
This will depend on the characteristics of your business. At first it seems easier to incorporate an LLC, because it is more manageable, tax friendly, etc. However, it can be tax disadvantageous in the face of international double taxation.
We have to take into account that your business would be expanding, it would be internationalizing. Not only will you be present in the United States, but you will also be in Spain or any other country. The company that is incorporated in the United States will most likely be part of the business' corporate network or will have relationships with companies already incorporated.
The distribution of benefits at the level of personal income offered by the LLC is usually neither desirable nor recommended for the internationalization of business, in many occasions the partners do not want to create the company to distribute dividends, or if they do, they want to avoid taxation in their countries of residence.
In addition, the level of management responsibilities, structure, regulation, and case law, is well established regarding the Corporation, a classic in the common-law. While LLCs are comparatively new. A Corporation usually offers much more security.
If, on the other hand, we are talking about the birth of an independent business, the incorporation of an LLC could be very convenient.
How can Gowper help you?
At Gowper we constantly assist businesses in their internationalization processes, and one of the most common destinations we work in is the United States. We are based in Miami, and we have a network of trusted professionals in several states of the United States.
We help our clients from the beginning to the end. This means:
- To help them assess whether it is time for an internationalization, evaluating the advantages that this could bring them against the costs and obligations that will be acquired in the process.
- Selection of the most appropriate State for the incorporation according to the type of business, activity to be developed in the United States, form of relationship with the companies of origin, etc.
- Selection of the most appropriate type of company for the expansion, based on the economic objectives, form of relationship with the rest of the business, partners, etc.
- Assistance in the incorporation process, managing all the work with the Registered Agent, and drafting and/or reviewing the corporate documentation.
- Assistance and intermediation in applications for tax identification numbers, business licenses, etc.
- Intermediation in the contracting and/or acquisition of means of production, premises, and other assets necessary for the development of the business.
- Assistance in opening bank accounts, contracting tax and accounting services, etc.